Flipping Houses: An Introduction

There can be some hefty profits made from buying and selling houses. The main keys to success are discipline, good-judgment, and flexibility. But perhaps the most important thing you need is a licensed Realtor® to work with. In this short post, we’re going to take a look at some of the things involved with buying houses for the sole purpose of later re-selling them for a profit. Warning, since it would take an entire book (and there many of them out there) to cover every aspect of this subject, this post is simply a primer to get you thinking about some of what is involved.

Flipping houses involves finding property that is priced lower than what its normal market value should be for some reason or another. Perhaps its a foreclosure or maybe the last tenants who lived there for 10+ years simply neglected the entire place and now there is mold in the walls or broken windows and doors. There could be any number of reasons as to why you were able to find a property priced under what would otherwise be its normal market value. The reason for the price is far less important than the focus on a profit. We’ll cover this in more detail later, but the bottom line is that if you can purchase the property, and manage the cost of any repairs and clean up, for less than what you can sell it for then you’re on the right track.

The first thing to keep in mind when considering flipping a home is that your entire focus should be on making a profit — not how cute it is or what a neat project it would be, etc. In order to keep from wasting time and money you must make every decision with one eye on the bottom line (the difference between cost and profit.) Often, the common goal amongst flippers is to make around 20–25 percent profit when they re-sell the property.

Obviously, achieving this profit goal is a bit easier for people who are already experienced in some of the building trades (carpentry, roofing, plumbing, etc.) or who have experience in choosing the right people to assist in any necessary rehab efforts. But for those with no experience and no knowledge this can be a perilous, and sometimes costly, learning experience. A very important point to be emphasized here is that, if you don’t know what you’re doing then hire someone who does! Most people that believe they can just learn things as they go usually end up hiring someone later on to fix or replace the mistakes that have been made.

Next, people new to flipping often have a tendency to want to over-do everything. Don’t fall into this trap. You are not making the next Taj Mahal, rather, you are only making the minimal improvements necessary to bring the property up to its normal market value. The goal here is to make money, not spend it. And often a $20 bathroom faucet works just as well as a $100 faucet. Better yet, sometimes the faucet that’s there will work just fine after replacing a .99 cent rubber washer and polishing the chrome with some scouring cream. So don’t get carried away with vanity and expenses. Simply focus on what needs replaced or repaired and move on.

Many people that invest money in real estate (for more than just a place to live) use quick rules of thumb to guide them. These rules are not the makers or breakers of any deals but, rather, they are just quick guides to help someone decide if a property is even worth further consideration. And the most popular rule of thumb amongst flippers is the 70 percent rule. This rule is pretty simple: Do not purchase any home for more than 70 percent (plus the repair costs) of the resale value of the property.

So, if you find a property that you think you can sell for $100,000, but it will probably need $10,000 in repair, then you can afford to pay no more than $60,000 in total for the purchase. The math is pretty simple… Figure out 70 percent of the homes’ resale value (in this example $100,000 x 70 percent = $70,000) and then minus the estimated repair costs (in this example, $10,000) from the 70 percent (in this example we deducted $10,000 from $70,000) and you will have the maximum amount (in this example, $60,000) that you can pay for the property and still realize a profit.

Seems simple enough, right? But why is there a 30 percent margin there instead of the original 20–25 percent I mentioned above? This one is really simple, too! LIFE HAPPENS. Besides things such as Realtor® commissions and closing costs, that extra 5–10 percent margin gives you some extra cushion because rarely does anything in home building ever happen on time or under the expected cost. So, in the above example, you actually have a $5,000–10,000 cushion already figured in to your profit model. If repairs come in cheaper, then hooray — You get to pocket some extra bucks! But if they don’t, then you’re covered for some extra cost.

Now, of course, the above formula is only a quick guide to help you decide if you should tour the property, hire an inspector to fully check the property, etc., etc. It is not a golden rule or a requirement, but simply a tool that helps you decide if you should just head off to look for something else. Also important to note here is the fact that you will need to be somewhat familiar with pricing repairs, parts, and services which the property may need to return it back to it’s normal market value.

If you are not familiar with pricing parts and services then you should really consider paying someone (such as a licensed home inspector) to consult with you as you tour a property. An expert from one of the home building/repair trades (or even a home inspector) will be able to help you see and price most of the basic issues you might find. Just remember that, in order to stay within your minimum profit margin, the cost of paying someone a consulting fee must also be deducted from any offer you can afford to make.

Finally, you will want to work with a licensed Realtor® to help you find properties and to help with all of the details involved with closing a sale, from securing financing to finding a good title insurance company. And, when it comes time to re-sell your new investment, that same Realtor® is going to be able to help you find buyers and close the deal much sooner than you will be able to do it on your own.

So, there we have it! A quick and dirty guide to flipping houses for fun and profit. Well, sort of a guide. If you are interested in pursuing this investment route then you should certainly get some books on the topic. As well, you should probably find a book or two on basic real estate transactions just to be more familiar with that subject, too. There are plenty of free websites and videos out on the web that can also help you get more familiar with both of those topics. Whatever way you choose to learn, just make sure to take the time to learn, because simply jumping in head first with no idea of what you are getting into can quickly turn into a very expensive lesson all by itself. Best of luck with your house hunting and I’ll see you soon with a brand new post!