Here are my 6 tips for successful house flipping. Buying homes, renovating them, and reselling them for a profit is becoming ever more popular. However, it is not as easy as it may appear. You need to take certain steps to ensure that your potential profits are not lost, or even worse, that you do not lose money on the deal.
1. Do Your Homework
Before putting an offer in on a potential flip property, do your homework. Determine the market value of comparable properties in the same area. More importantly, you also need to know what the market value is for comparable renovated properties.
For example, you discover a fixer-upper with an asking price of $150,000. There are a few other fixer-uppers on the market in the same neighborhood with an average asking price of $145,000. Conversely, move-in ready homes of comparable size and configuration have an average asking price of $220,000. That is a spread of $75,000. You now know what you have to work with.
2. Do a Thorough Inspection
When you are ready to submit an offer, be sure to include a “subject to inspection” clause and allow yourself sufficient time to complete a thorough inspection. You do not want any surprises when the renovations begin. This is especially important with older homes. You never really know what is lurking behind the walls or under the floors.
If you are planning to make a career out of flipping homes, you should establish a relationship with one or more general contractors. Have them accompany you for the inspection and get an estimate of the repair and renovation costs.
3. Complete a Realistic Estimate of the Renovation Costs
Once the inspection is complete, determine the total renovation costs and then add between 10 and 20% to cover any unexpected costs. There will be surprises. The question is, how expensive will they be?
Another important point; do NOT over improve the property relative to other homes in the area. You may like granite countertops and marble floors, but in some areas, buyers may not be willing to pay the premium for these amenities.
On the same note, do not renovate based on your personal tastes. Choose neutral colors and finishes that will appeal to the largest number of buyers.
Be sure to include financing costs and closing costs in your estimate.
Tip: You should budget at least 3 months of financing costs. This not only includes the time to complete the renovations but also allows the title to be seasoned.
What exactly is title seasoning? This is a term used in the mortgage lending industry to describe the amount of time that a seller has owned a property.
Why is this important? Many lenders will require the seller to have owned the property for at least 3 months; some require 12 months. If you try to sell your property in less than 3 months, your buyer may have difficulty obtaining a mortgage. For more information on title seasoning, go here.
There are creative financing methods that you can use to avoid this problem. You can read my previous post on Creative Financing.
4. Do Not Overpay for a Property
My real estate attorney, who was also a real estate investor, told me a long time ago, you make your profit on the purchase, not on the sale. Truer words were never spoken.
Let’s go back to our previous example. The asking price is $150,000. You have estimated the renovation costs to be $50,000. This leaves you with a potential profit of $20,000, assuming the market value of the renovated home is $220,000. However, you have no guarantee of how long your property will be on the market. The longer it stays on the market, the higher the holding costs will be and the smaller your profit will be. It might be prudent to submit an offer for $135,000 to give yourself more flexibility and ensure a better return on your investment.
5. Schedule the Work
Before you even close the deal, you should have already scheduled the work, and if possible, materials should have been ordered. This is especially important if you are ordering custom work, such as kitchen cabinets or windows.
If any of the renovations that you have planned require building permits, be sure to schedule the necessary time for obtaining the permits and completing the inspections.
To avoid any unnecessary delays due to unforeseen issues, build in extra days as a cushion, even if you think that you may not need them. If you don’t need them, the project will be finished earlier than planned. This would only improve your ROI.
6. Control the Sale
The biggest mistake you can make when flipping a house is not controlling the sale to the end buyer. The last thing you want is to have your property tied up under contract for months only to see the deal fall apart. There are three things you can do to ensure that the sale closes in a timely manner.
a) Make sure your buyer is pre-approved for a mortgage. If you have a relationship with a lender or mortgage broker, you can stipulate that the buyer must be pre-approved by him/her.
b) Add a clause to the offer that the deposit is non-refundable. Make sure that the deposit is high enough so that the buyer will be reluctant to walk away from the deal.
c) Once the buyer has completed his inspections, he or his agent may come back with a list of repairs. If the repairs are legitimate, negotiate a reduction in the sales price to cover the cost of the repairs. Never agree to do the repairs. By reducing the sales price, there will be no time delays and it shifts the burden of satisfaction to the buyer.
Successful home flipping is an art as well as a science. There is a methodology that needs to be followed to ensure a successful flip. Just as important is the ability to be creative. One thing I always did was read design magazines to see what the latest trends were in interior design. Quite often, I could incorporate some of those trends for little cost but added tremendous market value to the property.
Finding the ideal property to flip can sometimes be tedious and time-consuming but the results are well worth it.