Television shows often make “flipping” look easy, with investors buying homes and then quickly selling them for a profit.
Experts and scalpers alike say there's no need to rush.
“There are many moving parts to flipping a home, and overlooking something can have serious financial consequences,” says Audra Walters, a real estate agent with Front Porch Properties in Charleston, S.C. “Failure to properly estimate renovations or obtain the proper permits can cause delays and lead to huge losses.”
For Jeryl Norden, a former NASA robotics researcher who now flips three or four homes at a time through a Connecticut real estate company, the hardest part has been finding the financing to buy the properties.
“The idea of asking anyone, including a lender, for money was a scary thought,” says Noorden, who started flipping homes in 2016. “I went online and found some investor forums and asked, 'If I find a property below market price, is there anyone who would be willing to pay for the house, pay for repairs, and split the profits?'”
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While most people laughed at the idea, one investor agreed. In the end, they made an $80,000 profit, even though the cost of repairs doubled and the project took 11 months to complete.
Flipping a home can be profitable if done right, and here are some steps you can take to increase your chances of a successful flip.
Study the market
Nathaniel Butler, marketing manager at Washington Capital Partners in Falls Church, Virginia, advises that your best opportunities will come from off-market listings — outside the multiple listing service (MLS), where brokers list homes for sale and make them available for viewing.
“These properties can be found through off-market dealer platforms, wholesalers (people who find properties, put them under contract and then transfer them to another buyer to complete the transaction), resale contractors and even 'driving for money' neighbors with troubled properties.”
Don't be afraid to hire an agent.
“Find an agent who understands the local real estate market, takes the time to educate you, and can identify good opportunities,” says Robin Kensel, a real estate broker with Compass in Greenwich, Conn. “Understanding what the market will charge for property in your area is key to a successful resale.”
Ask fellow investors if they know of any agents who have experience working with home flippers. The benefit for agents is that agents who offer smart, savvy business advice are in a better position to build long-term relationships with investors as they buy and sell property, says Kensel.
Finding the Right Flip
Avery Carle, a real estate broker in Nashville, Tennessee, flips homes and combs neighborhoods to find below-market properties.
“Look for homes that appear to be poorly maintained — broken windows, peeling paint, overgrown grass,” says Karl.
She ended up buying and reselling six properties over the course of several years, buying a “lipstick flip” that only required carpeting and painting. Her strategy was to buy a $100,000 home, increase its value by $40,000 to $50,000, and resell it for a profit of $15,000 to $20,000.
Timing is key, says Kensel, the Connecticut real estate broker. Look when fewer people are house hunting, such as “over the holidays, at the end of the year, in the summer.” “You want to be on the lookout when other people are looking elsewhere.”
Set a budget and schedule
Noorden says first-time property flippers need to understand the costs involved in the entire transaction, as well as the value of the home once repairs are completed.
“People lose out on closing costs, lending fees, seller's agent fees, holding costs, contingencies, utilities, construction costs, renovation costs, etc.,” he explains. “You need to buy the home at a fair price to account for these expenses.”
That means calculating the after-repair value (ARV), which is “the projected value of the home after it's been fully renovated,” says Noorden.
Many buyers use what's called the 70% rule.
Stefano Grottoli of Orange Sun Investments in New Jersey gives this example: “If the home you're looking to buy will be worth $200,000 after renovations and it will cost you $50,000 to renovate, you should be paying less than $90,000 to buy the home.”
Let's do the math:
$200,000 (ARV) x 70% = $140,000
$140,000 (70% of ARV) – $50,000 (repairs) = $90,000 (maximum purchase price).
“Obviously, your opening offer will be much lower than $90,000, but even at that price, you can expect to make a pretty penny if there are no other issues,” Grottoli says. “A good contractor can help you calculate repair costs, but be sure to hire an inspector before you buy to look for signs of black mold, termite damage, underground oil tanks and foundation damage.”
Either way, investors should leave some room in their repair budget to cover unexpected expenses.
A timeline must also be set.
Manage your team
Property renovation is a complex undertaking. For each project, hire a team of professionals, including architects, contractors, inspectors, lenders, CPAs, real estate agents, and real estate attorneys. Even with these professionals on your side, remember that the responsibility remains with you.
“Communicate a detailed scope of work to contractors, including an itemized budget and deadlines for completion of each phase,” Grottoli says. “Never put down more than 10 percent before actual work begins, and never leave your home in the hands of a contractor; always supervise their work.”
Avoid over-improvement
This is the biggest mistake many first-time buyers make, says Karl, a Nashville real estate broker who also buys and sells properties. “Do you need the most expensive marble countertops in a B-list neighborhood? No, a nice-looking solid wood countertop will do,” he says. Karl also says not to get emotionally attached to the property.
“Do what it takes to unlock the value of the property,” she says, “but don't make it a vanity project.”