What Do People Think You Do?
People often think it’s like the TV shows on house flipping. There are some similarities, and there is definitely drama, but never does it go as smoothly as shown on TV. Nor are the profits as they lead you to believe. They show a gross profit if they show anything. There are usually a LOT more expenses of carrying a property, and unless you’re a larger company, you also cannot get their pricing for labor and materials.
What Do You Really Do?
I search for houses with very specific criteria in specific market areas. These houses are usually not currently for sale. I am looking for houses I can buy at approximately 65% of the market value, or less. Either the owner or the house usually has some type of distress. The house may be in disrepair, totally outdated, have a leaking roof, or something that requires a substantial investment of money. Or, the owner may be distressed. Examples are divorce, death in the family, inheritance, or pending foreclosure. (There are dozens of reasons.)
I contact owners, and see if they’re willing to sell to me. I have to buy at a price where I can make all of the necessary improvements, cover carrying costs of taxes, insurance, utilities, etc., and still make a decent profit for the time spent. Because you can never be certain of the exact expenses, you have to build in a cushion for unknown expenses and time.
Once I make a deal, I close on the property and make the budgeted renovations. This may take 2 weeks to several months. The scope of the renovations depend upon the price of the house and the other houses in the neighborhood. You do not want to over or under-improve. Once complete, then the property is put on the market and sold.
The difference between what I sell it for, less selling costs, buying costs, carrying costs, and renovation costs, equals my profit.
A Day In The Life
Every day, I search for new opportunities to buy a house. The market is competitive, so you must always be looking. It may take several months to convince the owner to sell, so you should always have a pipeline of houses you’re working on (to earn a living). These houses are typically not listed for sale, so you cannot look with a Realtor or on Realtor.com. Houses that are already on the market will not usually be good deals for a house flipper.
I buy lists of houses/owners that have specific criteria, including how long they’ve lived in the house, how old the house is, how much equity is in the house, the age of the house, etc. All of this information is available through list sellers. You must also specify your desired zip codes.
We send a letter to these addresses, usually every 6 – 8 weeks, asking if they’re interested in selling. It’s a numbers game. You have to mail repeatedly and hope that when they are ready to sell, you’re mailer was recently delivered and they act on it. We also try to find a phone number for each owner. This can be done by hiring a skip trace service. (Phone numbers don’t usually come with the list.) We call several times, before giving up.
Once someone is willing to have us make an offer, we schedule an appointment to see the house. Prior to going, we do all the online research. We search comparables, and determine what it will cost to renovate the house. This is all based on averages. When we arrive at the house, we do a visual inspection. We make a lot of assumptions before we get there, and if the visual inspection is close to what we expected, we’re already prepared to make the offer. Time is of the essence. Typically, if you leave without making an offer, it’s very difficult to get another appointment. On average, 5 – 10% of people will respond to the letter or phone call. Then 1 of 20 appointments will sell their house to you. So you need a lot of mail and calls going on all the time.
Once you contract for the house, you hire a title company or real estate attorney to do the closing. They check for liens and clear title.
If you don’t have cash, you must get a hard money loan (or borrow from friends, family, etc. but I consider that cash). Hard money lenders are easy to find and they will often fund 75% – 80% of the purchase price, plus 100% of the renovations. These loans are very expensive. You typically do not have to make any loan payments during the renovations. There’s one payment when the house is sold. You can expect to pay several points (1 point = 1% of the loan amount) as fees, plus 13 – 15% interest. It seems high, but remember you only have the house for a few months…and there’s no where else to get the money. Banks will not lend on house flips. You must factor this cost into your budget.
Now, you hire contractors. Depending upon the amount of work to be done, you’re probably going to oversee the project yourself versus hiring a general contractor. You can also do the work yourself if you’re qualified to do so. However, you must do quality work if you expect to sell to the average buyer. You don’t want inferior work or problems to be hidden from the buyer. You must always work with integrity and honesty.
Every day, continue the search for houses to buy, plus oversee any houses under renovation. Contractors are notorious for not showing up and/or not doing good work. You must follow up continuously. No one will care about your timeline or your budget except you. If you do enough houses, you will learn contractors you can trust and count on. If you go with the cheapest bid, you will usually get an inferior product or someone who doesn’t show up regularly or will tell you half way through the job that they need more money.
Quite often, once renovations start, you will find problems you did not uncover prior to purchase. There’s no way to know everything in advance. These aren’t standard transactions where you do inspections prior to close and ask for credit from the seller. (You can. But you will most likely lose the sale. Your offer has to account for things unknown. Remember these houses or owners are under some kind of distress and they react accordingly. This is a very difficult time for most of them. You are not taking advantage or them. You are often their only viable option.)
You must always be prepared for things to not go according to plan, no matter how hard you try. The kitchen cabinets you ordered are out of stock. Your plumber didn’t show up today. The electrician found that all of the wiring in the house needs to be replaced. The city is requiring you to pull permits and it’ll take an additional 2 weeks. Someone broke into the house while you were renovating it and stole the new appliances. Etc. This isn’t to scare you, but you have to learn to deal with the unexpected problem.
Once the renovations are complete, you list the house for sale. You should use a Realtor to assist you, but you can sell it yourself. Remember every day you hold onto the house costs you with the lender, the utilities, the taxes and insurance. Hire a professional to sell the house quickly.
House flipping can be a lot of fun! It’s a LOT of work and it has risks. You MUST buy at the right price, or your profit is gone before you start. You must do your homework thoroughly. Once you own the house, you must either do the renovations or sell it to someone else who will most likely pay less than you did. It very rewarding to see the finished product! Often we turn ugly into nice. And you can make more money with one or two houses than many people make in a year. But, you have to be a person willing to take risks and know you’ll have to deal with problems. You also get better with experience.
On TV you’ll often see people buy foreclosures from auctions. Keep in mind that most foreclosures will not let you inspect the house prior to bidding. You usually must buy sight unseen, and you have no recourse to back out if you find something you don’t like. You also usually have to pay in full within 24 – 48 hours, thus no time to get a hard money loan. You can get great deals through auctions. However, you can uncover problems you had no idea existed and you couldn’t budget for. (The entire interior could be destroyed.) Buying at auctions is only for seasoned, higher volume flippers because you’ll make money on some, and you’ll lose money on others.
What’s The Average Income?
$15,000 per house.
What Education If Any Is Needed?
No specific education is needed. However, being a real estate agent will help you have access to and know how to do comparables before you buy. Buying at the right price is more important than anything else.
Also, the more you know about constructions/renovations, the better.
Sometimes you can work for a house flipper. They often need someone to make calls to owners, do mailings, check up on renovations and other miscellaneous jobs. It’s a great way to learn while someone else is taking the risks.
Something Important To Know
This is a job for someone willing to take risks and does not get stressed when things go wrong. Things will definitely go wrong, but you learn how to move through the challenges. It isn’t for timid people. It can be a high stress job because so much money is at stake.
If you get good at it, it can be great! You make a lot of money and work your own schedule. But you’re always looking for your next deal, and there’s no consistency to finding them (until you become a larger company, spending a lot of money on marketing).
Ideally work for someone who’s already doing it and learn. Flippers won’t usually mentor you, as there’s nothing in if for them and you’ll become competition. But they often need employees, knowing that most won’t become competition because it’s not for everyone.