Many home buyers want a property they can move into quickly. Finding a property that needs repairs, and with an asking price that reflects that condition, is one way of investing in real estate. Buying low and selling high isn't revolutionary. What separates planning to flip a home from holding onto an investment property while home prices rise, is what's in between.
Here's a quick guide on how to resell a house.
First, you need to determine how much you can spend on reselling. This will include the price of the property, but there are many other costs involved. You should also factor these costs into your budget:
Repairs and upgrades. How much will repairs cost? What can you do yourself and what will you need to call a professional for? Having a ballpark figure will help, too.
Carrying costs. Just as the cost of carrying inventory impacts a business's bottom line, think about the recurring costs you have to incur while owning a home, including interest on a mortgage if you have one, utilities, homeowners insurance, property taxes, homeowners association dues, etc.
Closing costs. Whether you pay cash or buy at auction, you'll likely incur fees. There are also closing costs if you sell.
Your team. In addition to your tradespeople, you may need other professionals on your side. When it comes time to sell, you may work with a real estate agent. A real estate attorney is required in some states and can also handle any legal issues that arise.
You don't actually have to pay for it, but if you're putting in the effort yourself, you'll want to consider the value of your time: How many evenings and weekends are you willing to sacrifice to resell?
2. Find the best market for resale
Sure, real estate is always about the three “L's” – location, location, location – but when it comes to buying and selling real estate to make a profit, location can mean the difference between getting a nice chunk of money or having major regrets.
Neighborhoods in the middle of the real estate market tend to be good for flipping. At the high end, a six-figure home is too high an initial investment. At the low end, you can get a super cheap property in a low-cost neighborhood, renovate it into a home with great amenities, and still not be able to sell it for enough to recoup your investment.
A real estate agent with experience working with investors can be helpful and may be a good selling agent when it comes time to sell: They know what's standard in the neighborhood, have up-to-date information on similar property sales, and may be able to give you tips about potential issues like zoning.
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3. Build a network of artisans
Once you have an idea of the area you want to resell in, start looking for professionals you want to work with. You don't necessarily have to hire them. Have the phone numbers of trusted electricians, plumbers, HVAC technicians, etc. handy so you can contact them if necessary.
Another reason to assemble a team: To maximize your profits from flipping a home, you want to have possession of the property as quickly as possible. The sooner you start renovations, the closer you'll be to selling that home. If you need a general contractor, it's a good idea to work them into your schedule, as they'll likely be booked for work weeks or even months in advance.
Making a cash offer on a home flip can save you money by incurring lower closing costs and not paying interest while you work on the property. About 60% of home flippers purchased properties with cash in the first quarter of 2021, according to real estate data firm Atom Data Solutions. But not everyone can afford to pay cash, especially if they're a first-time flipper.
If you have significant home equity in your primary residence, a cash-out refinance can give you money to buy an investment property. A home equity loan could also be used for the same purpose. However, both carry risks, as you could lose your home if you are unable to repay the loan.
Investment property loans are also available. This type of mortgage usually has stricter terms than a mortgage for a primary residence, because lenders assume that if the borrower goes into hardship, they will likely continue to repay the original mortgage and will be unable to repay the investment property loan.
Here's what a lender will likely expect from you when considering an investment property loan.
The minimum credit score is 620, but different lenders have different minimum scores.
Cash reserves sufficient to cover at least six months' worth of expenses.
Mortgage rates for investment properties also tend to be higher than mortgage rates for primary residence properties. Comparing the rates and fees of multiple lenders can help you find the best deal.
5. Find and buy houses that can be resold
Now that you have your budget set, you’ve identified the right area, and your financing is done, it’s time to actually start looking for a resale property.
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You’ve already made a lot of decisions, but there are two big ones to make: First, what renovations or repairs do you need?
Are they repairs you can afford to carry out? Cosmetic improvements such as new flooring and tile are relatively doable even for novice renovators and will produce visible results.
Are there any issues that could turn the property into a money-suck? A home with a flawed foundation or other structural issues probably isn't worth your time and money.
Once you've determined the scope of work, you move on to the second decision: what is a reasonable offer? Many home flippers use the 70% rule to determine the maximum amount they'll pay for a property. The idea is to offer no more than 70% of the home's value after repairs, minus the cost of the work. You can figure out what the after-repair value will be by researching sales of similar properties in the neighborhood.
(Renovated Home Value x 0.7) – Repair Cost = Maximum Purchase Price
So if you find a home you think will sell for $250,000, but it needs $60,000 worth of work, you shouldn't pay more than $115,000 up front.
Having a specific number in mind can be especially helpful if you're going to an auction or competing with other buyers in a traditional sale — you'll know when it's time to give up and start again with a different home.
This is what looks like so much fun on TV. In reality, it's never a montage. According to The Atomos, it took an average of 159 days to flip a home in the second quarter of 2021 from purchase to sale. That's just over five months, with most of that time likely spent on renovations.
While you may be able to get more cash out of your project with more effort, it's important to stay within the scope of your expertise. Shoddy repairs could be flagged up in a home inspection, or even worse, you could be sued by the eventual buyer. Cosmetic renovations that are poorly done may not get you as much value as you hoped for.
Calling in professionals when necessary and obtaining necessary permits throughout the process will cost you time and money, but it can prevent major headaches later.
7. Sell your upgraded home
Finally! Your renovated, fixed-up property is ready to be turned over to a new owner. That means pricing the home, listing it for sale, and showing it to potential buyers. Some home flippers choose to forego a real estate agent (and their fees) and sell by owner to maximize profits. As with renovations, whether you choose FSBO or work with a real estate agent comes down to your priorities. Selling without a real estate agent can save you 3%, but it can also take more time.
According to Attom, home flippers made an average of $63,500 in profits from resales in the first quarter of 2021. If you're happy with the results, you might have found a new side hustle.