The notion of flipping a house has become quite popular these days, and everyone wants in on the action if this is a viable method of making a good return on investment in a short period of time. Television shows, the real estate agent who lives across the street, the contractor on the corner, and the guy who got laid off and is looking for a new line of work are all turning to the idea of buying a house, fixing it up cheaply, and turning around to sell it. Does it work? Yes. Always? No.
Flipping a house requires two things that few of us have enough of: time and capital. Not only do you have to be able to qualify for the mortgage on each property you’re interested in, but you also need the cash for the renovations necessary to turn the home into a winning investment. If you have that, then you are halfway there. Most people who flip houses do not hire contractors for anything they can do themselves. Buying supplies and doing the renovations yourself is cheaper, provided you know what you’re doing. If you have limited capabilities, just be honest with yourself and hire out the projects that require more skill than you possess. This is vital to the process. If you do sloppy work, you will not earn on your investment. Period.
Important Tips for Successful House Flipping
Know what you’re purchasing. You must have a good understanding of the real estate market and the true value of a home to negotiate it as far down as possible before purchase. The better you are at this part of the process, the greater return you will receive. Once you have purchased the home, you need to start with a realistic plan and timeline. Your budget for this plan is coming out of your pocket, so be cautious. If you have no experience, start small and build from there. Starting with one small property is less costly in terms of mistakes than starting with three large properties that get out of control. Keep in mind that you may find, once you start, that you dislike the process and simply want out. This is easier to do with one small property than with several larger ones.
When laying out your plan, budget an extra 10-15% for unexpected costs. These “oops” factors are unforeseen mistakes that a newbie is likely to make along the way. Flipping a house is a business, and you’re going to have to learn from a few hands-on mistakes before getting it right. And even after you “get it right,” you’ll still encounter mild “oops” factors along the way.
Some investors who are a little low on capital negotiate with contractors, offering a portion of the fee upfront and then a larger percentage when the home sells. While some contractors may laugh and walk away, others may see it as a good investment. However, a word of caution: in many cases, you may end up paying more this way than if you simply paid for the work outright. You may also find yourself on the hook for a large amount of money if the home doesn’t sell within a reasonable period of time, as many contractors will only agree to wait so long before collecting on the debt.
The best way to break into the business is to start with a structurally sound home and focus on aesthetic improvements—such as new countertops, tubs, floors, wallpaper or paint, and other visually appealing upgrades. Avoid structural enhancements until you’ve gained experience with a few flips.
Once you become adept at the flipping process and prove an excellent track record, some loan officers can offer special financing deals in return for bringing them qualified buyers. In many cases, you can even suspend the payments until after the home sells. However, this is not legal in all counties, so be sure to check your local jurisdiction for home financing and zoning laws before beginning the process.
With a few basic home improvements and some experience, it’s more than possible to pull off a $50,000 return on your investment with each home—sometimes even more when the market is favorable. This doesn’t happen immediately, but with practice and a few mistakes to teach you the “don’ts” of the business, you can find yourself with a nice little business that provides you with the one thing we’re most lacking: time and capital.
The prospect of flipping a house is much more appealing on television than it is in real life. It’s a project that should be approached carefully, as the expense of rushing in can be devastating. Make sure to take the time to learn the process and understand the real estate market before jumping in.
