To flip a house is to buy a property and sell it for a profit, preferably in the same calendar year. When most people hear house flipping, they think of foreclosed homes or homes that need extensive work done. But that’s not always the case. You can buy and sell a property that is not foreclosed and won’t require any substantial renovation, all the while still profiting on the sale. Despite popular belief, flipping houses is anything but easy, and requires a lot of research and knowledge. Without which, one can crash and burn substantially, losing hundreds of thousands in the process. If you’re interested in learning more of what it takes to flip houses, continue reading below our personal guide to house flipping.
Guide to house flipping
To flip houses, you’re going to require capital. Whether in the form of cash, bank loan, or loan from a third party source. If you have cash, great! If you require a loan from the bank, you must be ready to go through the grilling process and pass with flying colors. That means your credit score and income need to meet the terms and conditions for approval. Finding an investor may be harder to achieve than the first two options mentioned. Instead, if you have some money but not enough to flip a house, consider partnering up with someone that will put up the rest, leaving you to do all of the leg work. You may not make as much on this deal, but if you’re just starting out, this will be a great learning experience, and will potentially leave you with enough to fly solo on the next deal.
- Build your team
House flipping is more of a team effort than a solo one. Yes, this may be your project, but you certainly need pros guiding you through the process. A team of specialists that will help you achieve maximum profits should include multiple real estate agents, a real estate attorney, insurance agent, general contractor, and a wholesaler. They will work together and help you make money faster than you would on your own.
- Know your market
Knowing your market is of great importance because it will help you choose the right property, know what the not-to-exceed price is, and most importantly figure out your profit margin. Is the neighborhood established with great schools and community? Or is it transitioning and still undergoing gentrification?
- Do the math
You don’t need to be a math whiz to figure this out, but non the less do the math and know your numbers. You must first figure out the price you will sell the property for once it has been renovated, this is known as ARV or After Repair Value. Then you need to figure out the highest price point at which you can buy the property for while still profiting on the deal significantly. This is known as MAO or Maximum Allowable Offer. The 70% rule is used to calculate the numbers. Essentially, it is designed to keep your profits at a maximum. You will start by multiplying you ARV by 70%. The take the number your contractor gave you for renovation costs and deduct it from the total to arrive at your MAO number.
For example: Your ARV is $400k, multiply that by 70% to get $280k. Then subtract renovation costs from $280k to get your MAO. Let’s say renovation will cost $50k. $280k – $50k = $230k ← your MAO, that is the most you should pay for the property.
- Don’t overprice the property
While it may be tempting to overprice the property considering all of the fancy renovations you have done to it, doing so may scare away clients and keep you on the market for months. Every neighborhood has a general price point, and you shouldn’t sway away from it. In fact, slightly underpricing can yield multiple offers, resulting in a bidding war between prospects. Which may ultimately result in a sale that is above the original asking price.
- Sell fast
This is clearly a no brainer and in fact the agenda for everyone who is in the business of house flipping. The faster you sell the higher your profits will be. The reason your profits diminish with time is due to factors such as financing payments, insurance payments, utilities, and other misc. costs. So if you have to renovate, do it well, but do it fast!