What is flipping houses?
Let’s start with the very basics. In fact, let’s make sure we understand the definition of “house flipping”.
Essentially “house flipping” or “flipping houses” is a term that means you are buying a house and then turning around and selling it for a profit.
Now, of course it isn’t as simple as that. Normally you spend some time and money (or someone else’s time and money) fixing things up (or “rehabbing”) the home. This isn’t always the case, but usually it is. This process of fixing up the home is how you add value to the home.
But I’m getting ahead of myself. Let’s talk about what I refer to as The Four Pillars of House Flipping. These are the four basic parts of the house flipping process from beginning to end. When putting together a house flipping business you can see each of these as separate “departments” in your organization. By breaking your business down in to these areas it will make the learning process less overwhelming and allow you to focus on one aspect at a time while studying these fundamentals.
Each of these Four Pillars can take days or weeks (or months?) to discuss on their own, but for now we will just give you a quick overview so you have a basic understanding of how it all works, and then we will dive in to more detail in future posts.
Flipping Houses – Pillar 1: Buying
Knowing how to find, analyze, and buy houses is the single most important skill you can have when it comes to flipping houses! In fact if you become good enough at buying houses it is possible to create a business on this one skill alone! (more on this later.)
Essentially the process of “Buying” can be broken down as well into 4 areas as well.
You will need to figure out and decide…
Inventory: What kind of houses will you focus on buying?
Farm Area: Where (what location) will you focus your efforts in looking for these houses?
Deal Analysis: What will you offer for these Houses?
Acquisitions or Buying Methods: Which methods will you use to find and acquire these houses?
First off what kind of inventory you are going to focus on? If you are just starting out, your best bet is to focus on a standard house with 3-4 bedrooms and probably anywhere from 1,200-2,000 square feet with a standard “entry level” price range. This is not a hard and fast rule and may change from area to area but key point being you want to buy a house that will be easy for you to sell. So if most of the houses in the area you are buying are about 1,500 sq ft and priced around $200,000 then you probably don’t want to buy a 5,000 sq ft 1,000,000 house or a 1 bed 500 sq ft house as your first investment deal 🙂
FEMA - 35411 - Damaged home in Colorado - Flipping Houses 101
Maybe a bit too distressed for your *first* project 😉
You will want to focus on homes that are “distressed” or need work and updating, but I wouldn’t buy anything too major for your first purchase. You may want to stay away from anything that needs structural or major changes done to it and focus more on houses that need cosmetic or basic repairs and updating.
Kind of along those lines for beginners you may not want to buy anything too old either. I would say your best bet while you are beginning would be to start looking at houses that are somewhere between 1950-1990. Homes built pre 1950’s often didn’t have very strict code regulations, and if you focus on newer houses, you may have a tough time being able to get a good enough of a discount to be able to sell it for a profit.
Once again these are only basic guidelines to give you an idea of where to focus when you are first starting out, but can be adjusted accordingly based on your area and level of experience.
The next step is choosing your “farm area” or the place you will focus your efforts on buying houses. This can be as small as a neighborhood or as large as several counties.
Farm land near Punsholt Farm - geograph.org.uk - 109052 - Flipping Houses 101
Hopefully your farm area has more houses than this
For starters I would say you probably want to pick one city, or a part of a city if it is a large city, or a zip code, and you can adjust from there. The size of your farm area will depend on your level of experience as well as the buying strategie(s) you choose to implement. As you grow your business and adjust buying strategies you may increase the size of your farm area overtime, but when you are first starting out it is very important to really focus in on a smaller location at first and become familiar with that area.
Really being familiar with your farm area can give you a great advantage when it comes to buying houses because you will know the neighborhoods, and streets as well as what is expected to be done to those houses to bring up value. I cannot over emphasis the importance of having and really getting to know your farm area and the values of houses in that area throughout your investing career and ESPECIALLY when you are just getting started.
Your goal should be to pick a farm area as close to you as possible. It could be the city where you live or work or if you live in an area that you don’t think would fit the inventory you would want to focus on, then you could pick a surrounding city or area but try to keep it as “close to home” as possible. The last thing you need to do is be driving hours away to reach your farm area when you are just getting started.
Deal Analysis – The Key to Flipping Houses!
If Buying is the first pillar, then Deal Analysis is the cement from which that pillar is made. It is the process by which you determine the amount you can pay for a property in order to cover all the required expenses involved in flipping houses and still ensure a profit.
US Navy 101211-N-4440L-025 Builder Constructionman Bianca Manzanero, left, and Builder Constructionman Haani Leah (Flipping Houses 101)
Let’s mix that cement and analyze some deals!
If you don’t learn and understand how to properly analyze and evaluate the houses you buy you will be dead in the water in this business. If Buying is the most important pillar in the house flipping machine then Deal analysis is the cement that holds that pillar together. You simply cannot run your business without understanding this critical skill! Because it is so important we will cover this skill in an entire separate post. In fact this skill was discussed in many of our podcasts as well. Not to mention that it is a featured topic on the popular real estate website Bigger Pockets.
Basically the goal behind analyzing a deal is to first come up with the ARV (After Repair Value) this is the price the house will sell for once you have done your rehab and improvements and brought it up to “retail” condition. Once you know what you can sell the property for, you can work backwards and subtract repair costs, closing costs, holding costs, and lastly desired profit in order to come up with your offer price.
We will go over exactly how you come up with the ARV, and outline all of the expenses involved in buying, holding and selling a home. We will also cover some of the quick, and more detailed formulas used to calculate what to offer as well as what you may want to expect for a profit. In a separate post we will also go over estimating repairs since this is a crucial part of the deal analysis equation as well.
Buying and Acquisition Methods for Flipping Houses
This seems like a pretty good deal.
Last of all is the “buying” process. This is learning about and determining the methods you will use to go about acquiring these properties. These range from working with real estate agents and buying houses listed on the “MLS” (Multiple Listing Service) to buying at auctions, (Online, Bank owned, and foreclosure or trustee sale) to marketing for and working directly with private sellers. There are multiple other ways to find and acquire deals as well which we will cover in more detail later.
It’s worth mentioning that this (as well as the other three areas of buying) has several sub-topics of its own. In fact buying and acquisition methods will be one of our main focuses throughout the 7 Figure Flipping blog and podcast.
One of the most common questions about this pillar is about why someone would sell a house to you for a discount.
The list of reasons is a long one. From inheritances, to bad tenants, to relocation to wanting or needing to “cash out”. We’ll save going into details on this topic for a future post. For now, just know that there are a lot of reasons why you are able to purchase homes for less than the “retail value”.
Just to summarize: buying is essentially the process by which you find properties (your inventory), focus on a location (farm area), figure out your offer (analyze the deal), and figure out the method by which you will buy the house (buying or acquisition methods). Each of these steps has a slough of moving parts that we are going to get in to much more detail in future posts. I just want to make sure you have a big-picture view of how the buying engine runs.
Flipping Houses Pillar 2: Financing
Here we come to the second fundamental part of flipping houses: financing. Financing is just a fancy term that means you have to come up with the capital (or “money”) to pay for the property.
Two big myths with financing is that you either have to do it through a bank, or you must only use your own cash to buy the property.
This couldn’t be farther from the truth! Bank financing is only one way to get money for a property and definitely not necessarily the first one I would recommend. And you are certainly not limited to using only your own money either.
One popular way to finance a property when flipping houses is to use “private money“. A private money lender is someone who is seeking an alternative way to invest their money, rather than a risky stock market or low-yield savings accounts and CDs. Since flipping houses can often provide individuals with an annualized return of 8-12% on their capital, which is a fair sight better than the 0.05% return that most banks provide.
Similar to that is “hard money“. The main differences between hard money and private money is that hard money is more “institutionalized” and you might need to qualify for the loan. The benefit of this method over using a bank is that the qualification process is much less stringent. Although hard money lenders will look at some qualifications, they mostly focus on the deal and the house you are buying, rather than your credit. They might charge you points and other fees that you don’t get with private lenders, their rates might be higher and you usually won’t get the entire amount for the purchase of the home, so you might have to come up with additional capital outside of that provided with your money lender.
A third popular method for financing a house purchase is an equity split, also called a Joint Venture or “JV” for short. If you know someone who has capital and wants to be “in on the action”, but they don’t have the time or know-how to do the leg work and oversee the project, then they can put up the capital and you would be responsible for finding the house, rehabbing it and then selling it. Then you will split the profit at the sale. The split is usually 50/50, but you can do whatever you both agree to.
A few years ago when I started flipping houses on a larger scale I had a big equity partner who put up a lot of capital for me to do just this. He was quite experienced in flipping houses himself, but he had more capital than he did deals, so it was worth it for him to partner with me while I provided the “grunt work” on the deal and we split the profit. Doing this really helped me increase the number of houses I was able to buy and catapult my house flipping business!
There is also “creative financing” where you work with the seller to come up with terms for the purchase of the home. They can “carry the note”, which means you sign a note (an agreement which outlines the terms) to make payments directly to them for the property.
It is also possible to take over their payments. In fact, we are currently doing this on a house which allowed us to save on financing costs and helped the deal make more sense. If we would have had to pay for hard money financing the property the numbers wouldn’t have worked out for us to do the deal. In this case you basically take title (ownership) to the property but the loan remains in their name. You agree to make mortgage and other payments during the time you own the property, and when you go to sell the property, the loan is paid off from the proceeds and you are left with your profit.
It is also possible to combine or mix up various types of financing. For example, you might have a hard money loan on a house but still need $50,000 to cover the remaining cost of the purchase and repairs for the property. In this case you could work with a private money lender to cover the difference.
Financing is a lot more flexible, creative and ripe with possibilities than most people might realize. In future posts we will go through detailed methods to finance a house so you can have as many tools at your disposal as possible. I know working with lenders can be confusing at times… I wrote another in-depth article about this subject and you read more about it here.. “How to Work with Private Money Lenders”
Flipping Houses Pillar 3: Rehabbing
The 3rd pillar in operating a house flipping business is rehabbing.
Rehabbing is the process by which you fix and upgrade a house to bring it up to “retail” value, so you can then sell it for a profit. (assuming you bought it right :-))
Many people believe they need to be “handy” or able to do repairs themselves in order to flip houses because they don’t think they would know anything about the rehab process.
Another way to add efficiency to your business is to create systems that save time. For example, on 90% of our projects we basically use the same materials on every house. The same color, flooring, granite and fixtures. We never go to Home Depot or have to spend hours figuring out patterns, colors or working with an interior designer. The contractors we work with know exactly what to get. It becomes like an assembly line. Which is a great thing because it saves a ton of time and money. These sorts of systems are crucial for bringing your house flipping business to the next level and we’ll go in more detail with this process in future posts.
You could really have a whole seminar or course just on rehabbing and fixing up properties, and we’re going to go in to a lot more detail in further posts as well as the podcast. But if you start by focusing on a few of the basic rules and have the resources you need, then rehabbing houses will be a breeze.
Flipping Houses Pillar 4: Selling
So you’ve worked hard to buy, finance and purchase, and rehab the property and now is the time for the moment of truth! Time to get this baby sold and make a profit!
Although there are many ways to sell a house which we can cover in more detail later, for now I will just tell you that once you have gone through all the work of coming up with a great product your best bet is probably to list the house on the open market with a Realtor.
Yes if you are not a Real Estate agent yourself, it will cost you a commission, but you will most likely more than make up for it with the price you are able to get as opposed to just trying to sell the house without listing it on the MLS (Multiple Listing Service). With the MLS your pool of buyers will be so much larger and your chances of getting a much higher price are much greater.
Plus you are usually dealing with “pre-qualified” buyers because they too are most likely represented by another real estate agent who probably wouldn’t work with them unless they knew they were qualified to buy a house in the first place.
We will cover exactly how to go about finding and building a good relationship with a great real estate agent in a later post. For now, just know that if you are new to this business having a good agent to help you sell the house is huge. Not only can they help you get a great price, but they will help you understand the paperwork and closing process as well.
These are all things we will be covering in greater detail but having a good realtor can really save you a lot of time and heartache, which in the end equals saving or allowing you to make more money as well 🙂
With regards to selling, something that I alluded to before is that you can just skip pillars 2 (financing) and 3 (rehabbing) and focus on a skill called “wholesaling” Wholesaling is where you get a house “under contract” and then sell or “assign” the rights to that contract to another investor who then takes care of the financing, rehab and getting an end or “retail” buyer.
This is basically a “risk free” way, you can get into this business without having to ever actually buy the house! You never take title, you never get financing, you never have to fix it. Essentially the only risk you have into the deal is your time equity and maybe some marketing costs which you spent to get in contact with the seller (depending on how you found it).
Wholesaling is a great place to start if you are a new investor, in fact this is all I did for the first 2.5 years! We currently are not doing a much wholesaling ourselves but we do love buying from other “wholesalers” so if you have a house that you just want to get a quick fee out of and not have to find financing or take on the risk PLEASE send it our way 🙂
(Now before I get 100 e-mails with random houses, let me tell you that we will only look at a “wholesale” deal that is “under contract” and from a wholesaler who understands how to evaluate properties.)
Just to be clear wholesaling is not just for the “newbie” investor. If you are really good at marketing/prospecting for deals you can often times make even more money from wholesaling than retailing. (I get into this more in my Report which covers the 6 ways we have purchased 200 houses in 2 years).
To give you a current example (in fact, this was just a couple hours ago), I got an e-mail from a wholesaler today who is doing almost nothing but wholesaling. I won’t get into details because I don’t have their permission, but I’m sure they will read this post and have a chuckle. Let me just say they showed me a picture of a wall with multiple houses they put under contract in just the past few months, and most of those have been wholesale deals. I know because I purchased many of them and let me tell you, he is doing just fine as a wholesaler!
OK, I’m getting way too carried away here! We will probably cover wholesaling in several other posts and podcasts because it is a HUGE part of this business, and there are some really good wholesalers and some really BAD wholesalers! In fact I have written off about 90% of all wholesalers, but if you find a good wholesaler they can potentially bring you more deals than you can handle.
We will go over how to find and work with wholesalers and how to become a wholesaler if you choose to, but since this is the “selling pillar”, just understand that wholesaling can also be a great way to sell properties! 🙂
The Big Picture of Flipping Houses
Phew! Now that was a lot of info! 🙂
By now you should be all ready to LAUNCH into starting your own business flipping houses!
I mean, how hard can it really be?
Step 1: Find A House
Step 2: Increase Value
Step 3: Sell for a Profit!
Piece of cake! Right? 😉