If you’re reading this, you probably know that house prices are rising and there aren’t as many people selling as you’d like there to be. Actually, I’m writing this because as of 12/17/15, the Feds hiked up the interest rate and this affects you, me, well…everything. So with all of these things combined, real estate investing and house flipping gets tougher to do.
With reality television shows out today like Rehab Addict, Property Brothers, and Flip or Flop(my favorite), it’s also more competitive today than it’s ever been. Basically, everyone and their mother wants to get into house-flipping. See below 5 tips that will definitely help you for your first flip!
1. Stick to Your Numbers – Always:
You have to, have to, have to know what ARV means. ARV stands for the “After Repair Value” of the property you’re potentially going to flip. It’s the amount that the house or property will sell for AFTER it’s rehabbed, repaired, and has a white picket fence.
You never want to be “in the deal’ (meaning your total investment for buying the house and rehabbing it) for more than 70% of its ARV. Remember that. Live by it.
That means, you buy and rehab the house for 70% or less of what the final selling price will be. If you go over this number and disregard the formula, you’re screwing yourself and your investors and will see little to zero profit. The magic number for real estate investing and house flipping is always 70%. Remember that.
The Perfect Deal
If you know that you can sell a property for $200k after it’s fixed up (because you have a good realtor who knows how to price comparable sales in the area, and a good contractor who knows how to bid a project) you never want to spend more than $140k on it for the purchase, repair, and rehab. Don’t do it.
If you know that the ARV is $200k, and can buy the house for $100k (or less), and put $40k (or less) into the rehab, that’s the perfect scenario. The 30% profit you make after the sale will go toward the real estate commissions and money costs, and other stuff (which would be about $30k on this deal) which means on that example deal, after you pay everyone, you could put about $30k in your pocket.
Not bad eh?
No imagine doing that 3-5 times a month, and you’ll know what it’s like to live in my world. And trust me, if I can do it, anyone can.
2. Know Your Local Market:
It doesn’t matter what the Property Brothers are doing on TV, what matters is what’s happening in your own town, city, area, etc. This is your niche.You have to know what’s going on in your area, in your niche (you need a niche, for me in my area, I do a lot of acreage/rural stuff) and always stay on top of it.
- Are you in an area with rising prices?
- Is the property you want to buy in a transitional neighborhood or an established one?
- How about the schools?
- What about the demographics?
You have to know this stuff because when you do, it’ll help you choose (and dominate) your niche and figure out your profit margin. Do your homework on recent sales, comps, and what the average amount of days properties like yours will sit on market. This will help you figure out good deals and spot bad ones. This will help you negotiate prices (as a buyer and seller), buy low, and sell high. It’ll also help you determine what type of house flip you want to pursue.
When you know your market, it can mean the difference between buying and holding a property (maybe you want to rent it for awhile until the neighborhood takes off) for a few months or years, or doing a “Fix N Flip” which means you buy, rehab, and move it off your roster quickly.
3. Know Your Buyers & Rehab With Them in Mind:
Once you know your numbers and market, you better make sure you know what types of buyers are in the area too. If you buy acreages in rural areas, your buyer is likely a horse guy, or older family. If you flip a property next to an elementary school, you’re rehabbing for young families with kids. You have to rehab the house with the types of people who will be living there in mind It doesn’t matter WHAT YOU LIKE, it matters what THEY LIKE.
Most older homes don’t have the open kitchen/family room plans that young families like. So you have to create these spaces, or market and sell to older couples. Every house and flip is different. If you have a property in a nice, younger subdivision, spend your money making the family room open and inviting.
Make sure there are enough bathrooms.
Make sure there’s a master bathroom.
I could go on forever here…but all this is to say one thing: make it something a young family with kids would want to buy.
Maybe a playhouse in the backyard would help. Maybe a bonus room upstairs for the kids (or adults) would be nice.
Whatever you do, remember this: there’s no magic bullet or a proven formula that works every time here. House flipping and rehabbing requires common sense and wisdom, so use them.
4. Show Off Your Rehab:
You put in the work, so make a list of what you did and let the buyers, agents, inspectors, and appraisers see it.
Show them every system that was replaced or added on (e.g. HVAC, electrical, structural problems you fixed, appliances, hot water heater, etc.).
If you replaced the roof or all the windows in the house (I’ve done this several times), let people know. They need to see it, because it creates peace of mind for the buyer. A
re there warranties on your rehabs or repairs? Let the buyer know.
Did you put a new garage door opener in, and new sprinkler systems? Don’t leave those off of your list.
When you create value, make a note of it and when the property goes up for sale, put it all in a binder and leave it on the table.
You want EVERYONE who walks into your house to know everything you did to it to make it better. That’s how you sell a house.
5. Don’t Get Greedy:
Do not, do not, do not overprice your property. If you do it won’t sell and you’ll end up holding onto it (and paying for it) for longer than you wanted to (ask me how I know this).
It’s tempting to overvalue the home. After all, you bought it, fixed it up, and put a ton of time into it so you want your value out of it right? It’s understandable, but don’t do it. Stick you the ARV (remember that from step one above?) and it’ll sell at the right price. You have to keep in mind that the buyer probably didn’t see the house before you started fixing it up.
They don’t know that it needed a new well, had a flooded basement, and the roof needed replacing. They have no idea how much time you put it, and how much stress it may have caused you. The buyer sees the finished house you’re selling. That’s it. They’ve been shopping comparable homes, and when they walk into yours they’re not thinking about how you fixed it up – they’re just thinking about what it’s worth and if they want to live there.
Every neighborhood has a general price point, and you need to stay within it. Underpricing slightly could result in multiple competing offers, which is awesome, but not all the time.
So price appropriately. Don’t undervalue or price high. Sell it for what it’s worth and you’ll do great as a house flipper. Trust me, I’ve been doing it for almost a decade.
The Bottom Line:
No matter what you do, let wisdom, common sense, diligence, and honesty be your guides. If you approach real estate investing the right way, armed with the right tools, and have a mentor or coach in your corner- you will not fail. You just won’t.
House flipping is a lucrative industry and if you take the time to do it right you’re going to build an awesome life for yourself. So re-read this article, bookmark it, and educate yourself. You’ll be glad you did. 5 Tips to Flip Your First House