House Flipping 101 for New Real Estate Investors

[William Allen]

What is flipping houses?

Let’s start with the basics to make sure we are on the same page about what “house flipping” is.

Essentially “house flipping” or “flipping houses” means you are buying a house and selling it for profit. This usually requires some time and money (or someone else’s time and money) fixing up (or “rehabbing”) the home. This process of fixing up the home is how you add value.

There are four basic parts of the house flipping process from beginning to end. When putting together a house flipping business each of these can be separate “departments” in your organization. By breaking your business down into these areas you can focus on one aspect at a time making the entry process less overwhelming.

Flipping Houses – Pillar 1: Buying

Knowing how to find, analyze, and buy houses is the single most important skill you can have when it comes to flipping houses.

The process of “Buying” can be broken down into 4 areas.

Inventory: What kind of houses will you focus on buying?

Farm Area: Where (what location) will you focus your efforts in looking for these houses?

Deal Analysis: What will you offer for these Houses?

Acquisitions or Buying Methods: Which methods will you use to find and acquire these houses?

Inventory

If you are getting started, your best bet is to focus on a standard house with 3-4 bedrooms anywhere from 1,200-2,000 square feet with an “entry-level” price range. You want to buy a house that will be easy for you to sell. Match the market in size and price range in your early days to get a sale under your belt.

You want to focus on homes that are “distressed” or need work or updating but only to a certain extent for your early projects. Avoid anything that needs structural or major changes and focus on houses that need cosmetic or basic repairs. Along the same lines avoid older homes built before stricter regulation codes were in place.

Farm Area

The next step is choosing your “farm area” or the place you will focus your efforts on buying houses. This can be as small as a neighborhood or as large as several counties.

Pick one city or zip code to begin. The size of your farm area will depend on your level of experience and the buying strategie(s) you choose to implement. As you grow your business and adjust buying strategies you can increase the size of your farm area over time, but when you are first starting out focus in on a smaller location and become familiar with that area. Knowing your chosen area and what ‘rehab’ is expected of homes in that area will increase your chances of success as a new house-flipper.

Pro-tip:

Pick a farm area as close to you as possible. It could be the city where you live or a surrounding city or area if the inventory is more aligned. You want to minimize your travel time to maximize your time and energy on the project itself.

Deal Analysis – They Key to Flipping Houses!

If Buying is the first pillar, then Deal Analysis is the cement from which that pillar is made. It is the process by which you determine the amount you can pay for a property in order to cover all the required expenses and still ensure a profit.

The goal behind analyzing a deal is to come up with the ARV (After Repair Value) or the price the house will sell for once you have put in the work to bring it up to "retail" condition. Once you know what you can sell the property for, you can work backwards to subtract repair costs, closing costs, holding costs, and your desired profit to come up with your offer price.

Buying and Acquisition Methods for Flipping Houses

Last of all is the "buying" process. This pillar is learning and refining the methods you will use to acquire properties. These methods range from working with real estate agents and buying houses listed on the "MLS" (Multiple Listing Service) to buying at auctions (Online, Bank owned, and foreclosure or trustee sale), to marketing for and working directly with private sellers.

Especially in the early days, a commonly asked question is How do I Acquire properties at a Discounted Price?

In order to answer this you need to understand why someone would need to sell quickly. The reasons vary from inheritances to bad tenants, relocation, and wanting or needing to “cash out.”

Buying is created from the collaboration of all the above elements: finding properties (your inventory) by focusing on a location (farm area), deciding on your offer (analyze the deal), and knowing how you will buy the house (buying or acquisition methods).

Flipping Houses Pillar 2: Financing

The second fundamental pillar of flipping houses is financing. Financing means you have to come up with the capital (or “money”) to buy the property.

Two big myths with financing is that you either have to do it through a bank, or use your own cash to buy the property. This couldn’t be farther from the truth. Here are a few alternatives.

One popular way to finance a property when flipping houses is to use “private money.” A private money lender is someone seeking an alternative way to invest their money, beyond the stock market or low-yield savings accounts and CDs. Flipping houses can often provide individuals with an annualized return of 8-12% on their capital, which is far greater than the 0.05% return most banks provide.

Another option is ‘hard money.’ Hard money is more “institutionalized” than ‘private money’ and may require you to qualify for a loan. The benefit of this method over using a bank is the qualification process is less stringent. Although hard money lenders will look at qualifications, they mostly focus on the deal and the house you are buying, rather than your credit. The downsides are they may charge you points and fees that you don’t get with private lenders, their rates might be higher, and you usually won’t get the entire loan amount so you need a second source for additional capital.

A third method is an equity split, also called a Joint Venture or "JV" for short. If you know someone who has capital and wants to be "in on the action" but they don't have the time or know-how to do the leg work and oversee the project, they can put up the capital with you responsible for finding the house, rehabbing it and then selling it. Then you will split the profit at the sale. The split is usually 50/50, but you can work the deal on a case by case basis.

Another method is “creative financing” where you work with the seller to come up with terms for the purchase of the home. They can “carry the note,” which means you sign a note (an agreement which outlines the terms) to make payments directly to them for the property.

It is also possible to take over a seller’s payments. This allows you to save on financing costs and can make a deal worthwhile. In this case, you take title (ownership) to the property but the loan remains in their name. You agree to make the mortgage and other payments during the time you own the property, and when you sell the property, the loan is paid off from the proceeds and you are left with your profit.

It is also possible to combine various types of financing. For example, you might have a hard money loan on a house but still need $50,000 to cover the remaining cost of the purchase and repairs for the property. In this case you could work with a private money lender to cover the difference.

Financing is a lot more flexible, creative and ripe with possibilities than most people might realize.

Flipping Houses Pillar 3: Rehabbing

The 3rd pillar in operating a house flipping business is rehabbing.

Rehabbing is the process by which you fix and upgrade a house to bring it up to “retail” value, so you can sell it for a profit.

Many people believe they need to be “handy” or able to do repairs themselves in order to flip houses. In actuality, you don’t need to know anything about fixing up a house to be a pro at flipping houses, but you do need to know how to find, hire and manage the people who can do all of those things for you.

Pro tip:

Use a standard price list when working with contractors. It states exactly what we will pay per square foot for paint, flooring, etc., as well as a break down for any other expenses. This saves time in haggling and getting bids approved and allows both us and our contractors to focus on the work instead of the process to get the work.

Another way to add efficiency to the rehab process is to create systems that save time. For example, on 90% of our projects we basically use the same materials on every house. The same color, flooring, granite and fixtures. The contractors we work with know exactly what to get. It becomes like an assembly line. These systems are crucial for bringing your house flipping business to the next level.

Flipping Houses Pillar 4: Selling

Although there are many ways to sell a house, once you have gone through all the work of coming up with a great product, your best bet is to list the house on the open market with a Realtor.

If you are not a Real Estate agent yourself, it will cost you a commission, but you will probably make up for it with the price you are able to get as opposed to selling the house without listing it on the MLS (Multiple Listing Service).

If you are new to this business having a good agent to help you sell the house is huge. Not only can they help you get a great price, but they will help you understand the paperwork and closing process as well.

We hope this blog has given you some helpful information to get you off to a great start flipping houses!

Stay tuned for other blogs devoted to helping you be a successful house-flipper.