House Flipping for Beginners Archives - Page 5 of 5

Selecting the Right House to Flip If your thinking about flipping a house, you have to start with a good foundation by selecting the right house to flip. This is perhaps the most important part of house flipping because if you pick the wrong house no matter how much time or money you put into it you might still come up short and end up with a flop. But what goes into selecting the right house to flip? Before you step one foot into your first potential property you need to know a few key points and concepts about selecting the right house to flip. Know the market that you are working in from top to bottom, understand price points, average days on market, supply and demand, neighborhoods, school districts, local government, who the typical buyer is in your area and what are they looking for, what does the average home for sale look like in your market, and what is the average sales price in your area. You need to know all this information because when you find what you think is the right house or a good deal, how will you know unless you have something to compare it to and a working knowledge of the real estate market in your area? Patience is your friend, get to know him well. The process of flipping a house cannot be rushed, typically when things are rushed they lead to disastrous results. There is no set number of houses you need to look at before finding the right one maybe it’s 10 maybe it’s 50. You must be patient to find the right needle in the right haystack that will allow you to have a successful flip. Have a group of professionals in your corner. If you are just starting out in house flipping and are unsure of yourself, a professional opinion can make all the difference in the world. A good start to your group might include a real estate agent that has experience working with investors, a licensed contractor with several references that is familiar with rehabbing existing homes and what to look out for, and perhaps a real estate attorney to handle any sticky situations that you might find yourself in. Now let’s look at some factors to consider when selecting the right house to flip. Location and Selecting the Right House to Flip Location is perhaps one of the most important items when selecting the right house to flip. As the old saying goes location, location, location. Location can really make or break a good house after all location is one aspect of the home you can’t fix. Ask yourself is this home in a desirable area, do people want to live here? The answer needs to be yes to both. You don’t want to put all your time and money into a house only to find out that buyers love the home but hate the location. When considering a location look at things like school districts, location to shopping and dining, location to public parks or green space, is the home on a busy road, and if you are in more of an urban environment is the home close to public transportation? Curb Appeal Now keep in mind when we say curb appeal we do not mean overgrown lawns or peeling paint, these are items that can be fixed, and the more items like this you can address the more value you can add when house flipping. When considering curb appeal on a house you want to look at the things you can’t change or would be too cost-prohibitive to change such as the design and function of the home. Also when you are assessing curb appeal, note things you can change or update to add value to the home, like updating the exterior paint, adding new landscaping, replacing outdated lighting, or perhaps adding new shutters or a front door. Age of Home When considering the age of the home in regards to selecting the right house to flip, typically newer is better. Newer homes typically mean newer electric, plumbing, roof, and HVAC, etc….. This is good for you as a flipper in that it will save you money on the rehab costs if these systems don’t need to be updated or replaced. If you pick an older home with non-functioning or outdated mechanics and systems you might spend all of your time and money on these items instead of on fit and finishes, which oftentimes sells the home. Also, many people may quickly find themselves beyond their rehab skills in trying to bring an older home up to modern and functional standards. The older the house is the more and costlier the repairs are that need to be made. Functional Floor Plan When walking through a potential flip take notice of the floor plan. A bad floor plan is another very costly repair if major changes need to be made such as moving walls and rooms around inside the home. When walking through the home do things feel awkward or out of place to you, if they do they will more than likely feel the same way to your future buyer. If the floor plan does have issues figure out if a few minor changes can be made to improve the overall flow and design. Look for quick fixes such as adding or removing a doorway or perhaps adding or removing a single wall. Keep in mind though every wall in a house cannot be removed easily. If the wall in question is load-bearing then it will more than likely be to cost prohibitive for it to be removed, you might, however, be able to add a larger opening or perhaps a pass-through to open up the floor plan if the wall cannot be removed. Price This one factor in house flipping is so powerful that it can potentially handle or address all other items on this list. The price of the home will make or break the potential to flip the house. If you overpay for the home on the front end it is nearly impossible to make it back through the rehab or sell of the flip. When looking for the right house to flip, the deal is made when you buy the house not when you sell it. If you buy the house right it can help smooth over the inevitable bumps and roadblocks you hit when house flipping. When considering the price you need to have three main questions in mind. What can you buy it for? How much can you rehab it for? What can you sell it for? All three of these questions need to line up with each other. If just one is out of whack then you are in danger of potentially having a flop on your hands and losing money instead of making it. Land Often time’s people get so caught up in looking at the house they forget to look at the dirt under their feet when selecting the right house to flip. When looking at a potential flip notice if the land is flat or if the house is sitting on an awkward hill or slope making the walks or driveway hard to navigate? Is the property located in a floodplain or prone to flooding? If the home is in a floodplain not only will it cost you extra to carry the home due to flood insurance but it will also be more costly for your potential future buyer to own the home. Many buyers will not even look at a house in a floodplain due to the extra costs and fear of their home flooding one day. Is there a septic system or any old holding tanks on the property? If there is a septic system what kind of condition is the system in? Septic repairs can be extremely expensive and can single handily destroy the profit of your flip. There also could potentially be old underground holding tanks on the property for water or heating oil. You need to know if they exist, their condition, and any code or safety issues to be aware of when dealing with existing underground storage tanks. Condition of Property When looking at the home notice the condition of the property. Does the home mainly need paint and carpet or is it going to need major repairs? When determining the needed repairs keep in mind your skill level in rehabbing a home. Many first-timers or beginners are prudent to stick with homes that need paint and carpet and perhaps light updating as they are easier and more manageable to flip. Also, know the general cost of the repairs that will need to take place to bring the home back to updated modern standards. Before you make an offer on any house you need to have a complete budget in mind in regards to total rehab costs. Neighborhood This one is closely related to location but needs special attention. When looking at a potential flip you not only need to look at the subject house but the houses that are directly around it. Keep in mind that you can fix your house up until your heart is content but if your house is surrounded by homes that are not being taken care of, they are going to bring the value of your home down. Ideally, when house flipping, you want every house on the street to be very well cared for and the house you are considering to be the eyesore of the neighborhood and street. That way when you fix the house up you can get the maximum benefit. Home Attributes When considering a home and trying to select the right house to flip look at how many bedrooms and bathrooms it has as well as square footage. You want your house to conform to neighborhood standards and ideally have more of each of those above attributes. Also a quick note on 3 bedroom homes versus 2 bedroom homes. When you are on your search you are going to come across 2 bedroom houses that are cheaper than 3 bedroom homes. This is because 2 bedroom homes are less desirable and do not fit people’s needs as well as 3 bedroom homes do. With that being said it does not mean you can’t look at 2 bedroom homes just know that you will not be able to sell the house for as much so you need to buy the house cheaper than you would a 3 bedroom house. Generally speaking 3 bedrooms and 2 bathrooms are ideal when weighing functionality versus the cost of the home. Finding that many buyers are looking for 3 bedrooms and 2 bathroom homes and above. Average Price Point This reference to price is in relation to how the price of your potential finished flip will compare to the average price of a home in your area. Typically the closer your finished flip is to the average sale price of a home in your area the better. You will find that the majority of buyer’s in your area are going to be looking right around that average price point. So the closer your flip is to the average the more potential buyers you will have for your finished product. Selecting the Right House to Flip – Conclusion While this is not an all-inclusive list of items to look for in a potential flip we hope that this list will help you get started and make you aware of some of the things to keep in mind when looking at future flips. How to Get Money to Flip a House One of the most important parts of flipping is to figure out how to get money to flip a house. After all, you have to purchase the property before you can worry about all the next steps like rehabbing and selling the home for a profit. While the list of how to get money to flip a house can be as long as your imagination will allow. Typically funding comes in one of two ways for flippers either borrowing the money or partnering to obtain the money. There are pros and cons to both types of funding so let’s take a closer look at each. Borrowing There are two main ways on how to get money to flip a house, either obtaining funds from an institutional lender or a private lender. Institutional Lenders – Banks and mortgage companies that make their loans primarily on the creditworthiness of the borrower. Private Lenders – Individuals or groups that make loans based on the present and future value of the property in question. With institutional lenders, they make their loan decision based primarily on the creditworthiness of the particular borrower in question. Typically to qualify you are going to need good credit, at least 20% down, and good income history. Also keep in mind as part of the loan conditions a bank is going to require the home to meet minimum condition standards, meaning that the home needs to be in at least average condition. If you are looking at a real fixer-upper that has roof issues, missing HVAC, plumbing issues, and or electrical issues you are going to run into a lot of difficulty in getting the loan done even if you meet the bank’s standards on a personal level. Another point to consider with this financing route is that institutional lenders can take one to two months to complete their loan process. This amount of time can be at odds with how quickly you might need the cash on a good deal in real estate. One of the ways that investors can stand out when making offers is that they can offer quick cash with little to no contingencies; it is difficult to make this kind of an offer if you are using an institutional lender for financing. If you fit the mold of what an institutional lender is looking for though do not discount them based on the potential above limitations. The best course of action is to start the conversation early with a lender and find a good contact at the bank long before you have a house in mind. That way you can hopefully lay a lot of the groundwork ahead of time and when that house does come along you can move much quicker and smoother through the loan process. On the other side private money lenders, who are oftentimes referred to as “hard money lenders” are individuals or groups that specifically lend money for real estate investments. These private money lenders do not base their lending decision solely on your creditworthiness and are typically much more concerned and interested in the deal that you have found that you want to finance. While some private money lenders might require decent credit scores others may not. Another advantage to private lenders is their loan process is typically much quicker and can potentially be accomplished within a week. The reason that these hard money lenders loan money this way is that they are looking at the real estate for the collateral for the loan instead of your personal credit history. If the deal goes bad and you default on the loan they will foreclose on the property and take possession of the home potentially at a profit. Their main concern is whether or not the property will be worth more than loan value if they have to foreclose. Due to this hard money lenders are very concerned with “LTV” or loan to value ratio. Typically hard money lenders will not lend beyond a 75% loan to value ratio with some not willing to go higher than 65%. As with intuitional lenders, a good idea is to start a dialogue early with private money lenders before you find the house, that way you will understand their lending process and know what a typical loan from them might cost you, which will also help when you are analyzing a particular real estate deal. Partnering Another popular way in how to get money to flip a house would be to find a partner that can fund the purchase and rehab. The biggest difference between borrowing and partnering for funding the real estate flip is what you are offering the individual or group for funding the deal. With borrowing, you are offering the group or institution defined loan terms that dictate interest and potentially funding fees that you agree to pay regardless of the results of your flip. When partnering you are offering equity in the property and agreeing to share any profits that may come from flipping the home. Obviously, you are potentially giving up much more money when partnering as opposed to borrowing, for this though you are getting a partner in the deal and limiting your personal finical exposure to the real estate deal in case it was to go bad. Many beginning investors with little to no track record of flipping homes can get their start by partnering with an investor. A potential partner may be willing to take a risk on an unfounded real estate flipper due to the large potential upside of sharing in the real estate flipping profits, where a bank or private money lender might pass on the new investor due to their lack of experience and smaller upside. When partnering to fund a real estate flip the deal can really be structured in any way that is agreeable to the potential partners. Typically a good place to start with a partnership in regards to splitting ownership and profit is 50-50 if one party is finding, working on, and managing the rehab of the house and the other party is providing the funds for the purchase and rehab of the home. From this 50-50 starting point, you can adjust the percentage one way or the other depending on what each party is contributing to the deal and what is agreeable to all parties. How to Get Money to Flip a House – Conclusion So which financing strategy is right for you? This is something that only you can decide as there are pros and cons to each method of funding. The best choice for you is going to be which financing fits your particular situation and needs. Real Estate Flipping Quiet Costs When it comes to flipping houses beginning investors might only consider two types of costs associated with flipping such as the purchase price and the rehab costs. However, when analyzing a potential flip with just those costs in mind their numbers can be off by a great deal. Making them believe there is a profit when in fact they would encounter a loss when selling the property. When flipping property you must also consider what are called real estate flipping quiet costs. Real estate flipping quiet costs as the name implies are costs that are associated with the flip that goes beyond the initial purchase price and rehab costs that might go unnoticed and involve costs or fees that are associated with buying, holding, financing, and selling your flip. Real Estate Flipping Quiet costs can be broken up into four main categories. Buying Costs Holding Costs Cost of the Money Selling Costs Let’s look at each closely so that you will be better prepared to calculate and handle the quiet costs of your next flip. Buying Costs These costs are associated with the actual purchase of the property; in essence buying costs can include any fee that results from the transfer of ownership. Please note that these costs will vary depending on the purchase price as well as the location of the property. Some of the transfer costs that you might be charged include costs for a survey, appraisal, inspection of the property, title insurance, documentation fees, and a title company or real estate agent transaction fee. However, depending on where the property is located some of these costs can be picked up by the seller of the property. A best practice if you are unsure of how sale costs are broken down in your area is to consult a local expert such as a real estate agent, title company, or real estate attorney. Holding Costs These are costs you will incur while holding the property such as homeowners insurance, property taxes, utilities, maintenance fees such as lawn care, and potentially homeowner or condo association dues. Some of these costs might at first seem minor but depending on how long you hold the property and the price point of the home, they can really add up quickly and start to eat away at any potential profit you were hoping for. Cost of the Money Unless you use your own cash to flip houses there is going to be a cost to the money that you are using to flip with. The list of financing options available to fund a flip can be as long as your imagination will allow but some more common finance types include mortgage loans, hard money loans, equity lines of credit, private investor funds, or seller financing. All of these different types of loans have their pros and cons and it is extremely important that you understand the basic elements of the loan you are entering into such as loan amount, the duration of the loan, and the loan terms. In regards to real estate flipping quiet costs, the cost of the money can be one of your largest expenses so it is important to know exactly how much it is going to cost you for the use of the money. Things that you want to pay particular attention to is the interest rate being charged, whether or not there is a funding fee, are there any prepayment penalties, are there limits to the duration of the loan, and any other fees that might be associated with the money. Selling Costs As with the other three quiet costs, your selling costs can vary a great deal depending on the price point of the property and the location of the property. However, the two main categories to consider with selling costs are real estate agent commissions and closing costs. Real estate agent commissions will typically be a percentage of the sale price, total agent commissions can be around 6% but this can be negotiated with your real estate agent and it could be lower or higher. As you can imagine if you are working at a higher price point the real estate agent commission can add up to a very large cost to you. The other selling cost would be closing costs associated with the sale of the property. These are very similar in nature to the buying costs you incurred when you purchased the property except now you are on the other side as the seller of the home. Typical closing costs might include title search, doc fees, title insurance, survey, and title company transaction fees. While some of these costs can be picked up by the buyer, if you have any doubts about the local customs in splitting up the selling costs your best bet is to consult a local expert in your area such as a real estate agent, title company, or a real estate attorney. Real Estate Flipping Quiet Costs Conclusion As you can see when you put all of these costs together they can quickly add up to tens of thousands of dollars. So when you are analyzing any potential flip you must account for all four types of quiet costs in addition to purchase price and rehab costs, as it can make the difference between you making money or losing money on your next flip. Using Real Estate Agents When House Flipping While there are general basic guidelines and principles for flipping houses, all house flippers and investors have their own opinion or best practices when it comes to choosing the best path to a successful flip. This is no more evident than in using real estate agents when house flipping. Some investors feel that real estate agent commissions are just too expensive for the services that they receive and will avoid them at all costs. While other investors swear by an experienced real estate agent. Let’s go over a few pros and cons of using a real estate agent when house flipping so that you can make your own informed decision on whether it is prudent to flip homes with an agent or not. Pros to Using Real Estate Agents When House Flipping: A good experienced real estate agent knows the market that they are working in from top to bottom. Their knowledge includes homes that are for sale on the market, homes that just sold, and possibly even a line on a home that is not publicly advertised on the market through the MLS. However the agent’s market knowledge is not just limited to specific homes for sale or sold, they can be a great source of information on what buyers are looking for, whether a particular neighborhood is hot or not, and what the good school districts are that buyer’s are clamoring for. Real estate agents can be excellent negotiators when dealing with the type of money involved in a real estate transaction it is always good to have someone in your corner looking out for your bottom line. When you have put the finishing touches on your latest flip and are ready to get the property sold, a real estate agent can offer invaluable exposure for your home. Perhaps one of the greatest advantages to working with a real estate broker when getting your homes sold is that they can list your home on the MLS offering great exposure to the market and the general public. By doing so not only is your listing agent working to get the home sold but also the countless buyer’s agents out there that are working with specific buyers to try to find them a home to buy. An agent can be a cool head in what can be a stressful and emotionally charged situation. Often times in a real estate transaction we can be our own worst enemies, as we might react emotionally to a particular situation instead of logically. A good real estate broker can talk you through the situation and help you realize the best course of action without involving charged emotions like anger, fear, or greed. A real estate agent can be an excellent source of many needed items and people while you are going through the flipping process. Often times an experienced agent will know many great contractors, subcontractors, home inspectors, title companies, and real estate attorneys. While a broker is not an attorney and cannot act in such a capacity, they can be very good at keeping you out of legal trouble. A broker is going to know customary real estate practices, required appropriate disclosures, and standardized contract forms to help the transaction go smoothly and hopefully stay out of the courts. Cons to Using Real Estate Agents When House Flipping Perhaps the biggest and most obvious disadvantage is the cost associated with using an agent. Typically the seller will pay any applicable real estate commissions to both the buyer’s agent and the listing agent. So if you are using an agent to purchase a home you should not incur any real estate commission fees with the exception of perhaps a small transaction fee from the real estate brokerage. When you go to sell the home however you will be on the other side of the transaction and the real estate commission is going to be charged to you out of the proceeds of the sale. While there is no specific real estate commission an agent can charge typically a broker will look to receive 6% of the total purchase price to be shared in some manner between the listing agent and potential buyer’s agent involved in the transaction. The final commission charge to you can be substantial especially if you are working at a higher price point. Just like any other profession, there are good and bad real estate agents out there. Using a bad real estate agent can cause many issues including miss-handled negotiations, missing out on a good buy, and under-representing your interest in the process. While we won’t go into great detail here a lot of this can be avoided by asking the real estate agent a few simple questions like how long have you been an agent? how many homes did you sell last year? what aspect of real estate agency do you specialize in? These types of questions can help you uncover their level of experience and aptitude and being an agent. Obviously, you are looking for an agent with a good amount of experience preferably involved in the real estate investment side of the profession. Conclusion There are both pros and cons to using an agent and every real estate investor has to decide for themselves whether or not they are going to employ the services of a real estate agent. In our opinion the pros far out way the cons of using real estate agents when house flipping. Especially with a little due diligence and negotiation of the real estate commission on the front end, you can help mitigate some of the cons. Unless you are confident that you can adequately fill all the responsibilities and roles listed in the pro column on your own you are typically going to be better off using a good quality real estate agent. If you do choose to use an agent to flip houses and feel the sting when you see how much money your agent is getting, just know that in the long run, you are typically better off working with an agent as opposed to not.