Spending an afternoon watching one of the many house flipping shows on cable television can be enough to convince anyone to try their hand at this seemingly quick and easy way to make thousands of dollars of profit.
After all, the process looks easy enough. Just buy a very cheap fixer-upper house, put a little time and money into it, and then resell for thousand more than you paid... right?
But as the old saying goes, nothing is ever as easy as it looks and if you now own a house you are trying to flip, you may have already found that old saying to be absolutely true. Before you panic, read the following tips designed to help avoid rookie mistakes and increase your chances of actually flipping your house for real profits at the closing table.
Do Preliminary Research and Planning Prior to Flipping
Planning and research is one of the most important parts of the home-flipping process, and it happens before the purchase of a home even takes place. Here are a few things to keep in mind prior to flipping a home.
Take Time to Learn About Your Local Market
Successful house flippers study their local market constantly, watching for trends, niches and upcoming changes that will influence prices and create or dampen buyer interest. This includes knowing what factors are attracting buyers to the area, such as new employment opportunities or great schools.
They also track sold home information, new listings and the amount of time it takes for homes to go under contract and close in the neighborhoods where they own homes they intend to flip. Knowing this information will help give you parameters for better managing your budget and renovation time frame for each home you expect to flip.
Start at the End
When it comes to flipping a home, renovators need to first know who is most likely to want the property. They need to consider how the following questions will affect the sale:
- How much will the average buyer be able to pay?
- What kind of features are they likely to value?
- What is the community like?
Learn What Makes a House Flippable
Before leaping into the real estate market, it's important to understand what makes a house a viable investment for flipping. Any home can be renovated, but for it to have appeal to buyers, and for it not to run too much money for the flipper, certain elements must be in place.
- Location. Location is perhaps one of the most important specifications when picking a home to flip. Certain neighborhoods are valued more highly than others, and some neighborhoods are located near good schools, work locations, entertainment, and other prime visiting spots that buyers would be willing to pay for proximity to.
- Structural Soundness. When buying a home to flip, oftentimes it's expected that the home will be a fixer-upper. But if it's too much of a fixer-upper, it may be impossible to recoup the money sunk into renovating it at the time of sale. Structural damages are often far too expensive of repairs for flippers to take on, and instead, people who want to flip houses should focus on homes that only need cosmetic repair instead.
- Value. The price of a home typically cannot increase past the price of homes in the existing neighborhood. When buying a home, flippers should be sure that they are purchasing it below the market value, so that the renovations will bring it up to the value of the neighborhood while still enabling them to turn a profit. If the cost is too high, the flipper may not make any money on the house, or even lose money.
It's important when learning how to flip a house to understand these principles before purchasing.
Those just getting started with home flipping should ease their way into it. Purchasing a simple home that needs $25,000 of repairs can be a great way to explore the world of permits, safety, and negotiation. Even flippers who are planning to do most of the work themselves will need to budget a learning curve into their project.
For example, are city officials happy to help, or constantly throwing a wrench in the plans? Do certain contractors only want to work with certain home flippers? Are real estate agents wary of home flips because of quality issues in the past? These answers are specific to the area in which a person flips their home, so owners should limit their risks at the beginning until they know how to navigate the waters.
Seek Out Qualified Professional Services
While house flipping shows might appear to be all about the flipper, the truth is that successful house flippers know the value and importance of assembling a top-notch team. Having a reliable, trustworthy team helps to insulate them from excessive risk, while offering a better chance of meeting maximum profit margins on each home they flip.
Assembling this type of team starts with seeking out a real estate professional in your area who understands what it takes to successfully flip a home and has a track record to prove it. This type of sales agent will be able to help you understand the market, determine how to make the best possible use of your renovation budget and what needs to be done to attract the most qualified buyers when the home is ready for the market. In addition, building a relationship with an agent of this caliber will provide you with referrals to high quality contractors for your team who will take pride in completing their work on budget and on time.
Renovation Considerations When Flipping a Home
There are a number of considerations when renovating a home to flip it. Here are a few things to keep in mind when planning renovations in a home.
Focus on the Foundation
The walls, floors, and ceilings are the structural components of the home that are non-negotiable. So while a backsplash and an open-water faucet are certainly nice to have, they're not as important as renovating these key characteristics. A new buyer may know little about joists and cornices, but they can gauge the sturdiness of a home without needing an architectural degree. If something seems wrong to the buyer, it will be easier for them to dismiss the home without necessarily even realizing why.
Flipping a Clarksville home can be an undoubtedly lucrative way to capitalize on the real estate market. However, there's a reason why not every flipper makes money from their investment. Understanding the basics of flipping can make it easier to forge ahead with the right attitude.
Renovate With Likely Buyers in Mind
A mistake often made by new house flippers is to renovate the home to their personal tastes or with the wrong buyer in mine. To flip a home successfully, it is imperative that you understand who your buyer is most likely to be and what housing features and amenities are most valuable to their lifestyles.
For example, if the home is likely to be sold to a household of one or two people, a larger master bedroom and bath and a second bedroom that can be used for guests or an office may sell better than a home with three smaller bedrooms. However, if the neighborhood is predominantly made up of larger households of four or five people, having the third bedroom becomes a major selling point.
To get a good understanding of who your most likely buyer prospects will be, based on the location of the home, ask your real estate professional to help you analyze the local market and decide what type of features and improvements to include and which ones to avoid.
Stay On Budget, On Time and On the Plan, Always
The fourth key to successfully flipping a home is a very important one - the need to stay on budget and stick closely to both the time frame and plan for renovations and marketing. Failing to do any of the these will end up reducing your opportunity to earn expected profits on the sale of the home.
If something unknown arises that must be dealt with, such as finding a latent defect that must be corrected during the renovation but was not in the plan or budget, look for ways to reduce other costs in order to pay for the repair without exceeding your initial budget. Since delays could mean missing your expected completion date and losing prime marketing time, you may need to also look for ways to fit unexpected repairs into the planned timeframe in order to minimize lost profits, such as scheduling some work on the home to be done after normal business hours or on the weekend.
Watch the Clock
Time is a major concern when it comes to flipping a home. If the updates can't be completed quickly enough, flippers lose money every day the contractors run over schedule. The longer everything drags out, the more money an owner will lose to interest if there is a loan or mortgage to buy the property. Experts recommend fast turnarounds even when a person has purchased the property in cash. Efficiency is the key to finding new properties to invest profits.
You should be especially careful with meeting deadlines of your investment loan if you borrowed the capital from a hard money lender. In case of a hard money loan foreclosure, a default rate clause may force you to pay a significantly higher amount than your initial debt. According to this hard money loans guide, the rate can be raised for up to ¼ of the original amount in the event of default.
There is one major warning though when it comes to a flipper's timeline. Professional home flippers should be motivated to finish their project as soon as possible, but this doesn't mean they should rush into the sale. If the market takes a turn for the worse in the following few months of purchase, sometimes it makes sense to rent the home rather than take a loss.
Price to the Market, Not to Your Needs or Expectations
Successful house flippers do not want to build an inventory of completed homes waiting to be sold. Unsold homes are subject to the market fluctuations that can erase potential profit margins overnight. To become successful as a house flipper, you will want and need the homes you renovate to sell as quickly as possible. Doing this means pricing them accurately based on the most current local market information, which is not always the same as the flipper's needs or expectations.
To correctly price a home that will be flipped, sellers need to create a detailed budget and time frame for the entire project before beginning any work. Their real estate professional can use this information along with an in-depth comparative market analysis and sales projections based on historical trends for the area to help the seller price the home as accurately as possible to attract maximum interest from qualified buyers and sell the home as quickly as possible.
What Risks Are Involved in House Flipping?
When flipping houses, nothing is guaranteed. As you work, the market could fall out from under you, causing the value of the property to plummet. Although you can try, predicting this change with any sort of accuracy is nearly impossible. Luck must be on your side to ensure you can make a tidy profit from each house you flip.
This is also true when digging into the renovation process. As you start to remove floorboards and walls, it is possible to uncover a world of unsavory secrets, ranging from mold to structural damage. As you work on repairing those previously-hidden problems, the cost of materials and labor could dip into your profits. The work timeline will extend out considerably as well, depending on the extent of the unexpected issues and their repair needs.
Beyond potentially impacting your finances, fixing and flipping houses can take a toll on your mental health as well. As you encounter unexpected issues and other hiccups along the way, your stress levels can start to climb. Without a healthy way to cope, your ability to handle your personal and professional activities could decline. You must honestly assess if you are ready for whatever comes with this process to see if you should move forward with this project.
Although flipping houses has many risks, the potential for great rewards also exists. You can minimize the risk factors by working with skilled professionals in finding the property – and preparing it to reenter the market.
Even if you follow every rule out there, flipping a home can still be fraught with challenges and unexpected pitfalls. Carefully examine the risks involved and find a real estate professional that you can trust along the way if you believe this kind of investing is for you.
The Ashton Real Estate Group of RE/MAX Advantage
The #1 Real Estate Team in Tennessee and #2 RE/MAX team in the World!