The Secret to Flipping Houses

26 May

Don Loyd

Flipping houses is a common vehicle for real estate investors to turn a profit. I have bought and held property, but I have also flipped.

I cringe sometimes when I watch the TV real estate flippers. I actually wonder if they really know anything about the subject.

Sometimes I think they are more lucky (could be they are simply not telling the truth?) than real estate savvy.

After looking at hundreds of flips, and talking to many in my real estate club who were active with them, I gained some insight as I saw a pattern develop.

If you want to succeed at flipping house, here is a checklist I encourage you to use, or one similar.

First, if you are going to make a profit, you must know your true after repair value (ARV) going in, before you close the purchase.

Many new investors fail here. They tell themselves it’s worth more than it really is. Always be conservative in computing this value and use valid comparable sales.

Second, know your rehab costs. I’ve been in real estate and home construction for about 40 years and I still can get it wrong at times. It seems like there are always more cost after you open the walls. Always pad your expense line item sheet and include a contingency line item if your lender, if any, allows it.

Third, make an offer to purchase that reflects your ability to make a good profit. Do your best to not overpay. New flippers get excited and think they have to buy. True is, you don’t. Only buy when the price is right and you can make a healthy profit. You will see why in a minute.

Fourth, get qualified contractors to do your rehab work. If you don’t you will be in the rehab “business” and if you are not qualified to perform the work, you could open yourself up to almost endless repairs and even get sued to perform the work in a workman like manner. The bottom line is you could waste a lot of time and money. In Oregon, where I live, you must be licensed with the state contractor board as a contractor.

Fifth, be realistic about the time it’s going to take to rehab the property. I have seen many lose potential profit because they told themselves it would take 30 days.

Rather, it took 60 or 90 days when unforeseen issue arise or contractors don’t show up. That is a problem because if you are paying interest on a hard money loan, it could eat up a good amount of the profit.

Or, if you are using your cash, you have your money tied up and you are out of business until the darned thing sells and closes.

Sixth, be honest about how many days on the market before your property is closed. If he average number of days is 30, don’t fall into the trap of expecting 10 days.

Seventh, buyers generally will get an independent inspection on the property before they close escrow. If there are items your contractor missed (a real possibility) or you did some shoddy work (which has happened), they will likely try to negotiate a lower price. There goes more of your profit.

Eighth, after all your work, all your worry, all your frustration, you finally get to the closing table and learn that the $50,000 in profit has shrunk to about $10,000, or less.

Can that actually happen? Yes. In fact if you didn’t buy the house right, you might even lose money out of pocket.

Understand this: Flipping houses is not “real estate investing.” It is a very specialized business. “Investing” suggests the money does the work, not you. If you enter into the flipping business, and you lose money (which is a real possibility) you have not lost money on a real estate investment.

And if you want to make some “free” extra money on that property, try to find a way to change it’s use.

In other words, add an additional bedroom for a few dollars, change the zoning to commercial, and so forth.  Over the years I have made a lot of money by doing this (sometimes) very simple thing.

Before you enter into a purchase agreement, ask yourself (and be really honest with the answers):

1. If I buy this, how much wealth do I create today (not tomorrow or after appreciation).

2. If I buy this house, how much cash out of my pocket will it take? You want to use as little as possible so you can stay in the business of real estate investing.

3. If I put my cash into this house, when do I get it back? Remember that the cash you have in the purchase is cash you don’t have for another purchase.

4. If I choose to hold (or maybe forced to hold), how much each month comes out of my pocket, or how much goes in my pocket? If you have to pay out cash each month, you become a slave – like it or not.

It’s also possible to make a ton of money flipping houses. I know people who do very well.

If you are going to flip for profit, you might consider teaming up with someone who can help you avoid some of the pitfalls.

Here's to your success.

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