There are good reasons why house flipping is still a thing. There aren’t enough homes for today’s household formations, and new homes have yet to be built quickly enough to address the problem. That leaves existing, older homes, many in need of major work, as a viable solution for frustrated homebuyers. The icing on that cake is that many homebuyers aren’t experienced or don’t have the time or interest to do their own remodeling. They want a move-in-ready, turn-key experience, and they don’t care if they have to pay more for a home to get it. That leaves only one major problem for house flippers – where to find homes to buy, renovate and put back on the market within a month or two.
Flipping houses is a legitimate entrepreneurial business, and in every housing market, there’s a major market condition to overcome. You know you can sell the home once it’s renovated, but finding the home in the first place can be challenging. A much faster, more efficient way to get started is with a team, and each member of that team should be able to refer you to suitable homes that can work for your business plan.
Real estate professionals
According to RehabFinancial.com, you need to hire a real estate agent that specializes in real estate-owned (REO) properties. REOs are properties that have been taken back by the lender after the homeowners have defaulted on their loans. The reason these properties are desirable for flippers is that most of the homes have already gone through the foreclosure and eviction process. The homes are likely to show neglect and deferred maintenance which makes them less valuable than other similar nearby homes. The third reason to look for REOs is that the bank isn’t looking to make a killing on the real estate market. It just wants the property off its books.
Your Berkshire Hathaway HomeServices network professional is either an REO specialist or would be happy to refer you to one to help you get started. You’ll rarely find suitable homes on the local MLS or on listing sites, but it’s possible your real estate agent can search for expired listings for you.
All bankers who provide mortgage loans occasionally loan to the wrong unfortunate person. Illness, job loss, death and divorce can put even the most conscientious homeowner in a bind. Introduce yourself to the mortgage lenders in the area where you want to flip homes. They may be able to provide you with leads for homes that have been taken back by the bank. At the very least, you’ll need a lender to help you secure loans to buy properties to flip, and it won’t hurt that they provide tips to you.
Unless you’re a licensed plumber or electrician, you’ll need someone to help you renovate the home by doing the things you’re not qualified to do. Forget the house-flipping shows you’ve watched on TV. You need an ace contractor who’s busy, knows lots of clients, and has an arsenal of carpenters, artisans, and other experts on speed dial.
Real estate attorney
A real estate attorney can also be a good source of leads, and it’s a good idea to have one in your corner in case you need one. Bankruptcy attorneys can also help you with leads, such as directing you to the lender that is holding one of their client's former homes.
Certified Public Accountant
There are so many tax rules in real estate, from federal to state, to municipal taxing authorities. CPAs can also specialize in real estate to help you with the numbers, and they can also be a source of leads.
Inspectors and Appraisers
Especially if you’re paying cash for a property, you’ll need to have housing inspectors and appraisers on your team. It’s wise to perform the same due diligence that a lender would on every home you invest in.
Now that you have sources to find homes, what kind of homes should you look for? RehabFinancial.com suggests that you look for homes in popular markets with desirable schools. It makes sense to search in areas where your target homebuyer wants to live which will help create demand for the home you renovate. You should have an idealized target house in mind, including how much you want to pay for it, how much you want to spend on improvements, and the price you’d like to resell the home for.
Keep in mind that healthy economies stimulate housing demand, so expect to pay much for a home in a brisk market. The 70% rule is a flexible guideline you can use; pay no more than 70% of the market value of a home less the cost of renovations. Another way to say it is that you should know the market conditions where you’re buying. If the average home in a given neighborhood is selling for $300,000 in top condition, that should give you the ballpark after-repair value. Here’s the formula: $300,000 X .70 = $210,000 - $30,000 (estimated repairs) = $180,000. You should pay no more than $180,000 for the home. Should you be in a brisk seller’s market, you may have to pay as much as 85% of after-repair valueless improvements. That’s fair considering you’ll be able to resell the home quickly and you’ll still make a nice profit in a short period.
Look for areas of town where you’re seeing improvements being made – new stores and restaurants being opened and/or renovated, and homes that are being remodeled. Be sure to pay attention to local news so you’ll know if a major employer is coming to town and can start looking for homes to buy near their new site. If a large employer exits the area, don’t buy any property until you’re certain other economic growth will take place. Carefully examine trends in local municipal taxes and how quickly they can escalate. You’ll be paying taxes at the previous homeowner’s rate until the end of the assessment period or year, but expect a big increase when the new tax rate based on what you paid for the home – without a homesteader’s discount - is applied to your property.
In all great business plans, something can go wrong, so protect yourself and your investment by avoiding the following mistakes:
1. Take advantage of all the advice and other help that you can. A wise tip can prevent you from making a mistake and inexperience is expensive.
2. Don’t fall in love with any property. It’s all about the numbers, and you’ll be selling it as soon as you can anyway.
3. Don’t run out of money. It’s better to overbudget your expenses than to cut corners to make a deal work.
4. Be realistic about time and how long it takes to get things done. Create a schedule with your team members and stick to it.
5. Educate yourself about the things you don’t know. Read, take classes, and do everything you can to learn the aspects of flipping that you don’t know.
6. Create a professional business plan. You’ll need it to show lenders and anyone who is investing in your business.