How to Start Flipping Houses

The Expert Guide to Finding, Fixing and Selling Real Estate for Profit

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Welcome to the most comprehensive guide to flipping houses that you will find on the Internet, or anywhere else. The goal of this tutorial is to get you more than a few steps ahead of other new house flippers who are trying to do it on their own without doing the necessary research first. House flipping can be a lucrative business, but it requires a tremendous attention to detail on your part to be successful.

The Characteristics Of A Successful House Flipper

With enough work, dedication, and experience, anyone can learn to flip houses and make a profit. But before you head out to buy your first distressed property, you need to understand the characteristics that are found in every successful house flipper. These are the skills and traits you need to develop if you want to make a profit and have fun flipping houses.

Determined

A house flipper is determined to learn something new with every flip, expand their professional network of contacts, and stay ahead of the competition at all costs. You need to have a passion for house flipping to be successful, because it is going to require a good deal of your time to get your business off the ground. Even experienced house flippers need to maintain that intense edge that they need to stay successful and build their businesses.

Patient

House flipping deals happen quickly when they get started, but it can take time to find the right deal that will make you a profit. Patience is something new flippers need because you will lose money at first, and you will make mistakes. The key is to be patient, learn from your mistakes, and be prepared to take a few losses to get your business started.

Charismatic

There is a lot of negotiating that goes on for every house flipping deal, and you need to have a certain level of charisma to negotiate with lenders, sellers, buyers, and contractors. The key element to having charisma is being confident, and confidence is born from success. If you work hard at learning your trade and being the best possible flipper you can, then your confidence will come through when you negotiate deals.

Persistent

When your newest project experiences a significant setback, you need to take a deep breath, solve the problem, and move forward. New flippers need to understand that they will face more than one moment when they will want to pack it in and give up on the real estate investing business. To be a success in real estate, you need to learn to be persistent and always look towards achieving your goals.

The Financial Side Of House Flipping

One of the elements of this guide that we are proudest of is that we do our best to present all sides of house flipping to give you the most comprehensive picture possible. This is not a get-rich-quick kind of business, and it can cause you to go broke if you are not careful. It takes a lot of courage to get started in house flipping, and it takes a lot of good contacts for contractors and sources of funding.

As with any investment business, you can lose your money in house flipping. But with house flipping, a poorly planned project can lose you much more than what you put into it. If you choose a house in a bad neighborhood and you are forced to hold onto it for months before it sells, then you could lose a lot more than you put into it. That is why we take the time to go into great detail on all of the considerations you have to make before you start a flip, to help you avoid significant losses.

The reason so many people get involved in real estate investing is that it can be extremely lucrative once you get it right. House flippers report making as much as $10,000 to $100,000 in profit on individual deals, and there are plenty of places to look for success stories all over the Internet. We always recommend that you find a mentor who can give you real accounts of their tremendous successes, and their failures. With house flipping, the potential for profit is tremendous, but you have to always be on guard to avoid losing money as well.

House Flipping Rules To Follow

Throughout this guide you will be given plenty of rules you should follow to help you find as much success as possible flipping houses. When you follow the rules of house flipping, you will find it easier to put together successful deals and find buyers who will help you to make a profit.

The More You Spend, The More You Should Make

If you plan on spending $40,000 remodeling a home to generate $20,000 in profit, then that is not a deal you want to get involved with. Big remodeling projects are always done to bring in big profits, and that is a rule you should always keep in mind when considering buying a distressed property.

Never Leave Anything To Chance

We offer a lot of information about planning your flip to help you avoid surprises and make a profit. The importance of planning every single aspect of your flip cannot be overstated. After you gain some experience, you will find that the plans you make for your flip will turn out to be your road maps to success.

Never Take On More Than You Can Handle

For many new investors, that first successful flip can act like a match set to gasoline. The fire for making profit burns bright, and the investor winds up taking on too many projects, or gets involved in projects that are beyond their abilities. As we have mentioned before, this is not a get-rich-quick business. This is a business where you build up your experience by taking on projects you can handle, and keeping your workload down to an amount that you can successfully monitor at all times.

Always Seek Out Reliable Advice

After years of flipping houses, you might start to gain confidence in your gut feelings on certain parts of your projects. But even the most successful flippers constantly seek out reliable advice from experienced people to help improve their own knowledge base. A good flipper never thinks that they have all of the answers because they know that arrogance is the best way to go broke.

Trust In Yourself

If you follow the step-by-step advice in this guide and get used to checking and re-checking your information, then you should develop the confidence you need to trust in your decisions. You may start out second guessing yourself, but experience and success will teach you to trust your own instincts over time.

Steady As It Goes

We are glad that you have chosen to spend the time to utilize our guide to start flipping houses. Even if you experience early success, we always recommend that new flippers take it nice and easy and gain the invaluable experience that will help their business to grow.

Understanding The Fear You Will Feel

There is a lot to be said for the power of positive thinking when it comes to flipping homes. Real estate investing is not a game for the faint of heart, and it takes a lot of dedication and confidence to see projects through to the end. If you want to flip houses, then you need to understand how to handle the mental obstacles that will often pop up during the process. The first emotion you have overcome is fear, and it can take a while to get yourself in the right state of mind to get past the fear that comes with flipping houses.

Fear Itself

The single most significant reason people do not follow up on their dreams of flipping houses is fear. The first thing your subconscious does when you decide to look into house flipping is question your motivations and worry about the potential outcomes. Fear is that hesitation that makes you stop and question yourself, and that is why becoming educated about the process of flipping houses is so important.

You are reading this primer because you have either made a decision that is striking fear in your heart, or you are curious about house flipping and want to see if the preliminary fears you have are true. It is common to question yourself when you decide to flip houses, but you need to beat that fear if you are going to be successful. Let's start identifying the various forms of fear that come with house flipping and work on how to eliminate them.

The Most Common Fears

Just because something is well-known does not mean it is understood. You might recognize all of the most common fears of house flipping, but we can help you to get past those fears and get on to the job of making money.

The House Won't Sell

Every fear associated with house flipping can be beaten with good planning. Many people new to flipping worry that a house they buy won't sell, so they put off making the investment. Throughout this guide, we will show you exactly how to identify properties that, with the right amount of work, can sell quickly.

We will also outline for you ways to sell your property quickly at a reduced profit, and ways you can make money with your property while it is on the market. Even if your house does not sell right away, you still have plenty of options available to make profit.

Running Out Of Money

Nothing frustrates a new house flipper more than running out of money before that first project is done. The proper way to fund a flip is to have your purchase money, your remodeling money, and holding costs already in the bank. You cannot over-plan a flip, especially when it comes to putting your funding together.

When you put together your remodeling budget, always put at least a 20 percent pad in the budget to allow for unseen circumstances. If you are not confident with your abilities to determine what needs to be done for a successful remodeling project, then hire a professional. When you hire an expert to help you plan your remodeling project, you are going to save a lot of money in the end.

Holding costs are the monthly bills you pay as owner of the property, such as mortgage payments, utilities, and maintenance. When you plan your flip, put three months worth of holding costs into your budget. If the house does not sell within three months, then rent it out or sell it to a wholesaler for a fixed amount. You have options when it comes to money, so you should never be afraid of running out.

Losing Money On The Deal

We have talked a little about how to get past the fear of losing money on a flip, but here are some more detailed ideas on how you can put that fear aside for good.

  • Take all three steps of your flip budget (purchase, remodeling, holding) and add 20 percent to the numbers you come up with. If you are on budget with the purchase price, then you have extra to apply to the remodeling project and the holding costs.
  • Remember that getting the funding from a lender and listing the property through a real estate agent also have costs associated with them. Don't forget to put those costs in your budget.
  • If you are not sure how to properly estimate a home's value, then take a real estate course or two. The investment will help you to properly estimate property values and avoid paying too much.
  • If you decide to buy properties through foreclosure auctions, remember that you normally are not allowed to look at the interior of the property before you bid. Foreclosures can be a gold mine if you know what you are doing, but you may want to watch a few auctions take place before bidding on your own.
  • There is no such thing as too much planning for a house flip. If you want to shed the fear of losing money, then learn everything you can about house flipping before you get started and continue to learn as you go along. Always do your due diligence on every project, and plan everything out as meticulously as possible. There are no shortcuts to success in house flipping, so do not go looking for the easy way out.

Fear Of Setbacks To Remodeling

"Some men just want to watch the world burn." - Alfred the Butler

Remember that quote from the movie The Dark Knight? It means that you can never see all possible contingencies, so you should never fear what you cannot stop. When some people see a house in a remodeling phase, they just have to vandalize the home. Some people see a construction site and feel like they have to steal whatever is not nailed down.

Your remodeling fears can also extend to other activities you cannot control. If you get a stretch of bad weather, then you may have to shut down. If someone forgets to file for the right permits, then the city or town you are in will shut you down. You should never fear these unknown contingencies, because you will always be prepared for them.

  • Insurance - You should make your house flipping business official by incorporating or at least filing a business certificate, and then insure your operations. You can talk to a commercial insurance sales professional about insurance to protect against theft, weather damage, revenue lost to circumstances out of your control, and just about anything else you can think of. Never start a flipping project without the right insurance in place.
  • Great Communication - If your remodeling job site supervisor gets handed an order to stop work because on insufficient permits, then he should know how to get ahold of you immediately to have you solve the problem. Great communication between contractors, investors, and real estate agents can solve a lot of flipping problems.
  • Emergency Funding - What if you have to stop the job because you underestimated remodeling funding? If you have lines of credit and other funding contingencies in place, then this should never be a problem.

Fear should never stop you from flipping houses because you can eliminate all fears with good research and comprehensive planning. When you make the decision to flip houses, your next step should be to put together the resources to get started. The entrepreneur who dedicates themselves to success should never let fear get in the way of making a profit.

In the next section, we will give you even more detailed information on how to combat all of your fears associated with house flipping. We will give you the comprehensive information you need to go from being a hesitant investor to a confident entrepreneur.

Overcoming The Fear Of Flipping

Once you have identified the fears involved with flipping houses and how those fears are created, the next step is to move past your fears and get to work. As we mentioned, you need to have a comprehensive understanding of flipping before you can set aside your hesitations and start investing. Once you get rolling, the experience you gain will help you to put aside all fears and become an aggressive and successful flipper.

Always Have A Plan

We keep saying that having a plan will help you overcome your fears, but what does that mean? Putting together a plan for flipping houses will act as your roadmap during the process and help you to avoid making costly errors. When you are new to flipping, it is impossible to remember everything you need to do to make a flip successful. Your plan can act like a checklist that keeps you on track. The elements of a good house flipping plan include:

  • Selling Prices - You want to get involved in neighborhoods with histories of selling properties at a profit. You use several online resources to see what kinds of value appreciation properties in certain neighborhoods are getting, and you want to start working in the neighborhoods that consistently add value to a property.
  • Singling Out Good Properties - A good neighborhood is only half of the equation when it comes to making a profit while flipping. You need to take the time to comprehensively scout each property in a neighborhood, and only deal in the properties that have plenty of room for profit. Buying a property that is not distressed and selling at close to retail value is not going to allow you to make a profit. Remember that just because you remodel a property does not mean it will sell for the profit you want.
  • Neighborhood Dynamics - Choose neighborhoods where properties sell quickly. If you are considering a neighborhood that has a history of properties being on the market for more than six months, then you will find it hard to make a profit in that area.

Be Good With Numbers

When it comes to flipping houses, math is your friend. You need to be able to calculate remodeling costs, understand how profit is made, and know when a deal makes mathematical sense. If you are not good with math, then it is time to go back to school and take some classes to improve your math skills. Experience in crunching real estate numbers will soon make you an expert in making accurate calculations quickly, and you should always be open to new ways for using the figures you generate.

Each house flipping transaction follows a pattern when it comes to crunching the numbers, and that pattern is:

  • Know how much profit you want to make before you get involved with a property
  • Be vigilant in putting together comprehensive numbers that will account for every aspect of the flip
  • Keep reliable notes on every aspect of the math involved with your transactions
  • Never hesitate to consult with an expert if your numbers are not working out or you are unsure what to do with the numbers you have

Never Flip On Your Own

Many flippers avoid taking on financial partners because they don't want to share the profits. That is a healthy entrepreneurial attitude, but it does not mean that you should run your flipping business on your own. In the business world, the most successful people realize that they don't know everything and they reach out to people who can help.

  • Real Estate Investors Association - There is an REIA group near you, and you need to join it and be as active as possible. Everyone in an REIA attends meetings for the same reasons; to network with other investors and increase their opportunities. Some REIA members are more than happy to explain parts of the process you do not know, while others prefer to barter by exchanging information for opportunity. If you want to flip houses successfully, then you need to be an active member of your local REIA.
  • Find A Mentor - When you attend REIA meetings or any professional networking function, you will start talking to people who have achieved the level of success you want to achieve. When these people are willing to take you under their wing and show you the ropes, they become your mentors. In the world of flipping houses, nothing is more valuable than being able to pick up the phone and get advice from an experienced expert.
  • Online Mentors - There are house flipping experts who reach a wide audience online, and they can help you to improve your profitability. The problem with online mentors is that there are a lot of people out there who prefer to scam entrepreneurs rather than give out good advice. If you decide to get information from an online mentor, be on guard for people who charge outrageous amounts of money for industry advice.
  • Try A Partner - If you are new to flipping, then it might be a good idea to try a joint venture with an experienced flipper for your first few projects. You can learn a great deal about the details involved in flipping when you are part of a partnership.

Allow Yourself A Learning Curve

Fear can often turn to frustration if you do not allow yourself the chance to learn as you go along. Take every flipping project slowly, and understand that you will make mistakes in the first few projects. The key is to learn from those mistakes and not get angry at yourself for making them. If you use your mistakes to enhance your knowledge, then you will become a much better flipper as time goes by.

The Only Thing To Fear Is...

Fear is inevitable when you are trying to get into a new business that you may not be familiar with. The two steps to overcoming fear are identifying that which frightens you, and then creating comprehensive plans for overcoming your hesitations. When it comes to house flipping, the overriding fear all new flippers feel is the fear of losing money.

One of the things that causes anxiety early in a flipper's career is the feeling that they are in over their heads. But with the right mentors and a strong partner to help you get started, you can learn as you go without causing your business to collapse. The other thing to remember is that you are going to fail more than once when you get started. If you know failure is coming, then you should use it to your advantage instead of fearing it. The most successful house flippers learn from their mistakes, and use confidence in their preparations to combat fear.

Developing Your Investment Criteria

The idea of planning for every house flip cannot be understated as planning is the most important part of any successful business. When it comes to finding the right properties, you need an outline you can follow that will help you decide what the best investments would be. While it is true that you are speculating until you actually start remodeling, you can significantly improve your chances of making a profit by constantly using experience to refine your investment criteria.

The Essential Elements Of A Good Flip

We are going to help you with your flipping business by providing you with a checklist you can use to decide if you want to pursue an investment opportunity or not. Before you start crunching any real numbers or bringing in contractors for estimates, you need to find out if the property you are considering contains all of the essential elements of a good flip.

  • The Right Location - The location of your property will determine its value and how fast it will sell. You want to find properties that are in neighborhoods where houses are selling quickly, and home values are appreciating at a rapid pace. Do research on which neighborhoods are considered the best to invest in and avoid neighborhoods that present challenges to your business.
  • A Solid Foundation - As a house flipper, you should expect to replace some drywall and repair a roof. But you want a home that is structurally sound and sits on a solid foundation. Mold, deteriorates roofs, damage to the home's wooden frame, and cracked foundation walls are red flags you want to avoid.
  • Reputable School District - A home located in a school district with a reputation for offering safe and effective schools will sell much faster.
  • Value Potential - To a house flipper, the smell of urine in an old home is the smell of money. Homes get depreciated in value for a lot of things that are easy to fix. When you examine homes to flip, look to pay as little as possible for a home that can bring in a strong return.
  • Consider Market Trends - Market trends in real estate vary from neighborhood to neighborhood. You might find a great neighborhood, but the most recent houses for sale have sat for months. Investigate trends for each market and only invest in neighborhoods that show an upward trend in home pricing.

Determining Your Profit

The profit you make is not always going to be the profit you want, but you still need to determine a profit amount as part of your flip planning. There are two ways to calculate potential profit:

  • As a function of remodeling costs
  • As a set amount

Many flippers calculate profit as a function of remodeling costs because it is an easier way to do things. Let's say that you purchased a foreclosed property for $45,000. The retail value of that property is $125,000 and you figure it will cost $35,000 to remodel it. You estimate it will take three months to sell, so you add in an extra $1,250 for various holding costs and transaction fees (we will explain these later.)

Your total investment would be $83, 750, and you estimate it will sell for $120,000 (it is always good to be conservative on your selling price. This gives you a potential profit of $36,250, which could be a little more or less depending on how quickly the property sells. Remember that your remodeling costs include a pad of 20 percent to cover any unforeseen expenses.

What if, in this same scenario, you decide you want to make $38,000 in profit? When you decide on a lump sum profit number, you have to adjust all of the numbers around it to make it work. If the selling price cannot be moved, then revisit the remodeling plan and try to cut out costs there. Be careful if you do decide to make cuts to the remodeling plan, because those cuts could prevent you from being able to sell the property fast enough to realize a profit.

Another way to make a lump sum profit is to purchase the property as a distressed property and then sell it to a wholesaler at a fixed price. The wholesaler will be looking to sell the property to another flipper, so you may have to bring your profit expectations down. But if you want to make a fast profit on flipping a house, then going through a wholesaler is one of the best routes to take.

To help you achieve your lump sum profit, you might consider taking on a tenant while the house is for sale. While it might be difficult to find a tenant willing to sign a three month lease, you might consider renting the property for a year and allowing its value to appreciate to realize a bigger profit. Your tenant will cover your holding costs, and you might increase your profit by allowing the property to appreciate.

Holding Costs And Fees

Holding costs are the expenses you pay every month to keep and maintain the property you are selling. You cannot show a house unless it has the power turned on, and someone needs to maintain the landscaping to keep the curb appeal up. Monthly holding costs include:

  • Utilities
  • Homeowner's Association Fees - You will want to think twice about trying to flip a home in a gated community or anywhere that has association fees.
  • Maintenance Costs - Whether you do he maintenance yourself or hire a service to do it, there are costs involved.
  • Repair Costs - If something happens to the property, such as vandalism or a break-in, then you have to assume the financial responsibility for making the repairs. This is where another holding cost, homeowners insurance, can come in handy.
  • Mortgage Payments - If you financed your property purchase in any way, then you will have a monthly payment to make to keep the property in your name. You will also have to pay monthly payments on any loans you took out to do the remodeling, and you will have to pay the associated loan fees every month as well.

Most new flippers forget to take into account the long list of fees that come with flipping a home. Those fees include:

  • Income Taxes - When you flip a home for a profit, you must pay income tax on that profit.
  • Property Taxes - You will be responsible for paying the prorated property taxes when you sell the property.
  • Closing Costs - You may choose to roll your closing costs into your financing when you buy the property, or you can pay them up front. These include property surveys, legal costs, insurance costs, and title search costs.
  • Liens - If there are liens on the property that the owner refuses to pay, then you will need to pay them before the purchase can go through.
  • Code Violations - During the remodeling process, you might rack up a few code violations that need to be paid before you can sell the property.

As you prepare to invest in a house flipping business, you need a guide to remind you of the tremendous financial responsibility that comes with flipping. A written guide can be the template you use to create a detailed budget, and you best way to avoid losing money on a flip. No profit is guaranteed, but people who plan these things out are destined to be more successful.

Finding Properties To Flip

For the savvy real estate investor, finding properties to flip is just as important as the flip itself. When it comes to finding good flipping properties, your primary criteria is to deal with distressed properties or distressed owners. We will go into more detail on what a distressed property or owner is, but the point is that you want to avoid buying properties that are asking for retail price and should probably get it.

Flipping houses is a business for patient people, because you should be considering at least three or four options for every decision you make. You should talk to several lenders, contractors, and attorneys before deciding on which one to hire, and you should do your diligence when it comes to finding properties. While you might want to find more than one property to flip at a time, you should always consider at least three or four properties to give yourself plenty of options to choose from.

What Are You Looking For?

Before you can go looking for properties to flip, you need to have a really good idea as to what you are looking for. A distressed property is one that is in need of repair before it can be sold for retail value. Many distressed properties have been abandoned for some time, which makes negotiating their purchase a little easier. A distressed owner is close to going into foreclosure, or has recently experienced life changes (lost their job or spouse lost their job) that makes selling their home a necessity.

Here is a list of the different conditions that cause distressed homes and owners. Most of the information you would need to find these types of properties and owners is public record and can be found online quickly.

  • Homes that have been hit with building code or zoning law violations.
  • Houses that have been listed as being in pre-forclosure due to several missed payments in a row.
  • Owners who have had to leave town and are desperate to sell their homes quickly.
  • Couples who have filed for divorce and may be interested in selling their home at a discount.
  • Go to estate sales and ask the estate sale company owner who owns the property and what is going to be done with it.
  • Contact families of the recently deceased to help them sell their loved one's home to you quickly.
  • People who have recently been convicted of a crime or lost a major civil lawsuit and may not be able to afford their homes anymore.
  • Members of the military who are on the verge of being deployed and may want to sell their home before they leave.
  • Attending foreclosure auctions and putting in bids. We will explain foreclosure auctions a little later.
  • Responding to classified ads for people selling distressed homes, and placing your own classified ad in the local newspaper offering to buy distressed homes.
  • Utilize free online classified advertising services such as Craigslist for your local area.
  • Utilize online resource such as AssetColumn.com to find sellers of distressed homes and possible buyers if you are looking to sell a home without remodeling it.
  • Go driving for dollars and scout out distressed properties in a targeted area. The contact information for the owner should be on file at city hall if the property is abandoned.

Understanding Foreclosure Auctions

Before you start placing bids at foreclosure auctions, we recommend that you attend a few and watch how the process unfolds. At an auction, you are normally not allowed any extended time to look at the exterior of the house, and you will not be allowed inside. If you know the auction address ahead of time, then you can try to get a look at it in advance, but you still will not be allowed to go inside.

It is important to understand the guidelines of an auction before you get involved, or else your bid could get you in trouble. Some auctions require cash payments at the end of the auction, while others allow you to have funding lined up that would have very short payment terms. Either way, you should expect to pay for your foreclosed property the day you buy it, and you might be asked to pay back taxes and any liens that are on the property as well.

Creative Ways To Find Properties

Sometimes it takes a little bit of thinking outside the box to find properties that you can flip. Part of the fun of flipping is developing new ways to find properties and seeing those properties turn into profits.

  • Most banks have a Real Estate Owned (REO) department that releases lists of properties that are coming up for foreclosure. Contact banks and start asking for their REO foreclosure lists.
  • Look through the Multiple Listing Service (MLS) expired listings to find properties that are still on the market. In some cases, owners may be willing to sell you their property at a discount just to get rid of it.
  • Check current MLS listings for properties with an excessive amount of Days On Market (DOM) time. You will need to research your market to find out how much DOM time is too much, but a good rule of thumb is to contact owners that have had properties on the list for one year or more.
  • When you look at the MLS listings in your area, consider contacting owners of listings that have gone through several price reductions.
  • Other potential property owners you could work with include people who have recently closed down their business, people who have recently retired and want to sell their home to buy a smaller one and any other instance where a property or owner may be distressed.

Reaching Out To Owners

Flipping houses is a numbers game in every sense of the word, and that means that you want to try and contact as many distressed property owners as possible. A good way to reach a lot of owners is to buy mailing lists based on the criteria we have outlined, and send out postcards to each owner offering your services.

Another excellent way to reach a lot of distressed owners or owners of distressed properties is to establish working relationships with as many real estate agents as possible. You can offer agents a finder's fee after a property has flipped, which means that you would only pay an agent for a property that has been sold at a profit. Real estate agents can also be invaluable resources for finding buyers after you have completed your remodeling project.

If you want to be successful flipping houses, then you need to know what kind of properties will make the best inventory. Unless you have considerable financial resources, it is best to keep your flipping projects down to one or two at a time. Once you get rolling, you will find it hard to turn deals down. But over time, you will develop the experience and professional network you need to turn almost any kind of distressed property into a profitable deal.

Finding And Rehabbing A Property

It takes time for an investor to be able to find and buy properties that make for good flipping projects. Each investor has their own ways of doing things, and good investors allow their skills to evolve as they gain confidence in their abilities to spot good deals. But no matter how good an investor gets at spotting deals, there are parts of the search and rehabprocess that should never change. If it is not broke then don't fix it, and if you start making money by relying on the expertise of other people then you should always take that professional advice into account.

Evaluating The Property

First and foremost, the investor has to be satisfied that the property can turn a profit after being rehabbed before anything else can happen. Over time, many house flippers learn to trust their guts when it comes to buying into or walking away from certain properties. The more experience you accrue over time, the more refined your instincts will be. But more importantly, experience will also tell you what, specifically, to look for in a property that will make it a successful or unsuccessful flip.

Many of the properties an investor buys to flip are sold through auctions where there is no opportunity to really look the property over to see if it is a good deal. Since a house flipper will make a good portion of their money evaluating auction properties, it makes sense to spend time developing the skills necessary to evaluate properties quickly. Some investors get so good at knowing what to look for that they can bid on an auction just using the pictures provided.

For those properties where the investor does have the chance to look around and really evaluate the deal, it is always smart to bring an experienced contractor. As a house flipper, you will become very good at spotting details that could make or break deals, but you will never have the eye of a professional contractor. You can learn a lot by evaluating homes with a contractor, and spending a little money on bringing a contractor along can prevent you from taking substantial losses if your try and flip a property that is not going to generate a profit.

Finding The Ideal Contractor

If you are going to make a career out of flipping homes, then you don't want a good or even great contractor working with you. What you want is the ideal contractor for you and your business. This means a contractor that you can trust, has your best interests in mind, is willing to work with you on flipping projects, and possibly even one who has a couple of crews that can get multiple projects done at the same time.

Every successful flipper has at least one contractor they work with on a regular basis to help identify opportunities and get projects completed on time. Your contractor will learn how you like to do business, when they can take the initiative and make decisions on your behalf, and the ways in which you are comfortable saving money on the remodeling budget. It is possible to cut corners on a remodeling project and still get excellent results, the key is to have a contractor who knows building codes and materials so well that they can makes substitutions that get quality results for much lower prices.

Hang Out At The Home Depot

Every weekday morning, sometimes including holiday, you will find local contractors buzzing around the Home Depot to pick up supplies, buy new equipment, and swap information with other contractors in the area. The Home Depot even makes it easier to find the contractors by having a separate loading area for contractors and their materials.

If you are looking for a reliable contractor, then hang out at the Home Depot for a few weeks and take notice of the contractors who regularly show up to buy materials. A contractor who only comes by once or twice a week is probably not going to be interested or even able to take on a flipping investor. But the regulars at Home Depot are usually responsible contractors who are more than interested in taking on a steady client.

Talk To Other Investors

It might not be easy to get trade secrets from successful house flippers, but it never hurts to try. As you get involved in flipping houses, you will start running into the same people at auctions and even at distressed properties you thought you found on your own. Some of these investors will be tight-lipped, but others are more than interested in mentoring new flippers.

Make yourself an available resource to other flippers in your area to get referrals for good contractors. You can team up with experienced flippers for deals and learn who you can talk to for good advice on properties. A savvy flipper can find ways to get others to trust them and get the information they need to be successful.

Join The Real Estate Investors Association (REIA)

There are a lot of reasons to join your local chapter of the Real Estate Investors Association (REIA), and finding a good contractor is one of them. An REIA meeting is a place where you can network with a wide variety of professionals who can make your life a lot easier. Contractors looking to work with house flippers regularly attend these meetings, and they are anxious to meet you.

No matter where you get your contractor referrals from, you should take the time to investigate each referral and only do business with contractors who fit your guidelines. You should hire experienced professionals who have a reliable and mature approach to business. After all, the contractor or contractors you decide to work with will have significant input on how you make decisions and you want to feel confident that you have chosen the right people to work with.

Manging Your Remodeling Project

You hire a reliable contractor to do your remodeling projects because you want them done right, but you are still going to have to manage these projects on your end to make sure each project generates a profit. As the investor, you need to feel confident enough about what you are doing to be able to give input to a contractor and suggest changes that could benefit the project.

  • Always keep a close eye on your costs and never be afraid to question your contractor on the money they are spending. If there are more cost-effective ways to get the same results, then you should insist on those ways. If your contractor comes up against a problem that will require more money to solve, then discuss all of your options before making a decision.
  • You should have a separate contract with your contractor for every project, and there should be penalty clauses for missed deadlines. There is nothing wrong with holding your contractor accountable for spending your money. To be fair, your contractor should have say in establishing project deadlines. It is unfair for you to create deadlines that are impossible to achieve, but you can learn to agree to deadlines that are negotiated with your contractor. If your contractor misses your deadline, then you assess what are called liquidated damages. This is an amount, usually $100 per day, that you deduct from the final price of the project for each day it is late.
  • You should spend some of your time doing research on the improvements that really bring value to a home. For example, upgrading a home's technology and adding technological upgrades can add value. You can also add value by installing solar panels on a home to help cut down on energy costs. In some situations, remodeling the kitchen or bathroom will also bring value, but you need to understand when those improvements will be effective and when they are not worth the investment.
  • Curb appeal is one of the most important factors in selling a home quickly and for more money. You should focus on landscaping and exterior improvements that will catch people's attention as they approach the home you are flipping.

The ability to find a good flipping project and get it done quickly is essential to your success as a house flipper. You need to spend plenty of time learning how to identify good deals, and networking with industry professionals who can help you to make the right decisions.

Estimating Repair Costs On Your Flip

We are dedicating an entire section to estimating repair and remodeling costs on your flip because of how critically important this skill is to putting together a complete price. You cannot determine how much to offer to buy a distressed property until you know how much profit you can make. Your repair and remodeling estimate is one part of your overall investment cost which also includes the purchase price of the property and holding costs. It is vital that every flipper know how to estimate repair or remodeling costs, even if they intend to hire a contractor to do the estimating for them.

Why Do I Have To Know How To Estimate Repair Costs?

As your flipping business grows you will learn two important lessons:

  • If you wait to pull off a deal, then you will lose the deal.
  • Contractors work on their own schedules and do not always have time to come with you to develop a detailed estimate.

While you want to avoid putting together repair or remodeling estimates on your own for your first few deals, it is imperative that you learn how to do it to keep your business going. A good deal for a distressed property could pop up on a Tuesday morning and be gone by Tuesday afternoon. If you are constantly waiting for your contractor to do repair or remodeling estimates for you, then you are going to find it hard to capitalize on the deals that you find.

The Purpose Of Repairing And Remodeling A Property

There are real estate investors who hunt down distressed properties at low prices and then flip those properties as fast as possible. In a business like that, you need to learn how to handle a high volume of deals if you want to make any kind of significant profit. A quick turnaround deal on a distressed property might bring in $2,000 or $3,000 in profit. But if you remodel the property, you could see profits in the tens of thousands of dollars.

Your reputation is of critical importance in the real estate investing world, and gaining a reputation for being a high-volume distressed property buyer and seller is going to limit your opportunities. People who are holding onto great deals usually want to see something done with the property to improve the neighborhood. If your reputation is to buy and sell distressed properties quickly, then you will find that you have to make your own deals more often. When you become known as someone who puts a shine onto distressed properties, then your phone will ring more often.

Your goal as a real estate investor is to make a profit, and the best way to make a profit is to remodel or repair a property to make it fit in with the rest of the completed properties in the neighborhood. Buying distressed properties at a low price, investing money into rehabbing them, and then selling as close to retail as possible is the best way to grow a successful real estate investing business.

Renovating To Scale

Does it make sense to spend a lot money to turn a property into a million dollar showpiece in a neighborhood where the average property value is $200,000? As a house flipper, you will learn to work in a variety of areas where property values come in at various levels. If you try to do too much to a property, you will price it out of the market and you could stand to lose a lot of money. But losing money is not the only reason for not overdoing it when it comes to rehabbing a house.

Your million dollar house in a $200,000 neighborhood could devalue the properties around it, and that would create a bad relationship with the homeowners in the neighborhood. At the very least, you putting a high-priced property in a neighborhood with average property values could trigger a reassessment of all of the properties in the neighborhood, and that would also damage your relationship with the other homeowners.

Overdoing it when it comes to your rehab will cause your property to sit unsold until you have to lower the costs just to avoid losing everything. People who want to buy homes in certain neighborhoods generally do not want to pay more than the per house average for that area. Your high-priced rehab is going to have a hard time attracting potential buyers, and it could be the last project your company ever does.

As for the neighborhood, they could be your biggest ally in selling your remodeled property if you make sure to put the property in the right price range. Homeowners don't like seeing abandoned properties in their neighborhoods because it hurts everyone's property values. You could be that neighborhood's hero if you do the right kind of remodeling project and turn an abandoned property into a vibrant part of the community.

Eye For Detail

As you work with your contractor on pricing your first few remodeling projects, create a checklist of the things the contractor looks for and become proficient in filling in that list for every project. Some of the most important parts of a home when it comes to remodeling estimates that people miss include:

  • The foundation
  • The sewage system (Is it a municipal sewer line or a septic tank? Septic tanks generally require more maintenance.)
  • The plumbing
  • The electrical wiring
  • Pests and insects

Over time, you will develop a comprehensive checklist that will allow you to do your own inspections and determine what kind of work needs to be done. Your contractor will also talk in terms of costs per square or cubic feet for determining how much the work will cost. After observing this technique and asking plenty of questions, you should be able to apply it to your own estimates with a good degree of accuracy.

Other details new investors leave are the title search and land survey. In most cases, any issues with the survey and the title search can be handled easily. But sometimes it takes a little remodeling to fix the title or the survey, and you will need to be able to identify those issues and create solutions.

Putting In The Pad

Every real estate investor needs to make two assumptions about their remodeling estimate, or an estimate they get from a contractor, to avoid problems.

  • The project will go over budget.
  • The project will take longer than planned.

While you will have the occasional project that clocks in on time and on budget, you need to plan for the worst case scenario. That is why you pad both the budget and the timetable with at least 20 percent more than your estimate says. You should add this pad to your own estimates and any estimates you get from contractors. The padded number is the one that you use to calculate how much money you can make from each deal.

A good house flipper knows how to use the resources available to them, but they also know that a good deal waits for no one. New flippers should avoid putting together their own remodeling estimates, unless they have a background in home building or general contracting. But over time, an experienced flipper should develop the skills necessary to create their own estimates and take advantage of good deals when they come up.

Buying A Distressed Property

After you have set up your network of sellers and have identified the distressed properties you want to buy, your next step is to put together an offer that will win you the house. In the world of house flipping, it is unusual to get a second chance at putting in an offer on the same distressed house. You need to learn how to create compelling first offers, and then negotiate with the seller until the property is yours.

In most cases, the seller of a distressed property is only going to be interested in selling the property as fast as possible at some kind of profit. Wholesalers will know what kind of profit they want to make, but there is always room for negotiation. Homeowners are usually more interested in selling quickly than making a huge profit, but you won't deal with homeowners as often as you will deal with wholesalers.

In order for a real estate deal to go through, all sides have to feel like they are getting a good deal. Of course, you want to get your property for the lowest price possible, but you have to keep in mind that the seller needs to make a profit as well. Negotiating in good faith is usually going to get you further than persistent aggressive negotiations.

Developing Your Initial Offer

Before you decide to make an initial offer on a property, you first have to decide if the deal works for you. To do that you would:

  • Determine the retail value of the property after remodeling by analyzing similar properties in the area
  • Estimate your remodeling costs, upfrpnt costs such as taxes and liens, and holding costs
  • Get the purchase price from the owner or wholesaler
  • Add together the purchase price, remodeling costs, and holding costs to get your After Repair Value (ARV)
  • Subtract the ARV from the retail value and that will give you the profit you will make

You can avoid getting involved in bad deals by subtracting 20 percent from your profit estimate to get a more conservative number you can work with. If the numbers work on your end, then it is time to put together an offer to the wholesaler or homeowner.

You can adjust your potential profit to get a lower or higher offer, but you should never adjust your remodeling and holding costs. Once you have adjusted the numbers and feel comfortable with the initial offer you have created, then you can give your offer to the owner. A sample calculation would look like this:

  • You estimate the retail value of the home after remodeling to be $200,000
  • You estimate the remodeling costs to be $45,000
  • You estimate upfront costs (including liens and closing costs) to be $7,000
  • You estimate your monthly holding costs to be $2,500 per month
  • You estimate you can sell the property in three months, which means a total of $7,500 in holding costs
  • The wholesaler has offered you the distressed property for $110,000
  • $110,000 (buying price) + $45,000 (remodeling costs) + $7,000 (upfront costs) + $7,500 (holding costs for the first three months) = $169,500
  • $200,000 (estimated retail value) - $169,500 (total investment) = $30,500
  • $30,500 (initial profit) - 20 percent (padding to protect your investment) = $24,400 total profit

If you are comfortable with $24,400 in profit and feel confident you can sell the property in three months, then you can meet the seller's price and close the deal quickly. But if you want to make an extra $10,000 in profit, then you would lower your initial offer to $100,000 and start the negotiations from there.

When you take the time to do this kind of math, you will have all of your numbers in front of you and you can negotiate from a position of confidence. You can adjust numbers based on any deals you can find, and you will be able to make an initial offer that makes sense to you. The best part is that you will also know exactly how much room you have for negotiations, if it comes to that.

Contract Contingencies

When you and the seller agree on a price, you should put that price in writing and include contingencies to protect yourself. What do you do if you cannot get financing? What happens if the house is in worse shape than you thought? The easiest way to protect yourself is to include stipulations in the contract that state that the completion of the deal is contingent upon:

  • A clean inspection
  • Financing being approved
  • An agreeable appraisal

You should also include a time frame for these contingencies of 30 days. If nothing happens within 30 days of the initial agreement, then the deal is off. This gives you time to get all of your inspections and appraisals together, and it also protects you from a seller who might be trying to shop your price to other buyers.

Be sure that the contract states that the property is being sold "as-is" based on the condition when you agreed to the price. This protects you from any damage that may occur to the property and makes the owner responsible for keeping the property in the condition in which you initially saw it.

When you agree to a price, then put a deposit on the contract to make sure the property is held in your name. Have a contingency in the contract that says that you get your deposit back if the deal falls through.

Closing The Deal

Any good house flipper has a title company and real estate attorney they trust to get deals done properly. It also helps to have a network of lenders in place that you can trust and will work with you to get deals done. You should also find a good escrow company that will help you to manage all of your holding costs and maintain your insurance and tax payment for you.

Inspection

If you get a good inspection on your property, then you can move on to the next phase of the closing. But what if the inspection comes back with problems? If the inspection finds that the roof leaks, the furnace needs replacing, or the hot water tank leaks and you did not expect those problems, then those could add to your remodeling costs.

At this point, you can walk away from the deal because the contract states that the home had to pass inspection. But instead of walking away, you should consider negotiating a lower offer. If the owner wants to sell the property bad enough, then you can use a bad inspection to generate more profit on the deal.

Remodeling The House

The day you close on the house and get the keys, you need to get your contractor over to the property to start putting together the scope of the remodeling project. If you did your own remodeling estimates, then this talk with the contractor will make you glad you padded your numbers by 20 percent.

Always get estimates from other contractors for two good reasons:

  • To see if you can get the work done for less and make more profit
  • To keep the contractor you normally work with honest

Business is business, and if you are going to spend a lot of money then you want to know you are getting good value for it and that you regular contractor is not taking your relationship for granted.

Preparing The House For The Market

If you bought your distressed home in a gated community, then you will need to check with the homeowner's association before you start remodeling. Many homeowner's associations have rules against certain types of remodeling work, and some associations force you to live in the home for a certain amount of time before you can sell it.

Before you sign off on the final invoice for the contractor, take the time to inspect the entire property and make a list of the things that need to be done before you will approve the project. Inspect every part of the property and then make sure that you are able to put the property on the market as it is before you pay the contractor.

Buying and preparing to sell a distressed property is a way of life for house flippers. It is important to pay attention to the details of every deal, and never take on so many deals that you get overwhelmed. In the real estate investing business, one simple mistake could be the last mistake your company ever makes.

Selling Your Remodeled House

After all of the calculations, negotiations, and money spent, it is finally time to put your house on the market and grab your profit. Until you gain experience in house flipping, it is always a good idea to be conservative in your expectations when it comes to profit. You might start talking to flippers who have no problem holding onto a property for months because they are confident they will sell it for the right price. As someone new to the industry, you could put yourself out of business quickly if you try tricks like that.

Many first-time flippers work directly with real estate agents to sell their properties, but real estate agents work for commissions and that could be thousands of dollars you would be giving up on every deal. As you learn the flipping business, you can gain your own insight into how to price your properties and keep that commission for yourself. The process for selling a remodeled home is based on getting the highest sale price in the shortest amount of time. To do that, there are steps you can follow that will help you to reach a successful sale.

Pricing Your Home

There are two important elements to selling any home; condition and price. You just invested a lot of time and money into the condition, so now it is time to work on the price. Early in your flipping process, you did a market analysis of the home to determine its retail value. It is time to get that paperwork back out and determine whether or not you want to stick with that retail value, or make some changes.

Price For The Neighborhood

Earlier in this tutorial we warned against paying for a remodeling project that would price the house out of contention in its neighborhood. While you need to price the house consistent with the homes in its neighborhood, you also do not want to leave money on the table. At the same time, pricing a home out of its market will delay or possible kill any chances of a sale.

Pigs Get Fat, Hogs Get Slaughtered

When you get greedy like a hog, you are almost guaranteed to lose money on your deal. But when you eat like a pig, you can maximize your profits. Your initial research gave you the range of home values in your area. Once the house is actually ready to go on the market, you need to:

  • Update that range
  • See if any houses in the area are currently up for sale and compare the features and amenities of those properties with yours
  • Update your neighborhood trend information that would show you whether prices in the neighborhood are headed up or down

This is the data you will need to price your house properly. You will scare buyers away if you price your house too high, so be careful when analyzing your data. If your house compares to other properties in the neighborhood at the lower end of the price range, then price your house accordingly. If your house compares to the higher end properties, then maximize your profit.

Remember that your buyers will try to negotiate you down on your selling price, so put a little room in there to allow you to sell for as close to your price as possible. You will never be able to negotiate your price up, so your asking price needs to be something just above the value of where your house falls. If you feel that your house is worth $200,000, then price it at $215,000 to give you negotiating room. You need to set a top price and a bottom price, and negotiate within that range.

Your Timeline

When you originally calculated your costs for flipping your property, you made an estimate of how long it will take to sell. You used this number to calculate how much you would have to pay out in holding costs, and the clock starts ticking the moment you buy the property. The sooner you can get it on the market, the better. Be sure to put project deadlines in the agreements with your contractors, and use your penalty clauses to recover losses if the project goes past your deadline.

If you can sell your property ahead of schedule, then you will save on holding costs and add more profit to your deal. More importantly, closing a deal fast means that you can use part of your profit to buy your next property and generate even more revenue.

Using A Realtor

Some flippers use realtors, but they also have special deals in place with those realtors to bring down commission costs. One way of maximizing the value of your real estate agent is to hire a licensed real estate agent and negotiate their pay upfront. Another option is to settle on one realtor and work out an agreement that pays them a lower commission per property, but guarantees them the chance to sell all of the properties you put on the market.

Multiple Listing Service

One of the benefits of working with a licensed real estate agent is their ability to list your properties on the Multiple Listing Service (MLS). This is collection of websites that reaches other real estate agents and buyers all over the country, and in your local area. But you do not need to be a real estate agent to use the MLS websites. You can list the properties on there as well, and it is a great way to get exposure for your properties.

Accepting Offers

There are two rules all flippers follow when it comes to offers on their properties; consider all offers, and respond quickly. The real estate industry is incredibly competitive, and waiting to respond to an offer could mean that the offer disappears as someone else will sell that potential buyer a house.

Always use official real estate offer forms to accept offers to make sure that you and the buyer are protected. You can get these forms online, at an office supply store, or you can have a real estate attorney make them up for you. As with the forms you used to buy the property, your offer sheets will have contingencies on them that include:

  • Contingent upon the buyer getting funding
  • Contingent upon the deal closing by a certain deadline
  • Contingent upon the buyer selling their current home (Look at this as an opportunity to go from one flip right into another)

Negotiating Offers

When you are just starting out in flipping houses, you should rely on your written calculations when it comes to negotiating offers. If a potential buyer submits an offer that is just below the range you are willing to accept, then respond with a counter-offer that brings the selling price back into your range and stay on that price.

Over time and with experience, you will be able to tell which low offers are worth accepting to close a deal fast and save on closing costs. But until you have the experience necessary to understand how to really negotiate a deal, you should stick with your plan and make the profit you had intended.

You always want to negotiate from a position of strength, but that is not always possible. If you are fielding multiple offers on the same property, then you obviously have your choice of offers. But if the offers are simply not coming in, then you may want to spend extra time negotiating with the one buyer who is interested.

Closing Out The Financial End Of The Deal

Most of the expenses you are responsible for in the closing of your flip project will come due at the closing itself. If you used a real estate agent, then you will have to pay the agent from your proceeds of the sale. You can arrange to have that done at closing through your title company.

The profit you get from flipping homes is considered income, and it will be taxed as such. Before you get involved in flipping, you should consult an experienced accountant to know how much you need to set aside from each deal to pay your taxes.

Selling your remodeled property is the final step in sealing your first real estate investment deal. It is a lot of hard work, and it takes a while to build up the experience you need to make your business successful. But if you are looking to get into real estate and you enjoy putting together a deal, the flipping houses just could be the perfect career choice for you.

How to Start Flipping Houses

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