Successfully flipping a house requires that a lot of different aspects of the flip go smoothly. Here is a list of what I feel are the best house flipping tips to make sure your house flip goes the way it is supposed to. These have been learned through experience. Some of which were not pleasant.
Experience is the best teacher. I just wish she was more inclined to hand out an A+ with a gold star more often. :)
First, have you joined our private FlippingJunkie facebook group? Come network with us!
Anyway, here they are:
1. Understanding Your Exit Strategy
You've got to know what you plan to do with the house you end up buying. If you don't know what your plan is with it, you won't know how to determine how much you should pay for it.
This post is detailing keys to successful buying, fixing and flipping a house, so we're going to assume that is the exit strategy. The plan is to buy a house, have a contractor fix it up and then sell it. The
plan is to also make money, so let's continue on so that we can make sure that
2. Knowing Where You Will Get The Money
If you are going to purchase the property, you're going to need some money to do
it. If you don't already have a source for the money, I would start looking now.
3. Knowing How Much The Money Will Cost
Whether you are going to be using your own money, private lenders or hard money lenders, you will need to figure out what the use of that money is going to cost. You will need to make assumptions for how long you will need to borrow that money. This depends on how long houses are taking to sell in your area. If they are typically taking 3-6 months to sell and close, assume 6 months or be conservative and go 9 months.
If you need money for the investment, try to finding local hard money lenders. Start a spreadsheet so that you can keep track of their terms and the costs of the loans. After you complete some successful flips, it will be much easier to start working with private lenders.
4. Finding A House That Will Sell
For a successful house flip, it's best to find a house that is in an area where houses are selling quickly. The price range of house will probably be what the majority of buyers in your area are able to afford. In my experience, this is typically just below the median home price. You don't want to buy a house to flip and find out that the area is mostly rentals and not desirable for homeowners. People just aren't looking to buy there.
5. Knowing What Repairs Will Be Needed
Always remember to try and set your rehabs apart. Buyers are looking at a lot of houses and they all tend to become a blur after a while. If you do some nice things that the other houses don't have, they will remember yours and are more likely to either stop looking or come back to it and make an offer.
Focus on curb appeal, bathrooms, kitchens and emphasizing the best aspects of the house. Fancy kitchen backsplashes, new countertops and updated knobs and handles go a long way. Bathroom vanities with granite tops are very inexpensive at the big box stores so it doesn't make sense to not use them.
A lot of what you use will depend on what the competition has. It doesn't hurt to view some of the other houses for sale and try to figure out how you can make your house more appealing.
6. Knowing How To Estimate The Cost of Those Repairs
In order to make an informed decision on how much to pay for a house, you will need to know how much repairing and updating the house is going to cost. The best way to accomplish this if you are not experienced is to bring a contractor to a house that needs a lot of repairs and take notes on the costs of replacing everything. You should find a contractor for your house flips as soon as possible.
Go shopping at Home Depot or Lowes and find inexpensive materials that you can use. Write down the SKU's and prices so that you can have your contractor use them if you need them.
7. Figuring Out The Maximum You Can Pay
The max you can pay is usually based on the MAO (maximum allowable offer) formula. This formula is where you take 70% of the ARV (after repair value which is the price you can sell the house for after you fix it up) minus the cost of the repairs needed.
So for a house that could sell for $100,000 fixed-up that needs $10,000 in repairs, the most you should pay would be $60,000 ($70,000 [70% of ARV] - $10,000 [cost of repairs]). The 30% of value removed from the ARV includes your profit, holding and closing costs. I like to be a little more conservative and go with 65% of ARV minus repairs.
8. Only Offering Less Than The Maximum
Never pay MAO. Always offer less than what you determined to be the maximum you can pay. You need room to negotiate and you never know if you could get it for even cheaper. So start with a lower amount and hopefully you will end up agreeing to a price that is below your max. This will give you more room for profits... or surviving mistakes.
9. Having Vacant House Insurance Before You Close
It's very important to have insurance on the house. Vacant houses can become targets of vandals and squatters. You'll want to get a builder's risk policy that will cover the house while you are working on it. If you go any other route, make sure to read the fine print and find out for sure if the policy will pay even if something happens while the houses are vacant.
10. Being Ready To Start Work As Soon As You Close
It's best to have a contractor lined up and the scope of work to be performed determined before you close, if possible. This way you can cut down on your holding costs (which can seriously eat into your profits or even eliminate them - which is no bueno, mi amigo).
11. Having A Solid Contract With Your Independent Contractor
Many problems (I'd even venture to say most problems) during a house flip usually have to do, in one way or another, with the contractor. Whether this is the fault of you, me, or the contractor is a different story.
The best way to avoid problems is to have everything in very detailed writing. Make sure you spell out 'exactly' what you want and what you expect. The timeline needs to be determined and the draws need to be determined. I have my draws based on certain milestones and not on time worked. Don't fall into the trap of giving in to a contractor that demands 50% to start. Please, don't do that. It's an invitation to get burned.
Also, spell out how extras and change orders are going to be handled. Require the time to do them and the price must be agreed upon in writing before being done. Oh and don't forget the penalty for not finishing on time. Very important!
12. Making Sure You Hold To Your Contract With Your Contractor
There is always a temptation to bend the rules of your contract when it involves confrontation or dealing with a problem. We all want to just take the easy way out and avoid problems. Don't do this!
If you go back on any terms of your contract, the whole thing can be thrown out the window and ignored. Make sure to enforce it.
13. Keeping From Over-Improving The House
Don't fall into the over-improvement trap. This is where you start doing things to the house that you would want in your own house.
You are not going to be moving into this house. It is an investment. It's not something to get emotional about. It's all about the numbers. Don't over do it.
Don't spend $10,000 on new windows for a $65,000 house. Just doesn't make sense.
14. Finishing The House On Time And Under Budget
You've got to stay on top of them and push when people need pushing. Show up on the job site unexpected and often. Keep people on their toes and let them know that you expect things to be done on time. The penalty for not finishing the job on time can be a great motivator.
Don't be a jerk and be unrealistic. If all that is left is the exterior and it rains for a week straight, it can't be helped. There are times when being realistic is important. There's always a delicate balance needed. Don't be a jerk, but be firm.
15. Thoroughly Cleaning and Staging The House
Nothing is worse than a completely rehabbed house that is filthy. I'm talking about dust everywhere, dirty toilets, scuffed up floors, paint drops everywhere, etc. These are the things that affect impressions. Sometimes the small things will make a big impact and may give people a negative impression of the house even though the whole thing was remodeled.
Staging a house can make a very huge difference if done right. You want to try and make it so nice that the buyer gets an impression that they are moving up if they buy the house.
Some studies done somewhere by someone (I won't pretend to remember) showed that houses that had furniture sold faster than vacant houses. Plus, it's just nice to be able to sit down and really 'experience' a house. If there is nowhere to sit, they probably won't spend as much time at the house.
16. Listing The House Right Away At A Good Price Based On Comps
Don't be the investor that prices his house based on what he has into it. Just doesn't make any damn sense. This is also typically the one that refuses to reduce the price and ends up spending way more in holding costs. Base your selling price on what other similar, nearby properties have sold for recently. Period. Even if your house is nicer, don't price it more than the comps, and if you do, don't go overboard. If a house has been sitting on the market for a while, people will begin to wonder
17. Be Willing To Lower The Price As Needed
This goes along with the last one. If the house isn't selling, it's almost always because it is priced too high. If there is a fault people are finding with the house fix it. If there is a fault that can't be fixed or you just can't afford or don't want to, you should lower the price. Don't be stubborn.
People lose their shirts all the time all because they are unwilling to lower the price. This happens a lot when people are into the house for far more than they should be. They don't want to lose a lot of money so they don't lower the price. Sometimes, you've just got to stop the bleeding.
18. Being Willing To Negotiate With Buyers
This one is an extension of the last one. Don't get angry with buyers wanting to negotiate. It's going to happen. The other side of this is when they offer a price you are willing to accept right away. Sometimes it's best to negotiate something insignificant just so that they can feel that they got the best price they could have. You don't want them wondering if they could have bought it cheaper. This might present itself after the inspection where they want to negotiate some repairs (which appear during every inspection).
19. Keeping An Eye On What Your Holding Costs Are
If you are not aware of what your investment is costing you as time goes by, you may end up with a horrible surprise when you have it sold and the dust settles. Always know how much you have into a project and how much it is costing you every
20. Keeping The Lawn In Good Shape And The House Clean
This is one a lot of rehabbers tend to get lazy about, yours truly included. It doesn't take much to go by from time to time and clean up the dead bugs, sweep and vacuum and wipe off counters. You also don't want that beautiful new lawn turning brown and dying on you.
21. Only Accepting Offers From Capable Buyers
This one you will get good at as time passes. You will find that certain lenders are a pain in the ass and others are a dream come true. Also, some buyers can also cause you serious grief as well. The ones that go into it making all kinds of demands are better told to take it or leave it sooner than later. Trust me.
22. Making Concessions, But Only Necessary Ones
The other side of the last one is being willing to make concessions to get the deal closed, when necessary. A perfect example is a house that was taking a long time for us to sell. We ended up finding a buyer and working 2 months to get it closed. At the last minute, the lender informs everyone that the buyer does not qualify for a loan to cover the purchase price. WHAT!!!!
In order to do the deal, we had to knock $8,000 of the price. That was not an easy decision, but one we were willing to make after much deliberation.
Incidentally, the fact that the buyer's agent even had the nerve to ask if we would lower the price that much impressed us and she has been our selling agent ever since. So there is always something positive that can be gained from a negative situation. You just have to find it.
23. Following Up With The Title Company To Make Sure Things Are Progressing
You've got to make sure people are doing what they are supposed to be doing. Someone always needs to be pushing. If you are not and someone else with another closing is, your stuff is likely to be sitting on someone's desk for a long time. Call in every several days just to touch base and keep things on track.
24. Checking The Final HUD Settlement Statement Before Going To Close
Before going to closing, make sure to review the HUD1 settlement statement. You want to make sure all the numbers for the closing are correct. You don't want to be in the middle of a closing only to find out that major mistakes had been made. What's even worse is if you miss mistakes because your mind is already sort of numb from all of the stress of getting the deal done.
Besides, don't you want to know as soon as possible how much you will be making?
25. Remember To Cancel The Insurance And Utilities
Don't do what I've done. On several occasions I've received notices to renew insurance on properties that we had sold almost a year before. Some policies allow you to receive a refund on policies that are cancelled before the policy expires. Because I had forgotten to cancel the policies,, I probably lost out on at least about a thousand dollars.
26. Taking Notes On What Went Right And What Went Wrong
After your successful house flip, review what you did well and what could use work. Take notes. You should always be working on improving the process so that you can squeeze more profit out of each deal.
27. Spending The Money Wisely
Don't go spending the money on a fancy car. This is your choice, but you will be much better off putting the money back into your company. Spend a good chunk on marketing to land more deals. Get the snowball rolling.
Don't forget to also celebrate your success. You've got to enjoy your wins. Positive reinforcement!
There you have it. All in one place. Follow these steps and you will have a much better chance at having a successful outcome to your house flip.
I can't think of everything and I'm sure some things have been left out that should be added. Please do me a favor and add what keys you have to successfully flipping houses in the comments. I really appreciate it.