Popular shows like HGTV’s “Flip or Flop” have brought more attention to the house-flipping business than ever before. While it may look like a fast, easy way to make money, in reality, figuring out how to flip a house and turn a profit is more complex than it seems.
To avoid your house-flipping venture from flopping, let’s take a closer look at what’s involved.
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What is a house flipper?
A house flipper is someone who makes money by buying a house, fixing it up and quickly putting it back on the market at a higher price. Typically, the house is bought and resold within 12 months to be considered a flip.
House flippers must follow different rules and get different home loans than buyers of primary residences. House flipping requires a more hands-on approach than other types of real estate investing, like real estate investment trusts (REITs).
House flipping is a straightforward process on the surface, but house flippers run into hurdles along the way. You’ll need to find the right property, line up financing, fix the home up then resell it to make a profit.
Here’s a step-by-step overview of the process:
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1. Find a target property
The goal of house flipping is to turn a profit, so you need to find homes in good neighborhoods that will attract buyers once renovations are done. So instead of looking for an ideal house, switch your mindset toward finding sellers who need help, said Bill Allen, CEO of 7 Figure Flipping and a real estate investor in Nashville, Tenn. To make money on a house flip, buy a home at a discount by finding sellers who value a quick, no-hassle sale, he said.
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2. Line up financing
In most cases, you need to put down at least 20% or more to get an investment property mortgage. If you don’t have that much cash handy, you’ll need to find other investors to fill the gap or look at alternative financing options, such as a hard-money loan. Lenders will want to see a detailed plan that outlines the estimated cost of repairs and anticipated resale price after repairs.
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3. Close on the house and begin renovations
After closing, it’s time to renovate. You likely bought the house at a discount because it needed significant updates or repairs. Generally, choose upgrades that will appeal to most buyers. Build in wiggle room into the renovation budget in case unexpected problems are found, such as water damage or structural issues. Also, vet the contractors you hire thoroughly, and make sure they pull the appropriate building permits if necessary.
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4. Re-list the house.
After renovations are complete, put the home back on the market at a higher price to net a profit. A real estate agent can help you evaluate comparable home sales in the area to figure out the right asking price.
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5. Close the sale
A home that’s priced right and updated tastefully should bring in buyer offers. You’ll sign a purchase agreement with a buyer and close on the property. After closing, you’ll repay your loan, (hopefully) pocket a decent profit and move to the next flip.
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How much does it cost to flip a house?
Every housing market is different, but the median purchase price of a flipped home was $160,000 (pre-flip) in the third quarter of 2019, according to real estate analytics firm ATTOM Data Solutions.
Using the median price above, you’d need a $32,000 (20%) down payment to purchase the home, but this will vary depending on home values in your area. Don’t forget closing costs, too, which range from 2% to 6%, depending on the loan amount, and real estate commission fees.
You’ll also need cash to rehab the property and pay other expenses. This might require having between 20% and 33% of the property’s after-repair value (ARV) in cash on hand, according to ATTOM’s report. For the example above, that’s between $45,000 and $75,000 for renovation expenses, bringing your total cost to flip a house between $77,000 and $108,000 for the median-priced flip house.
After repairs, homes flipped in the third quarter of 2019 sold for a median price of $224,900, resulting in a gross profit of $64,900.
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How to calculate how much to spend
When you’re evaluating homes to flip, focus on how much you expect to sell the home for. Pinpointing the sales price can help you use a fairly simple formula to determine whether you should buy the house.
After-Repair Value (ARV) – Repair Cost – Carrying Cost – Profit Margin = Maximum Offer Price
- ARV, or after-repair value, is the final sale price after renovations and depends on what comparable homes are selling for in the area. Comparable homes should be similar in size, features, age and condition to get an accurate basis for comparison.
- Repair costs can vary widely. Before buying a home to flip, Allen recommends walking through it with a contractor to estimate the price of repairs rather than trying to guess.
- Holding costs include overhead business expenses, homeowners insurance, property taxes, utilities/maintenance, interest payments or homeowners association fees.
- Profit margin represents how much money you want to make on the flip (20% is often the goal, but this can vary).
A final note: There’s always the risk of running over budget. Be prepared for repairs to be more costly than you anticipate, or the home taking longer to sell.
What is the ‘70% rule’ in house flipping?
You’ll hear about the 70% rule in house flipping, which refers to paying no more than 70% of the ARV (minus repair costs) for an investment property. It’s a quick, handy way to see if a deal is in the right ballpark before you make an offer.
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Loans for flipping houses
If you’re buying a home to flip, the available loans are much different from those intended for people buying a house to live in. Here are a few traditional loan options for house flippers. Be sure to shop around for the best lenders before committing.
- Investment home loans. Investment property loans are generally much different than traditional mortgages. Banks typically require a 20% down payment and excellent credit scores to qualify, and loans often must be repaid within 12 months.
- Hard-money loans. These short-term loans from private lenders typically cover less of the property’s value than a bank loan and come with a higher interest rate, but don’t require a credit score.
- Home equity loans. Depending on how much equity you have in your primary residence, you may be able to qualify for a home equity loan or home equity line of credit (HELOC) that could help fund your house flip. HELOCs and home equity loans are secured by your home, which puts you at risk of foreclosure if you fall behind on payments.
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How to flip houses with no money
Having ready access to your own cash is helpful when flipping houses, but it’s not a requirement.
“It takes money to flip a house,” Allen said. “But the money doesn’t have to be yours.”
Banks or hard-money lenders will typically let you borrow a significant portion of the home’s price, but not all of it. The rest of the money you need to come up with is known as “gap funding,” which can be raised from private investors. Doing so “is a combination of art and science,” Allen said. These investors look for a short-term, high-return investment.
However, be careful — especially if you’re buying a home “as-is” to flip. It’s likely you’ll find a lot of expensive repair problems that could eat into your profits and drain your cash reserves.
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How to start flipping houses
There are few formal requirements to get into the house flipping business. You don’t need a real estate license or contractor license to flip a home. However, at a minimum, you should find trusted professionals who can advise you.
Here are a few steps to take before making the leap into flipping homes.
- Learn the business model. Many novice house flippers think they’ll make the most money by renovating a house, but this isn’t always the case. “If you do that, you’ll just break even,” Allen said. Instead, buy houses that sell below market value.
- Research the market. Not all areas are ideal for house flipping. Look at neighborhoods where home values are projected to increase and buyer demand is booming. The best markets often have large numbers of older homes with lower price tags.
- Network. Connect with other investors who can share insights into how home flippers make money. Attend meetups in your city, go to local Real Estate Investing Association meetings or find a mentor.
- Build a team. You’ll need a real estate attorney, a general contractor, accountant and real estate agent to be successful.
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FAQs about real estate flipping
What’s the average profit on a house flip?
The average gross profit on a home flip was roughly $65,000 in the third quarter of 2019, according to recent data from real estate firm ATTOM Data Solutions. This represents a profit margin of 40.6%.
However, this number does not include the cost of renovations and overhead, which can range from 20% to 33% of the final value. After that’s subtracted out, the typical return ranged from a profit of $20,000 to a loss of $10,000.
What’s a typical income from flipping houses?
House flipping doesn’t come with a set income. With a home-flipping business, you’ll assume the risk of making a profit on your house flips. A full-time house flipper can reasonably expect to flip anywhere from two to seven houses per year. With a profit margin of 10%, a moderate scenario, that gives you an annual income ranging from $44,980 to $157,430, if we go by the previously mentioned median figures.
How do I find house flipping companies near me?
In hot real estate markets, a number of companies market quick home purchases intended for flipping. Vet any house flipping company before considering selling your house to one. Watch out for scams, too. Freddie Mac warns sellers to beware of companies offering a sale price significantly higher than asking price or those offering cash back to the seller. Be wary, too, of scammers who buy homes, make minimal repairs then quickly re-sell them to a partner at an inflated price, according to the FBI.
How do buyers find flip houses for sale?
The best house flippers don’t find homes to flip on real estate search portals or through agents. Instead, they reach out to homeowners in target neighborhoods and market their services to motivated sellers who need to sell a home quickly, Allen said.
This article originally appeared on ValuePenguin.com and was syndicated by MediaFeed.org.
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