Flipping Houses -
How To Flip A House For Quick Profit
FLIPPING HOUSES - I am uncertain as to how this one little phrase has caused so much angst, fervor and in many cases, disdain. As the investor who virtually developed most house flipping strategies many years ago (before most "infomercial gurus" were out of grade school), the art of flipping houses has been a boon, not only to me, personally, but to the American economy.
Some would disagree, claiming it was flipping houses that caused the housing crash. That is absurd. Investors buy houses at bargain prices, or homes that are in need of rehabbing. They then put those homes back into circulation. This puts a ton of money into the economy - the purchase of the house, then appliances and furnishings, then ongoing maintenance or landscaping. All money flowing into the economy, just by flipping a house.
First we should define what is meant by house flipping. Technically, the resale of any property is a house flip, whether you flip on the same day you buy (double escrow) or 50 years after you have lived in it. For investing purposes however, flipping a house means buying, then reselling as quickly as possible for the purpose of making a quick profit. In some cases that may be a double escrow, while in other instances it may involve buying, rehabbing, and then reselling. You can even flip a lease option (rent-to-own), contracts (assigning) and options. There are few limitations on flipping.
Each "flipper" has his or her own "rules" to go by, which are determined by their personal goals. Here are some of mine:
RULE #1 - My first rule in all my investing - treat everyone fairly, but insist on a profit or move on. As a professional investor I know tricks of the trade that, if abused, could be used to take advantage of buyers and sellers and cause them harm. I will not do that, and I request that my students abide by this rule, as well.
RULE #2 - If utilizing a double escrow without having to do any rehab, I will negotiate a price not to exceed 80% of the current market value. In this way I can offer my end buyer a bit of a bargain and still make a profit for myself.
RULE #4 - If rehabbing a property before reselling, I will determine the estimated "after repair value" (ARV). From that I would subtract the estimated costs to rehab (including having to pay the mortgage, taxes, insurance etc. while completing the work), and make an offer not to exceed 65% of the balance. EXAMPLE: Est. ARV is $150K. Est. costs is $50K. That leaves $100K. My offer would not exceed 65% of that, or $65K. Why? Because it may take a while to find a buyer, during which time there is still a mortgage to pay. And rehab costs have a tendancy to cost more than expected. And then there are Realtor commissions and closing costs. And, of course, my profit margin.
RULE #5 - If I choose to hire out some or all of the rehab work, I choose respected contractors with good references. Check "Angie's List" if you do not know of any.
RULE #6 - When rehabbing, use you head. Search for quality materials at salvage yards - you often get higher quality pieces at reasonable costs. Check with "salvage" or "fire sale" stores like Building 19, for cheap materials. Check hardware stores for custom-mixed paint that people never returned to pay for - these are sold at steep discount at places like Home Depot and Lowes. And when repainting, choose a neutral color - preferably an off-white. Two reasons - first, unused paint can be used on the next project. Second, buyer's will want to choose their own color schemes, and off-white is easy to cover. It is often cheaper than custom colors, also.
I also keep my eye out for storm damaged sheds and barns, and offer to take them down and cart it off for a small fee. I then have a lot of salvage materials to use.
Now for the basic steps involved in flipping a house. The first step is to locate a target property. Which property you target will depend on the type of flip you are pursuing and the demand in your local market. If you are looking for a quick profit with a double escrow in a working-class neighborhood, or assigning (selling the Purchase Agreement to another buyer), your target would likely be a decent, blue collar 3+ bedroom home in a nice area. In a retirement community, you would target single-level 2+ bedroom homes, or condos. Targeting to your market makes it easy to resell. You would also have to be able to negotiate either a bargain price or very good terms - that is where your profit would come from.
The basic structure of a double escrow requires you have enough time to find another buyer who can close by the closing date in your purchase agreement. The CUSTOM agreement in "The Simple Man's Guide to Real Estate" gives you up to 120 days. If you do not find a buyer in time, you can simply walk away.
Assigning is much simpler, and usually quicker, but the profit margin is usually smaller. In an assignment (aka wholesaling) you still have to get a bargain property under contract, but instead of selling the property in a double escrow, you sell (assign) the contract to another buyer, who takes your place in the purchase. That buyer pays you a fee for the contract. You do not need cash, credit, or go to any closing.
NOTE: A double escrow absolutely requires special purchase agreements designed specifically for the double escrow. Assigning also requires special contracts. Both are included in "The Simple Man's Guide to Real Estate", as are complete step-by-step details.
If you plan to rehab and flip, you would target a property in need of extensive cosmetic repairs (try to avoid buildings with structural damage - they get too expensive and time-consuming). The property ideally would be vacant and can be purchased at not more than 65% of the ARV minus the costs of repair (after repair value). For example, if the ARV is $150,000 and the cost of repairs is $50,000, you would not pay more than $65,000 for the property.
Complete a very thorough inspection, inside and out. Rehabs tend to throw a lot of unpleasant surprises at you. You may expect to have to update the bath, and only during the actual work you may discover the plumbing inside the wall is shot and needs to be replaced. Have the home inspected by a professional.
Prior to buying a rehab project, get your contractors lined up - time is money. For every month it takes to get the property fixed and resold, your costs go up - there is a mortgage to pay.
On any rehab project, take a personal hand in the operations. If you are not there pushing, workers may tend to slack off, or pad the cost of materials and labor. Take an active role.
These are some of the basics on how to start flipping houses. It also explains why I seldom tackle rehabs anymore. I can make almost as much profit with none of the work by using the double escrow. Full details on the various methods of flipping, along with all the right contracts and free mentoring are available from "The Simple Man's Guide to Real Estate."
Before leaving this page, why not "flip" some of the share buttons and share with family, friends or others in your circles? It's pretty neat stuff.
-- Bill Vaughn
Learn more about "The Simple Man's Guide to Real Estate...