Considering flipping your first home? You aren’t alone: Recent stats show that almost 7 percent of all home sales in the first quarter of 2018 were recently flipped. And seasoned flippers are bringing in an average of $69,500 in profits.
But before you dive in head-first at the thought of dollar signs, there are a few steps to take to make sure you’re setting yourself up for success – and not a long, drawn-out money trap.
1. Determine how you'll pay for the house and rehab.
If house flipping has you dreaming of cold, hard profits, you might want to back up a step. With future flips, you’ll (hopefully) have cash from prior sales to help fund the next project. But for your first one, you’ll need to come up with the money on your own.
Step 1 in the house flipping process is buying the home – which means you need to determine how you’ll pay for it and the rehab. Your primary options are:
- Mortgage the house and pay for the rehab in cash;
- Pay cash for everything; or
- Use a "hard money lender" who can loan you the entire amount (but often at a 10-15% interest rate).
If you go the mortgaging route, know that conventional financing requires 25% down – but keep in mind that you have alternative financing opportunities. (Psst. For these “alternative opportunities,” ask your Realtor. Like us.)
2. Determine your budget.
In addition to the list price of the home, house flipping requires additional money for the rehab part. While an experienced flipper can gut an entire house (which will likely run $150k+), we'd recommend first-timers stick to the cosmetic stuff. Updates like carpet, paint, landscaping, countertops and appliances can range anywhere from $15-50k, depending on quality, materials, house size and more. Before you start listing out all the items you’d want to update in a potential flip, determine your budget to make sure you’re able to fund the project – and make any kind of profit.
3. Choose the right location, with the help of an agent.
Where you flip a house really does matter. Just because a house is cheap doesn't mean it's the right house. You're not going to force a neighborhood to improve. Even though you aren’t buying the home for yourself, you’re still making a big purchase – and one that will benefit from the help of an expert.
A Realtor will really be in tune with the neighborhood you’re considering. They’ll know if the area is trending up in value or down, and they’ll understand what local buyers are looking for. Some aspects might be more important in one area versus another – like outdoor living spaces or mudrooms, for example – and a real estate agent can lead you in the right direction.
4. Buy at the right price.
When it comes to flipping, as they say, "You make your money when you buy.” In other words, you can't pay full retail price for a home, make improvements and expect to make a profit. You have to pay below market value in order to make a profit.
A generic calculation for this is purchase price= 70% ARV (after renovation value), minus repair cost. For example, If you want to re-list the house for $300,000 after putting $50,000 worth of renovations into it, then you wouldn't want to pay more than $160,000 for the house upfront.
Another thing to keep in mind about profits? You’ll be taxed on them. Don’t forget them when estimating at the outset.
5. Make accurate cost estimates.
Before you make an offer on a house to flip, list out all possible costs so you truly know what you’re getting yourself into. Gather realistic repair estimates, calculate how much it'll cost to "hold" the house, and don’t forget about real estate commissions and other things like insurance, taxes and permit costs.
P.S. The “costs” on house flipping shows on HGTV aren’t realistic. I can help with that, too.
6. Hire good contractors.
After you’ve made the decision to move forward with a house, be selective in the contractors you choose to help you flip it. Interview several contractors before deciding who to award the house to, but don’t just speak to them over the phone. Go see their work in person, look at their portfolio of previous jobs, call their references and verify their credentials. A bad contractor can mean you don't complete the renovation in time, overlook details or possibly even lose money on the flip.
7. Be realistic with improvements.
A Realtor can help you determine the ARV of a house and help in determining the type of buyer who will purchase it. You want to make sure the improvements are consistent with the cost of the home. For example, adding a $20,000 refrigerator to a $200,000 house probably doesn’t make sense (for either the home or your budget). And pay attention to your surroundings. Don’t put granite countertops in a house where all of the other houses in the area have laminate.
On the other hand, be cautious with cutting corners. Buyers – and their agents – are shrewd, and they can tend to be turned off by something that looks like it was flipped. They’ll know if you cut corners on finishes and quality, so don’t go too cheap – or it’ll end up costing you.
8. Remember that it isn’t your home.
Just like we recommend you remove your personal quirks when staging your home to list, keep yourself out of it when updating a house. When picking out finishes, colors and materials, make choices that will appeal to a mass amount of people. Opt for neutral hues and finishes, and remember: Just because you love carpet in the bathroom, doesn't mean anyone else does.
9. Jump into it.
For your first-ever house flip, you just have to jump into it with both feet. You’ll likely make mistakes, but you’ll learn enough to do better the next time around. And while you might not make money off your first project, know that you’ll more than likely do a lot better on the second.
Ready to start your search for a fixer-upper to flip? Contact us today, and let’s get started.