Things You Should Know Before You Flip a House - What are yours?

[Andy Davey]

4 Things You Should Know Before You Flip a House

As an entrepreneurial-minded person, you love to examine potential business opportunities. House flipping attracts countless business people like you, but not all of them make a profit.

They make preventable mistakes. For example, they dump money into “money pit” homes. They pick houses in the wrong neighborhoods. Then, after they've invested tens of thousands of dollars, they're forced to sell their investment property for a meager profit, or worse, a loss.

Most of these ill-advised decisions stem from bad information or a lack of knowledge. To help prevent you from making poor decisions before you flip a house, we've collected 4 tidbits of critical information about the process. Read our list, and inform yourself.

1. The Market Favors Entry-Level Homes, Not Luxury Properties

In 2016, house flipping experienced the most favorable conditions in 10 years. Contractors broke ground on 1.1 million entry-level homes, about 400,000 homes short of the projected need, leaving a need for less expensive properties. This limited housing inventory, an increased demand for entry-level homes, and low interest rates made it possible for nearly 10% of houses bought in 2016 to be flipped.

In previous years, investors focused on flipping luxury homes. They would net sizable profits from a few key properties each year. Now, the market has shifted, favoring less expensive homes for cash-strapped millennials and young families.

2. You Will Make Money Based on How Low You Buy, Not How High You Sell

As a house flipper, your goal is always to cover your repair expenses first. Then, you focus on making a profit. That profit margin may vary, depending on the house, the repairs it needs, the neighborhood where it's located, and the city it's in.

What doesn't vary is the bar investors set for picking and selling a home. Namely, investors should purchase a house for 70% or less than the home's projected After Repair Value (ARV).

To hit the 70% sweet spot, your best bet is to find a repairable home that's priced pretty low. Then, after you invest in its rehabilitation, you sell it at a moderate price. If you try to upsell the house too much, you risk not recouping your expenses, let alone making a profit. Why? Because an overpriced, recently rehabilitated home can sit on the market for a long, long time.

3. You Must Build a Team of Trusted Workers to Help You Rehabilitate a Home

To successfully flip a house, it takes a team of reliable contractors, home inspectors, electricians, plumbers, accountants, lawyers, real estate brokers, and you, the investor.

Your home improvement team should be able to handle every repair the house needs. Your accountant should be diligent about your expenses, notifying you about the cost of each repair. Your lawyers and real estate brokers should be able to handle all of the contracts and home pricing logistics, respectively. Lastly, you need to be ready to make challenging decisions at the drop of a dime, such as whether to invest a bathroom remodel.

If you haven't found people to fill these roles, then put your first flip on hold until you do.

4. You Should Know the real costs of repairs - especially in troubled areas

It's tempting to purchase an inexpensive home, hoping that you'll transform it and sell it for a tremendous profit. However, more often than not, low-priced properties have structural damage. Or, they're located in a crime-affected neighborhood.

It's important that you pick a property for its location but also make sure that damage costs are evaluated by professionals fully. It's also important that you pick a property that isn't so damaged that the required structural repairs outweigh the profits pursued. Without the right location and a reasonably repairable property, you risk losing everything.