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If there is one description of the real estate market that investors should understand is that it is cyclical. The market behaves differently in different areas as they fall in and out of favor when their demographics change causing the property values to rise or fall in response.
If you want to be successful in real estate, more particularly in flipping a property, you must understand the area’s cyclical nature so you will know where to buy.
You should know the areas that are most likely to become popular or where there are new developments nearby that would probably push the property values upward.
You could look for some of these things when considering where to buy a property: new commercial and retail developments such as new superstores, popular bars, and restaurants. Use these data to guide you on your next steps. After you’ve chosen an area, you then select a property to buy.
House Flipping: Rewarded But Risky
If you opt to invest in a fixer-upper, you know that you won’t be able to sell it ‘as-is’ and you are committing to do some improvement on it. Just remember that you don’t have to limit yourself to a fixer-upper or to a foreclosed home to make money.
You can buy a good property, not do any repairs, and still sell it for a profit if it’s in a good location.
Flipping houses could be a popular business but making a profit isn’t as simple as buying a cheap property, doing some renovation, and then selling it within 90 days. House flipping is a risky undertaking and if you don’t know what you’re doing, you might end up with an empty coffer. We want to help you, so we asked some experts to share some tips on how to make a successful flip.
Here is a list of some of the best house flipping practices to make sure your house flips bring in the bucks and not otherwise. These are all practical that the experts learned through experience.
Tip #1: Financing
You should know that when you buy a house to flip, different sellers and situations would have different terms of payment. For example, home foreclosure sales would mean you need to pay in cash. In some instances, the sellers would be willing to wait for you to get a traditional loan. However, there are also alternatives to traditional 15-year or 30-year mortgages.
Some financing options are:
- A seller that provides the financing and acts as the ‘bank’ in what they call a seller carryback
- Get a home equity line of credit (HELOC) if you have equity in a property with enough value
- Financing through a traditional bank for loans beyond 90 days
- Private lenders (hard money lenders) that can provide fast loans and accepts the property that you will rehab as security
- Borrow from family and friends
Borrowing from family and friends should be your last option for financing.
There is always a possibility that your house flipping venture will fail and defaulting on your money obligations to family and friends can strain or damage your important relationships.
Most mortgage lenders will require proof of homeowner’s insurance before they complete your mortgage loan. In many cases, you should submit it before you can close on your home – this is regardless whether someone will occupy the home or not during the renovation period.
Tip #2: Assess Your Cash Situation
To flip a house, you should have a lot of cash on hand. That cash could be your own or could come from a bank, or from other people – and that is even better. If you have your own money to use, you may say you’re a step ahead of your competitors. If you don’t have any cash, it doesn’t mean you can kiss your dream goodbye. Most private investors want a new flipper to have what they call “skin in the game,” but you can always take out a loan from other sources to get a head start.
Finding investors and raising money for a house flip is already a taxing venture. So, before you even spend any energy doing any capital raising, you need to assess what you already have available. When you finally decide on your first house to flip, you’ll have a good idea of how much more cash you’ll need to fund the acquisition.
One good idea to get your feet wet flipping houses (especially if you have little money) is to form a joint venture with someone who has enough capital. If you don’t have the cash, your joint venture partner can fund the deal while you do all the other work. Just take note that you may not get rich on your first deal, but you’ll gain priceless experience.
If you have to split the profits with your partner equally, you’ll still end up with 50% of something – which is a lot better than having 100% of nothing.
Tip #3: Assemble A Team
Before you jump right in, assemble your team of reliable professionals. We’re talking about house inspectors, builders, contractors, plumbers, electricians, cost accountants, and other field experts. Of course, finding a good contractor to work with you isn’t always easy. So, start looking for your team members before you start looking for a house. Ask for references and check those references. To help you decide, look at some of the projects they have done.
Important: Put everything in black and white. Before working with anyone, sign a written, legally-binding contract that spells out in detail the terms of the relationship in understandable wordings. You should apply this to all team members – including family and friends. In fact, you should do this all the more for family and friends to avoid any misunderstanding that may strain your relationship later.
Tip #4: Know Your Market
Real estate investors know that the three most important things in the industry are location, location, and location. Successful house flippers consider this an indispensable guide. It doesn’t matter if a house looks like it’s fit for a queen, if it’s in a terrible location, you won’t be able to sell it.
Pick a house in a good school district, in a safe neighborhood, with access to transportation and employment corridors in order for it to become attractive to buyers.
While you may think that buying the worst house in the best neighborhood will bring the highest income, inexperienced real estate flippers should not involve themselves in homes that need major significant structural repairs. Replacing a roof or reinforcing a foundation can drain your funds and delay your project if you run into problems with permits or contractors.
Before rehabilitating a house, know the market and its expectations. Your end product should blend with the style and finishes of competing houses in the neighborhood, without over-improving or exaggerating it.
Tip #5: Make Accurate Cost Estimates
A good flip involves several activities: finding a property in a good area, knowing the total repair costs, marketing it, and holding onto it while looking for a buyer – that’s why you need an accurate timetable. And impute all the relevant costs that you can attribute for a particular segment of the construction. For example, the cost of retiling the floor would include not only the $4-per-square foot price of the tile, but also the cost of mortar, grout, tools, and labor.
Important: Be conservative in your cost figures. Most newbies in house flipping commonly and easily make an unrealistic estimate of how much it actually costs to remodel. Veteran home flippers know that actual costs can easily escalate.
So, it is very crucial that you get a close estimate and try to reduce what the cost will be and then add some buffers to your figures.Don’t forget to include holding costs such as taxes, insurance, mortgage payments, utilities, homeowner’s dues, and any other charges that might come.
A reliable rule of thumb is to double your projected budget and double your target timeline. If your computation still looks okay profit-wise, then go ahead.
Tip #6: Speed Equals Profit
Any successful house flipper knows that time and timing are essential in the business and speed is one of the biggest determinants for profit. The shorter time you hold on to your investor’s money means the shorter time you will depend on financing and therefore, the better your profits will be.
The reason your profits become smaller with time is that the longer the renovation takes to finish, costs also continue to run and add up. These would include interest fees, insurance, town taxes, permits, utilities, and all other carrying costs. The more these costs run up, the more they will eat into your profits. So, try to do the job well and try to do it fast.
You may be thinking that a rapidly appreciating market is a guarantee for good profits in house flipping but that is not always the case. You make the real money in the math and the process itself. As long as you have the discipline to stick to a rigorous set of rules and make careful cost analysis, you can – and will – realize profits.
It doesn’t really matter what kind of market situation you may find yourself in – appreciating markets, stagnant markets, and even in spiraling markets – if you follow the guidelines, you have a big chance for success.
Tip #7: Find an Undervalued Property
Finding an undervalued property in this market is easier said than done. There are less foreclosed properties now than there were just a year ago, thanks to the foreclosure rates going down and the bank property inventory almost selling out.
The key here is knowing where to look. One of the best ways to get leads is to get people to call you to sell their properties. A good method is to use bandit signs. These are the signs you may see all over the city that prompt people to call a number if they want to “sell their ugly property.”
Some other methods to find houses to flip include email marketing to property owners, direct mail marketing to absentee owners, and contacting abandoned property owners using the town records for their contact information.
You can also use your real estate agent to find properties. Real estate agents have the resources to help you find houses that need expensive or extensive repairs. These are the ideal types of properties for a house flip.
Many inexperienced house flippers often just focus on looking for cheap homes. But keep in mind that a cheap house may cost more than average because they usually need more significant repairs that require more funds and time. Offhand, which do you think is better – House A that costs $55000 or House B that has an $85,000 tag price?
Well, if you know that House A would need $45,000 worth of repairs while House B would only need $10,000 worth of repairs, you would pick House B as a better house to flip. Provided that the future value is the same, the house that needs fewer repairs and time to fix would give you a better profit.
Additionally, the homes in the marginal middle of the price tag can give you a better opportunity for a lower price because many retail buyers and investors often don’t pay much attention to them.
Tip #8: Finding A House That Will Sell
To increase your chances of success flipping houses, find a house in an area where houses are selling fast. The price range of houses will usually depend on what the majority of the buyers in that area can afford. Our experience tells us that this typically just a little below the median home price.
You don’t want to make a mistake of buying a house to flip in an area that is mostly rentals and not really for homeowners. Homebuyers don’t normally choose these areas.
Tip #9: Have an Accurate Strategy
You need to do a little deductive reasoning to determine your prospective buyers. If the house is in a neighborhood with good schools, your buyer would probably be a young family. So, older homes may not have the features that young buyers demand such as an open kitchen or a family room.
This means that you can spend some money to open the family space to make it more inviting. Provide for enough bathrooms for the kids and add a Jack and Jill vanity in the hallway bath. If you can still afford to, make the basement a bit attractive for other use and not just for storage.
You don’t have to make a masterpiece out of the master suite, but make sure that mom and dad have their own bathroom. If the home is in a retirement area, look for a house that has just one main level or a ranch style.
If it’s unavoidable to have stairways, open them up and widen the tight spaces. Make sure the residents can get in and out from and to the street easily. Do away with big stairways up to the front door. And convert the yard into a patio so the occupants won’t have to do a lot of maintenance for their outdoor area.
Tip #10: Consider Repairs
Make sure that your rehabs stand out among the competition. Buyers will be looking and inspecting a lot of houses and they all tend to become a blur after some time. If you add a touch of ‘something’ that the other houses don’t have, they will remember yours. You then increase the possibility of them coming back and making an offer.
You will have to focus on curb appeal, bathrooms, kitchens and highlight the best aspects of the house. Eye-catching kitchen backsplashes, shiny countertops, updated knobs and handles – these little touches go a long way. There are a lot of inexpensive bathroom vanities with granite tops at the big box stores so, use them liberally.
In the house-flipping arena, competition will declare what materials you will use. You can look at some of the houses you are going up against and then try to figure out how you can make your house more attractive to buyers.
If you are a newcomer in the business, we recommend that you initially partner with a veteran house flipper with a good track record. Try to learn everything that you can, follow the advice we’ve shared and jump right in.
You might not immediately make tons of money, but you might find this venture more rewarding than what you are currently doing. Who knows? This might be your ticket to becoming a big-time real estate investor.