You may be looking to make extra cash on the side. You have seen the house flipping shows where people are making cash. You are thinking you can do that same thing they are doing on TV. I agree you can do it if you put in the time, learning and effort. You may be asking what is house flipping and how do you do it? House flipping is to buy a discounted home that needs repairs. You then rehab the home to make it like new. Then sell the home for a nice profit.
This is a very simple overview of flipping a home. You can make really good money doing a flip but remember as easy as you can make $30,000 you can also lose $30,000. You need to make sure you know what you are doing before buying.
Flipping a house overview
- You need to get your name out there that you are interested in buying homes that are distressed
- Marketing tactics to let people know you have money to buy homes
- Financing where are you going to get the money
- Buying the house based on numbers, not emotion
- Contractors how do you find them to do the work
- Contractor agreements
- Inspection of work
- Payment of contractors
- Completed home final inspection
- How will you sell home
Marketing to buy distressed homes
I currently own a bunch of homes that are rentals. I get called probably once a week from an investor. Their message is always the same, “We are interested in buying your property at 123 Main St. We offer all cash and can close quickly. Please call Tim back at 333-333-3333.”
Calling someone is much cheaper than sending letters or postcards. The trick is you have to be able to look up the phone number for the contact on the property. Many local county auditor sites have information on who owns the homes. Getting the phone number may be a little bit harder to get.
Letters and postcards
I also get maybe 1 to 4 letters or postcards a month asking if I want to sell my property. You can see by the picture what they say to entice me to sell. These guys have a system to do mailings in bulk so it is discounted. I am not sure where they get the list from to contact landlords local to their city. We use to get properties in foreclosure, bank owned or set for short sale from the city we live. We used this to do our mailings and we got callbacks all the time. Test some different ways to get leads then set up a system based on which ones work the best for you.
You can do many different things to find homes to buy. Here are a few you can do.
- Find wholesalers in your area and buy from them
- Business cards hand them out everywhere
- Signs on side of the road saying we buy houses with your number
- Home auctions
- Foreclosure auctions
- Drive around find house vacant in the area you want to invest then find the owner
This is just a few that you can check out to see what works for you.
Financing a flip
You are looking for a home to flip. One day soon you will actually have a deal and you will need cash. Most investors that flip homes go into the deals with cash. You offer cash and the competitor submits an offer with bank financing even if they offer more usually the owner will take cash. Cash is close in two weeks with no inspection or trouble to close. When someone comes with bank financing you have inspections, repairs on certain items, underwriters and many more things that could wreck the deal. All cash closings have none of those hassles.
Here is what you can do to get and use other people’s money.
- Hard money loans – You have to pay points and interest rates are high but way easier to deal with and get over a bank The more deals you do with hard money lenders the better rates and lower points you can get.
- Private investors – You can find private wealthy individuals that will want to make 10% to 15% on their money secured by real estate. This is very common in the flipping shows on TV. This is where most of them get their money to buy, rehab and sell homes.
- Your money – If you happen to have a bunch of money lying around you can use your own money to fund deals. You need to make sure you have enough cash to see the whole process through.
- Bank – You may be able to get a rehab loan with credit unions or small local banks in today’s real estate market. It may be tough to get a loan with the larger banks. You will need to check with the banks you have interest in to see if they have any rehab loan programs. Banks would be the cheapest on points and interest rate but hardest to get.
Buying a house based on numbers not emotion
Here is the golden flip rule when buying a home to flip. This is called the 70 rule.
70% of ARV –Rehab Costs
(ARV) = After Repair Value
I bought my home for $150,000 and it needed $10,000 in repairs. The house at the time we did the cosmetic repairs was worth $210,000.
Let’s plug in the numbers on my house that I bought as bank-owned at a nice discount.
70% of ARV –Rehab Costs
70% of $210,000-$10,000= $137,000
You can see that this home did not fit our guidelines for buying to rehab and then flip. I needed to buy at $137,000 if I was really going to flip this house for 30% profit. I could take a lower profit margin and still could have bought this property to flip.
Contractor finding good ones
The number of contractors you need depends on how many houses you are going to flip at one time. If you are new then I am assuming you will just be doing one at a time. Finding a great contractor can be tough when you first get started. You will have to look around to get some references on who is the best to use. You may have to go through a few to find the right one.
You will need a general contractor but will also need some other contractors which I included a list below.
- Electrical contractor if the home needs electrical work
- Plumbing contractor
- Heating and cooling contractor
- Flooring carpet, tile, and hardwood
- Roofing contractor
- Drywall contractor
- A general contractor does framing and all around installs like kitchen cabinets or bathroom showers. They just kind of do what the other expert contractors do not do
- Painting contractor
- Landscaping contractor
This is critical that you lay out in a contract that you both sign the work they are doing. If you do not do this then the contractor will do the work to how they think it should be done. You will want the work done to your level of detail.
If you leave no ambiguity then if the work is not done right you can have it re-done or you do not have to pay them. If it goes that far you will be looking for a new contractor to do the work. This has happened to me several times.
Inspect the work
You need to look at what is done for each phase of the rehab. If you just wait till the end you will have no idea if they did shotty work. When the electrician is done and plumbing is done do the inspection before the installation of the drywall. This way if there is a problem it can be fixed easily because the drywall is not installed.
You also need to have a checklist with everything the contractors are doing. You then walk through with the list when they are done check marking what is complete and to code.
Payment of contractors
It is best to pay the contractors as the project progresses. Most of the time we will pay at the beginning to get the project started. One time in the middle of the project after we have done the inspections. Then there is the final payment once all the work is complete and the punch out list is done.
You should never pay the contractors up front all the money for the project.
If for some reason the contractor does not do the work that was laid out in the contract. You should only pay up to what was done. Then you will need to get a different contractor to finish that work.
You are now in the home stretch by getting the house on the market. Set up to final inspection of all the work. Contact realtor to get the home ready to sell. Let’s see what you need to do.
- Final walk-through inspection with the general contractor
- Punch list of everything that needs to be fixed
- Have contractor start fixing list and get a time estimate
- Meet with a realtor for a walkthrough of the home
- Stage the house to get ready to sell
- Photographer come in to do a photo shoot of each room
- Set up a time when to put the house on the market
- Set up open house dates
- List property on the MLS
- Get property into contract
Your realtor will worry about this but make sure you only take offers from people pre-qualified for a loan. This will save you time with people that may not have the finances to buy the house.
The sooner you sell the quicker you can pay off the hard money lender or private investor. You will also get paid the profit to which you can buy another home to flip. You will have to pay capital gains tax on the profit so make sure you keep back 15% to 20% of the profit for taxes at the end of the year.
The more homes you can flip in a year the more profit you can make. Once you have done 3 to 5 flips see if you can develop a system to do 1 flip a month. Once you have that going well then you can increase to 2 a month. If you just want extra cash and you only do 2 to 4 flips a year that is fine. Do what you feel comfortable in doing.
We reviewed what a flip is so you can understand the work involved when flipping a home. I know it may seem hard but if you d just one and keep picky about the numbers you should do well. When you do not pay attention to the numbers is when you lose your shirt financially. Being new to the business always error on the side of caution when buying. Make sure you buy the homes at minimum 30% ARV minus rehab cost or if you are new you should be at 50% ARV minus rehab cost. Play is safe you make money flipping homes when buying the property.