If you've ever watched HGTV, you've likely seen one of the many home flipping television shows, like "Flip or Flop", "Property Brothers" and "Fix this Flip." Renovating homes is uber popular because it provides a unique opportunity for regular folks to use creativity and problem-solving to earn a handsome profit.
Our guide below was written by a real estate investor & broker, based in Georgia, who has flipped more than 50 houses in Florida, Georgia and Illinois in the last ten years.
Step 1: Get access to sub-contractors
Flipping requires access to many different "trades" or sub-contractor groups. For example, depending on the degree of renovation, you'll likely need an electrician, a plumber, a flooring installer, a tile installer, a carpenter, roofer, landscaper, painter and cabinet installer. You don't need to know all of these folks personally, but getting access to these trades is critical.
Over time you will accrue dozens of contractors in your network, but to get started, we recommend asking local Realtors, searching Google, dropping by job sites to meet subcontractors and using apps like Thumbtack or Angi's List to find local pros.
Step 2: Target neighborhoods where appreciation is trending up
Study your local real estate market and understand the nature of it. The best way to do this is to use tools like Zillow to understand trends and then drive around the areas corroborate your findings. Talking to local agents can also help confirm if an area is "hot." Often times the best neighborhoods are near the towns or communities that were "hot" 1-2 years prior.
Just because there is an affordable place in a nice neighborhood doesn’t necessarily mean that property will automatically become a profitable investment once renovated. Try to find a property in a neighborhood with a potentially bright future. The neighborhood should by a growing community, and the area should offer the potential for a high demand for rental properties. It can also help to buy properties that are close to public transportation hubs, schools or shopping.
Step 3: Don't overpay for the property
Being a flipper is not just about finding the cheapest properties and selling them for profit. Ideally you can purchase a property for 5-20% below the median home price in the same area, but this is not a critical requirement. That said, you definitely do not want to pay over the median average in the same zip code - otherwise you are unlikely to produce a healthy profit on the sale.
For example, if the average home in the target neighborhood is selling for $300,000, you do not want to pay $315,000 for a property and attempt to rehab and sell for $450,000. You will potentially lose money. However, you could successfully buy a home for $250,000 in the same neighborhood and ultimately rehab and sell it for a profit at $350,000
To understand the actual price you should pay for the property, you should consider calculations such as the 70:30 rule. The after repair value (ARV) generally should equal 70% of the price you should pay. The ARV will give you an estimate of the property’s actual worth after it has undergone renovations. It is not a critical requirement to meet the 70:30 rule, but it's one calculation to help define a healthy purchase price.
Step 4: Don't over-renovate
Before you start spending money, get several quotes from contractors for the work needed to be done. For example, you might get 2-3 painting estimates and ultimately choose one pro. Same with flooring, roofing, plumbing, etc. Hold your contractors to deadlines and offer incentives for staying on time and on budget.
Overpaying for labor is one of the biggest mistakes that most first-time flippers make. Performing some of the work yourself can definitely help mitigate this risk, but generally this also extends the timeline for completion of the flip unless you're an expert at multiple trades like electrical, plumbing, tile and drywall. It's difficult to do 100% of the rehab yourself because most people aren't good at multiple categories of renovation work.
Lastly, it's a common temptation to "over-improve" a property. Often this is not necessary and ends up costing you in the long run. You may not need marble countertops and new cabinets in the kitchen when you can get away with keeping the existing cabinets and installing basic granite countertops.
Step 5: List for an attractive asking price
Another common mistakes for rookie flippers is trying to list the property for way more than necessary once the rehab is complete. Easily the most tempting thing for flipper to do is to list the house for 10-20% more than what the comparable sales support. This tends to lead to 3 problems:
- The house sits on the market for multiple weeks
- Once you eventually receive an offer, you get a low-ball offer with bad terms
- The house doesn't appraise for the purchase price once it goes under contract
It sounds counter-intuitive, but if you list at market value (or slightly lower than market value), you will generate much more traffic (showings) and could potentially generate multiple offers and much better terms (over asking price, no contingencies, cash purchase, as-is purchase, quick closing, no due diligence, etc.).
Final Tips for Success
Once you’ve identified your property, have a business plan, and know your budget, it’s time to get the financing needed. While many investors use cash to acquire properties, roughly 2/3 of flips are actually financed.
If the renovation is more of a cosmetic rehab, conventional financing will be fine. You can also use 203K rehab loan if you're planning to occupy the property for at least a year before flipping it. Otherwise, a hard money loan is typically the ideal financing option for most flips. Fix and flip loans come with a faster turnaround time, and the money you get is pooled from private investors. And you can often financing some of the rehab costs as well.
Staging and decor
We see many (if not most) flippers selling their properties vacant and un-staged. While this is typically acceptable for lower price points (under $350K), we highly recommend spending the money to stage the home before getting photographs for the listing. It typically costs about $1,500 to stage a property.
Flipping real estate can be very lucrative if you pick a great area, complete repairs/upgrades quickly and have a little luck along the way. It’s wise to start small and not attempt a difficult flip right out of the gate. Don’t give up when you face difficulty on your first real estate deal, instead learn from your mistakes and grow.
If you’re ready to get started, SimpleShowing will be here to help you every step of the way. We have a team of experts that can help you find profitable flip opportunities in Georgia, Florida and Texas. Contact us today to get started!