You’ve likely seen a TV show about flipping houses. They can be entertaining, but the shows also really lack practical information for those who are interested in getting started with house flipping. Like a lot of “reality TV” – some of it is “staged” as well.

And some of these shows have featured on-camera flippers that tour the country selling $2,000 packages of house flipping DVDs and books. The material may not be relevant to the local market, and when they leave town, there is no one there to help you through the process. This is often when new flippers make mistakes, which can ultimately cause a loss of both time and money.

The truth is, house flipping is not as easy as the TV show “gurus” would have you think.

But like anything, it can be learned with an ongoing, committed effort. And it’s very wise to look for an experienced local real estate investor to help you learn along the way – and avoid those mistakes that can cost you dearly.

So for those who are committed to learning and want to acquire practical information about the most fundamental parts of the house flipping process – this is for you!

Essentially “house flipping” is a term that means you are buying a house, improving it, and then turning around and selling – or “flipping” it for a profit. You can think of the process as having five basic parts from beginning to end.

Below is a brief overview so you have a basic understanding of how it all works, and then we will go into more detail in future posts and SDREIC events.

Flipping - Step 1: Finding and Buying

Knowing how to find, analyze, and buy houses is an absolutely critical skill when flipping houses.

In breaking down the “Buying” step, you can break things down into:
1. Inventory and Location: What kind of properties will you focus on buying?
2. Deal Analysis: How much should you offer for the properties you find?
3. Acquisitions Methods: Which methods will you use to find and acquire these properties?

Inventory and Location:
Will you focus on buying Single family homes? Condos? High-end or low-end? What area will you focus on? When were the properties built? Are there any special factors that need to be considered – such as HOA restrictions, city restrictions, etc.?

You want to find homes that are “distressed” or need work and updating, but as a beginner, be careful about taking on any major challenges (e.g. cracked slabs, etc.) for your first purchase. Older homes can be a good market, but be careful not to buy anything too old, which could require extensive and expensive updating of major home systems, such as electrical or plumbing.

Deal Analysis – The Key to Flipping Houses!
Deal analysis is the process by which you determine the amount you should offer for a property in order to cover all the required expenses and still ensure a profit. This is a critical skill that takes time to hone.

The first step in analyzing a deal is to establish the ARV (After Repair Value). This is the price the property will sell for once you have done your rehab and improvements and brought it up to “retail” condition. You will arrive at the ARV by researching “comps” or “comparables” and considering a number of other property, location, and market factors.

Once you know what you can sell the property for, you can work backwards and subtract acquisition costs, repair costs, holding costs, selling costs, and the desired profit in order to come up with your offer price. It’s also wise to factor in a “what-if” cushion, as things may change along the way! For example, additional challenges and expenses may be revealed during the actual rehab process. It’s good – especially for a beginner – to have a cushion factor added in.

Acquisition Methods for Flipping Houses
The acquisition methods are the ways you will go about finding and acquiring the properties.

There are many available sources and they range from real estate agents and buying off the “MLS” (Multiple Listing Service) homes such as fixers, trust sales, probate sales, foreclosures, etc.… to marketing directly to motivated sellers… to auctions, wholesalers… and so forth. The list is virtually endless!

Why would someone sell you a property for a discount? The list of reasons is a long one – from banks wanting to get a non-performing asset off their books, to inheritances, to bad tenants, etc. For example, let’s say someone inherits a home that has not been updated or repaired for over 30 years. Everything is outdated and in need of repair. Perhaps the person who inherited the home doesn’t have the funds to rehab the home. Or they live out of state and don’t have the time to deal with it. This person may sell the property at a discount that would allow you to make a profit.

Flipping – Step 2: Financing

Financing is a term that basically means you have to come up with the money to pay for the property – and the repairs.

There are many ways to finance a purchase:
1. Cash – The easiest way is cash. You can purchase and rehab the property with your own cash funds.
2. Bank Loan - Perhaps you have a substantial down payment and qualify for a standard purchase and rehab bank loan.
3. Hard Money / Asset Based Lending (ABL). Put up a substantial down payment, and they will lend the rest.
4. Retirement Plan - Self-direct IRA or other retirement plan into buying real estate. The real estate returns are tax deferred (Traditional IRA) or Tax-free (Roth IRA).
5. Seller Financing – You may receive all or a portion of the property financing in the form of a loan from the seller.

What if you have little or no money to invest, but want to get started?
1. Private Money / OPM – Maybe you have a rich Uncle or friend?
2. Wholesale – Make the deal, get the contract, and “assign” the contract to another investor to receive a wholesaler fee.
3. Finder – Act as a "finder” to locate possible deals

Flipping – Step 3: 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. Perhaps you are quite handy and plan to handle many of the repairs yourself. Or you may not be handy at all, and plan to hire and manage other people to do all the repairs.

If you plan to fix and flip a number of properties, one option for efficiency is to develop a system that will save you time and money. The majority of the projects can use the same materials: the same color, flooring, granite and fixtures. You don’t need to go to Home Depot multiple times and spend hours figuring out patterns, colors or working with an interior designer.

Flipping – Step 4: Selling

You’ve made it through the Buying, Financing, Fixing, and now it’s time for the Flipping!

It’s time to get the property sold and make a profit!

There are many ways to sell a property, and you can certainly attempt to sell it yourself.

But generally the most efficient way to get the property sold quickly and for your top dollar, is to list the house on the open market with a Realtor.

Think of the Realtor’s commission as an expense, just like the rehab labor. With your property listed in the MLS, your pool of buyers will be so much larger and your chances of getting a much higher price are much greater.

And of course, if you are not an expert in real estate, a good Realtor will be very helpful when it comes to understanding the whole sale and escrow process, the paperwork involved, and the closing process.

The bottom line is a good Realtor can really save you a lot of time and headache, which in the end equals saving or allowing you to make more money as well. Let the Realtor focus on getting the property sold, while you focus on acquiring or rehabbing other properties.

Flipping – Synopsis

Ok, there you have it… the 4 Steps of Flipping!

Good for you if you read through this entire post!

Success in House Flipping is similar to other business. It takes Education, Setting Goals and taking Action.

So keep learning the fundamentals of this business, surround yourself with positive, committed people, set goals, and take Action!

Real Estate and House Flipping can help you achieve financial freedom.

It is our goal at SDREIC to help you get there!