Home Flipping 101
If you’re like many others, you’ve seen one or more of the house-flipping shows on television. Looks easy enough, right? Well, as with most things on TV, things aren’t as easy as they look. That doesn’t mean you can’t be a successful house flipper, it just means you need to do some homework ahead of time in order to stand a chance of turning a profit. Keep reading for some valuable info on this latest money-making craze that involves buying low-priced and usually distressed homes, spending time and money to get them market ready, and then selling for (hopefully) a healthy profit.
The first thing you need to understand is that house flipping costs money. A pretty good bit of it, in fact. If you don’t have ready access to cash and have to borrow money for your first project, make sure you can afford it. Really afford it. If you’re estimating 3 months from buy to sell, don’t just plan on paying your regular bills plus the project loan for that 3 months. What if you run into renovation delays? What if you can’t sell it as soon as it hits the market or sign a contract with buyers who run into delays on their end? It’s probably a good idea to plan on the project taking twice as long as you think it should–just in case.
Once you’re sure you can cover the flipping expenses in addition to your own household expenses for as long as necessary, you need to make sure you understand your local real estate market. Buying a dirt-cheap property is the goal, but only if it’s in an area where buyers are looking. A bargain on the front end might not seem so great if it’s in an area that’s on the decline in terms of population and overall property values. In flipping, as in the rest of real estate, location is everything. Look for properties in areas that are in the process of being rejuvenated or redeveloped or that are in an area that is expected to grow due to an influx of jobs or new schools being built.
Learn as much as you possibly can about potential properties. Traditional sales mean you should be able to do a thorough inspection of the property before submitting a bid. If you aren’t very well versed on home inspections, you’d be wise to hire someone who is to walk the property (inside and out) with you to look for potential problems. A home that isn’t sound in terms of structure, electrical, and plumbing can turn into a nightmare pretty quickly, especially if you’re not prepared for such problems. Often, properties sold at auction can’t be closely inspected. In these cases, having an expert to walk the perimeter can help identify signs of potential major problems (like water damage, outdated electrical work, or structural issues).
Knowing your local real estate market is also critical when determining exactly how to rehab your property. Typically, kitchens and bathrooms (especially master baths) sell houses, so you’d be wise to make these rooms stand out. Another key selling point for many buyers is a home that’s as energy efficient as possible. You might install a good air conditioner (if the home doesn’t already have one) or energy-efficient windows. In the end, you will have to calculate how much you absolutely have to spend to correct any safety or building code issues, which will determine what you have left for finishes. Knowing what’s selling in the neighborhood and doing all you can to represent that in your flip will always be your best bet. Networking with real estate pros in the area can help you make the most of your budget. Speaking of your budget, once you’ve done enough homework to estimate your rehab cost, bump it up by at least 10%. More often than not, unexpected expenses occur, so having a contingency built into your budget can be a lifesaver. It’s way better to have money left over at the end of the project than project left over at the end of the money!