Flipping Houses 101 [Beginner's Guide]
When I first learned about the concept of house-flipping, I assumed it was quite a simple and basic task. All you have to do is simply purchase a house, make general improvements and sell the property, right? And with the ever-increasing value of landed properties, virtually anyone could go into this business and earn consistent income.
News flash – nothing could be more further from the truth than this.
Flipping a house is not as easy and straightforward as it seems. Earning a living from house flipping involves a lot of intricate processes that should be learned to maximize your profits in the long run.
And this is why I have written this guide! To teach you how to flip a house and master all the processes needed to be profitable. The following sections also contain information that the 1% of house-flippers use to close in record numbers all year round, so stick around.
How to Start House Flipping
Your house flipping journey has begun, but before you purchase your first property for flipping, there are a few things you have to understand. Selecting a house is one of them. To do this effectively, it is crucial to acquire basic knowledge of the area or market you want to purchase from. Trust me when I say there are neighborhoods that even the best house-flippers can't succeed in.
And this is why market research is essential. As a newbie, I recommend that you start gathering information about your current geographical area. This will serve as an excellent environment to practice in and significantly speed up the learning curve since you might be more comfortable in familiar places. As you move forward in your house flipping journey, you can explore more neighborhoods or markets, gathering refined information that will help you ultimately select the perfect house for flipping.
In the coming sections, I will cover in detail the steps needed for a successful house flip.
Finding a House to Flip
As I have mentioned above, selecting a good house to flip is crucial. And to achieve this, you will need to carry out research on various homes in different neighborhoods or markets. This is because houses differ, and there are multiple reasons why some are more profitable than others.
After gathering enough research, you can go about purchasing a house in various ways;
Short sales
Auctions
Working with wholesalers and realtors
Direct mail marketing
Generally, auctions are a great way to find houses to flip. Houses on auction are best known as foreclosed properties, and if you make the right bid, you might get the foreclosed property at a great price! A foreclosed property usually has two values; the first is the purchased value, and the second is the market value. The difference between the two will determine how much you will spend on rehabilitation and the profit margin.
If you plan to make an offer on a foreclosed property, my advice for you is to have an accurate picture of what the specific market value is likely to be. The best sources for this are real estate appraisers, newspapers, and foreclosure websites.
How about short sales? Short sales occur when a financially distressed homeowner sells their property for less than the amount due on the mortgage. To initiate this process, a homeowner must submit financial documentation, such as tax returns and pay stubs, to the bank to prove that they can't make mortgage payments due to some hardship.
After the home is acquired, interested investors can make offers to the bank, and the house usually ends up being sold to the highest bidder.
Although these methods are very suitable to help you find the right houses to flip, you must note the common mistakes to avoid when applying these house-finding techniques. For short sales, you must not assume that everything is a quick short sale flip or go as far as committing fraud to secure an excellent deal on the house purchase. As for auctions, make sure you get the correct information on the property put up for auction.
Financing the House Flip
You have found the perfect house to flip, now how do you plan for and finance the project?
This is a question most newbies find themselves constantly asking, but don't worry; I will give you a rule used by a large majority of successful house flippers. This rule is called the 70% rule.
The 70% rule is a common term used among many real estate investors when flipping houses. This rule can help you determine what price to pay for a fix and flip to earn money. The 70 percent rule states that an investor should pay 70 percent of the After Repair Value (ARV) of a property minus the repairs needed. You might be wondering what an ARV is. Well, an ARV is what a home is worth after fully restored. Understanding this will help you properly budget for expenses. Now, let's move onto the next step, getting funds for the flip.
There are several ways to finance a house flip. The best forms of financing include cash payment, private money lenders, and hard money lenders. You can choose to make the payments by yourself if you can handle the cost; this is called cash payment.
Private money lenders can be described as private organizations or well-to-do individuals who give house flippers or real estate investors loans. Private money lending also involves acquiring loans from trusted family and friends who are willing to lend you.
Hard money lenders can be a good alternative for financing house flips. Hard money lenders make loans for flippers and real estate developers on slightly different terms than banks. These loans are designed for people who don't necessarily have excellent credit but need money to complete their renovations.
Typically, they are short-term loans, and the interest rates often fall in the double-digit range, making them a more expensive option. The shorter payoff period also means you might feel pressured to sell your flipped house quickly to avoid a big payment. If this process is not convenient for you, the best way to borrow will be to get a loan from the local banks.
Fixing Up the Property
The process of renovation usually starts with a plan or a house rehabilitation scope of work. This is a blueprint that will serve as the foundation for the rest of the property rehabilitation process.
It also represents an agreement between house flippers and their contractors. When done correctly, the property's scope of work will outline every single detail of an impending project and the materials to be used. The processes involved in the rehab scope of work include:
Creating a plan.
Developing the scope of work.
Hiring the contractor.
Signing the contracts.
Managing the rehab.
Walking through the inspection.
Selling the House
Now is time to sell your renovated house. The final stage involves selling the home for actual profits. The steps involved include:
Deciding on a pricing strategy
Staging the property
Keeping the place clean for the buyer
Take pictures of the house to put on adverts
Posting the listing on various outlets.
Putting the iconic "For Sale" sign up.
Call and pick calls from prospective buyers
Negotiate on the terms of sale
Coordinate closing the deal.
As a newbie, I recommend that you employ a realtor to help facilitate the house flipping process. This will help to maximize profits because the realtor will help you secure a fair and legitimate deal. Also, you will have the opportunity of learning the process from a professional. Although hiring a realtor might come at an extra cost and take a certain percentage of the profit, it will save you from avoidable problems in the long run.
Conclusion
House flipping is a profitable business that anyone can venture into, provided you can be diligent enough to master the skills and knowledge required to flip a house successfully.
Finally, my goal is to help investors get started and make the best return on their money from every development project they embark on. Get more FREE content on how to invest in real estate by joining our community list.
