A Beginner's Guide to Flipping a House
Flipping houses has become a popular way for people to make money in real estate. However, it is not as simple as buying a property, fixing it up, and selling it for a profit.
There are many factors to consider, from finding the right property to securing financing to navigating the legal and regulatory requirements. Getting started in the house flipping game can be overwhelming for those new to it.
For beginners to learn how to flip a house, this article provides a starting guide. We will walk you through the basics of the flipping process, from choosing the ideal property to selling it for a profit. We will also provide tips and resources to help you navigate the challenges and pitfalls of flipping houses. Whether you are a seasoned investor or just starting, you will find this guide helpful.
How Flipping Houses Works
Flipping (also known as wholesale real estate investing) is a type of real estate investment strategy where an investor purchases a property, not to use, but to sell for a profit.
Flipping properties involves purchasing and reselling a property or a group of properties. It is common for investors to engage in frequent flips to generate a steady flow of income.
How do you flip a house or building? Simply put, you want to buy low and sell high (like most other investments). But rather than adopt a buy-and-hold strategy, you aim to complete the transaction as quickly as possible to limit the risk to your capital.
It is generally more important to focus on speed than on profit. Every day that passes costs you more money (mortgage, utilities, property taxes, insurance, and other costs of homeownership). That is the general plan, even though it has several pitfalls.
That profit usually comes from price appreciation resulting from a hot real estate market in which prices are rising rapidly and/or from capital improvements. For instance, a real estate investor might buy a fixer-upper in a "hot" neighborhood, make significant renovations , then offer it for a price that reflects its new appearance and amenities.
However, you can buy and sell properties with limited renovations necessary. It is known as micro-flipping, and it may be a good option if you are looking for a quick sale and are not interested in renovating properties.
To do this, you will analyze data for opportunities to buy property below market value and sell it to another buyer quickly. These are typically homes that do not need any significant repairs.
The most crucial aspect of micro-flipping is that you do it quickly. Micro-flippers are successful because they deal with a high volume of transactions.
7 Steps to Flipping a House
Before you start flipping houses, you must know the essential steps. It will increase your odds of success and lower your financial risk. Here are seven steps on how you can start flipping houses:
1. Know your neighborhood.
As a first step, you will need to research the real estate market and decide which area to invest in before you can begin. Consider working with a real estate agent who can advise you throughout this home-buying process.
As soon as you find a home you are interested in purchasing, it is a good idea to bring in a general contractor to assess the property. It will help you determine how much work you need to do and whether the house still fits your budget.
2. Use the 70% rule to plan your budget.
Real estate investors commonly use the 70% rule to determine the purchase price. This rule states that an investor should only pay 70% of a property's after-repair value (ARV) minus the necessary repairs. The ARV is what the home is worth after it has undergone a complete renovation.
For instance, suppose the AVR of a home is $200,000, and it needs $25,000 in repairs. So, 70% of the AVR is $140,000, minus the repairs, which equals $115,000. Ideally, you will not pay more than $115,000 for that home.
3. Assess your skill set.
You will be more successful as a house flipper if you possess the right skill sets. For example, real estate, construction, and design knowledge are valuable skills. While it is okay if you do not personally have those skill sets, you must know where to find the professionals who do.
Before you flip houses, put together a team of experts to assist you. It could be lenders, real estate agents, insurance agents, and contractors who help you buy, fix, and sell the property.
4. Finance your project.
Your next step is to determine how you will finance your project. If you do not have the cash to pay for the project, you will need to get pre-approved for a loan. You will need a good credit score , and the bank may require a 20% down payment or some form of collateral.
5. Decide on and buy your house.
Finding the right property is one of the most challenging parts of flipping a house. That is because you cannot just think about how much the property costs as of now – you also need to consider the potential resale value to achieve the highest profit margin.
Foreclosed, distressed, and fixer-upper homes are all excellent choices to consider. However, you will want to use a real estate agent and contractor to help you understand the extent of the work you need to do.
When you find the right property, you can make an offer and close on the house. There is a chance that you will face some competition from other potential buyers if the house is a great bargain. Be sure that you know the maximum amount you can afford to pay for the property while remaining profitable at the same time.
6. Build sweat equity.
If you are new to house flipping and have a small budget, you can save money by building sweat equity. It refers to the unpaid labor you will put towards the project, whether in terms of physical or mental effort.
Many entrepreneurs find that sweat equity is essential to building a successful business. It keeps the momentum going and gives them the resources to keep going.
7. Flip the house.
After completing the repairs, it is now time to put the house up for sale. You have to act fast because the longer the property sits on the market, the less profit you can make. Therefore, your goal should be to make improvements quickly and sell the house as soon as possible.
When listing the house, you will want to work with a real estate agent to help you with the process. A real estate agent can list the property in the Multiple Listing Service (MLS) database. Moreover, they understand market fluctuations and can help you determine the right resale price for your property.
Cost of Flipping a House
The cost of flipping a house will vary depending on the acquisition costs, repairs, and how long it takes to complete the sale. Here is a brief overview of how much it will cost you to flip a house.
It is all about doing the math when buying and flipping a house. The goal is to ensure that at the end of it all, you will earn a profit that will make the time and money that you spent worth it.
And you need to account for more than the initial cost if you are buying and renovating a home. Expenses for house flippers include:
- Down payment
- Home inspection fees
- Property taxes
- Insurance payments
- Closing costs
- Utility costs
- Marketing costs
- Real estate agent fees
Flipping a house involves more than just a financial investment. It also requires a significant amount of time and effort. The exact amount of time it takes to complete the project will vary depending on the size and scope of the project.
If everything goes according to plan, you can expect to spend 6 to 12 weeks buying and flipping a home. However, this process could get delayed by several months if the remodeling process gets delayed or you require approval from a third party to purchase the property.
Is Flipping Houses Right for You?
The following are some of the pros and cons of flipping a house:
- Potential to make a lot of profit
- Great for people with high skill levels
- It is less risky than other types of real estate investing
- Gain valuable real estate experience
- Gain deeper insights into your local market
- Potential to lose money on an investment
- May require costly outside help and support
- Requires intense planning and budgeting
- Unexpected costs may arise, and they could be significant
- Requires extensive knowledge of the local real estate industry
Is It Necessary to Have a Cash Offer to Flip a House?
No. Since cash can be more attractive to sellers, you may see more cash offers accepted on home-flipping shows. 62.7% of house flips nationwide involve cash purchases. However, some people do finance their house flips. It all depends on the situation.
Does It Take a Long Time to Flip a House?
Of course, each project will be different. However, the average house flip takes 162 days from acquiring the property to selling the finished home in 2022.
Flipping a house for a good profit is not as easy as it appears on TV. A novice flipper may underestimate the time or money required and overestimate their skills. If you are considering flipping a house, you should understand what it takes and the risks involved.
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