On TV it looks so easy to buy a house, fix it and sell for a profit. It’s a one-two-three that seems like a great way to make a ton of money very quickly. Unfortunately, like other get rich schemes, it’s too good to be true when you see it that way. Sure, there’s money in the fix and flip market, and there always will be, but it’s not a business you can start and finish in the thirty minutes they show on HGTV. If you want to succeed at fix-and-flip real estate, you need a plan and patience.
How long does it actually take to fix and flip a house? CNBC estimates that it takes about six months (180 days) to flip houses on average. Unfortunately an ‘average,’ isn’t necessarily going to give you personally a fair idea how long it will take you to fix and flip. The time depends on two major things. First, the damages to the home and how fast you can get them repaired. The second major factor is how long it takes to sell the home once it’s finished. There’s no guarantee when it comes to selling a home.
Before You Buy
Before you can even begin the process of buying, rehabilitating and updating and then selling homes for a profit, you need money. You might find a free lunch in Las Vegas, but there’s no such thing as free real estate. If you happen to have a small fortune stashed somewhere, then perhaps you’re one step down the path to fix and flip heaven, but for everyone else, the question of finances comes first. It’s possible to get into the home renovation and sales game without money, but it’s a lot harder than you might think to pull off. Getting into this business may be called a “game,” but it’s not to be taken lightly. There’s serious commitment involved in terms of time, money and credit to say the least. You can opt for paying 10-20% down and securing a traditional mortgage if you have sufficient credit, but the process takes time and doesn’t offer anything to spend on renovations so you’d need a secondary source for that.
An FHA-insured Section 203(k) loan is another option. This type of loan allows you to add rehab costs into the amount you initially borrow. It might be a more straightforward choice for some home flippers. A Hard Money loan may be the best choice for those seeking to renovate and then turn the property around for sale. It’s easiest to think of this in terms of an investor. The individual or group who loans you the money to purchase and make repairs use the property itself as collateral to secure the loan. You get money, and if you don’t pay them back, whoever issued the loan keeps the partially repaired property. Of course, they also get to sue you for their losses, so it’s not as though it’s risk-free and you can just hand over a deed and leave if you decide that this isn’t a good fit for you.
Which Houses Should You Buy?
There are a couple of ways to make the calculations on the dollar amount, but before you do that you’ll need to know how to determine what it’s going to cost. The asking price is evident; that’s something the seller will post up front. The next concern is the amount and type of repairs necessary. You’ll also need to know the cost of any mandatory assessments and fees related to closing the sale (both as the buyer and when you’re the seller since it varies from state to state). Don’t ignore any part of the expense, no matter how small. Everything adds up over time.
Bonus Tip – Wherever possible, purchase the worst home in a nice neighborhood rather than a mediocre home in an average neighborhood or a beautiful house in a cheap area. It helps to increase your property value if you start in an area where other homeowners aren’t going to negatively affect your resale value.
Easy Fixes Are the Best
Look for properties that need primarily cosmetic alterations. Replacing cabinets, roof tiles, and repainting are great examples of cosmetic changes. You’ll want to find newer houses, those built in the last twenty years or so should have updated electrical and water lines. Realistically, making significant repairs like rewiring have unique considerations. Not only do you have to do more, as in the case with electrical where you need to remove parts of the walls to put in wires, but there’s also the issue of additional permits. More complicated fixes take more time and often require degreed, licensed and bonded specialists in order to be legal.
A basic cosmetic fix like paint or cabinet replacement has no special requirements in many places. You can often avoid the need for additional permits. If you’re so inclined, you can even do some of these repairs and replacements yourself. It takes a little practice but learning to paint with rollers, or spray guns isn’t terribly difficult. Always remember to ventilate properly with open windows and fans. Also, spring for a good ventilator mask for your health’s sake. You can certainly save a little money if you learn to DIY some parts.
Bonus Tip – Always overbudget where repairs are concerned. A good rule of thumb is to add 20% to the cost and amount of time you expect to spend. For example, if you plan to DIY some paint, and it should cost $100 for the paint, drop cloths, tape, ventilator, and rollers, then budget $120. If you expect to spend ten days, plan for twelve instead. When it comes to paying contractors, add a little more, 25% should do.
The 70% Rule or 10-20% Return On Investment (ROI)
Once you have an idea how much you’ll need to put out, you need to do the math to see if it’s worth it. There are two schools of thought, and both are entirely valid. You may want to start with smaller homes and work your way up as you gain skill and experience. It may take you some time to get good at fixing and flipping houses. There’s no instant gratification in this business.
A home in peak condition isn’t what you need to fix and flip. Generally speaking, a rundown home that’s in reasonable shape should go for about 3/4 of that price. So if the nice houses on a block are selling for $100,000, then you want a fixer-upper that’s upfront cost is 3/4 or $75,000 minus the cost of repairs. Let’s say this house only needs some kitchen renovation and paint for around $10,000. You wouldn’t want to pay more than $65,000 for it.
You’ll still have wiggle room in your budget for fees and anything reasonable that goes wrong and requires additional repairs in this case. Don’t forget, you’ll still owe taxes and utilities for the time you have the home, and you have to pay for fees associated with selling as well. That should leave you around 10-20% of the total cost as a profit when you’re done. So you’d walk away with $10,000- $20,000 in your pocket.
Bonus Tip – Federal Minimum Wage is $7.25/hr. At 40 hours a week, that means a minimum wage worker makes $15,080 a year. That’s about the same as a single successful house flip. Since it takes half a year on average to flip a house, you need to consider the time and effort. One house a year isn’t going to make you much money.
The 70% Rule
This variation of the what-to-pay calculation is a little different, but the concept is very similar to the 10-20% profit philosophy. The 70% rule states that you should pay no more than 70% of the ARV (After Repair Value) minus the cost of repairs. Let’s assume you’re looking at the same $100,000 home as before, with the same $10,000 repairs needed. Seventy percent of $100,000 is $70,000, and you want to subtract the repair cost of $10,000. That means, in this case, you wouldn’t want to pay more than $60,000 for the same home.
You have the same expenses and concerns regardless of how you calculate the output. You have to pay interest on most loans, and whether you have a loan or a mortgage, you have to pay for that monthly. Taxes, utilities and so forth are all the same. With the 70% rule, the difference is the amount of slush you have in case anything extra comes up. Naturally, if it doesn’t, you might make more profit, but it’s a safer tactic.
Bonus Tip- Any cash left if you don’t need the full sum you asked for from financiers should go directly back into your business, rather than into your pocket. Use it as part of the repayment for the loan. This may seem like a silly detail; after all, a profit is a profit right? Wrong, where the money comes from matters. You want to keep your accounting clean. It’s probably best to pay an accountant to handle it all for you, but if you DIY your books be meticulous and always conscientious. Audits are no fun, and you’re more likely to get audited if you don’t keep track of things the way you should. Money from financing isn’t meant to be part of a profit. It’s a loan, not a bonus.
Closing on Your First House (2-3 Months)
So you’ve found ‘The One,’ your first house to flip. You’ve made an offer, and it’s been accepted. Now what. The answer is probably that you have to wait a while. The average closing times on home buying have gone up in recent years. Some projections are showing nearly two months to close on average. What’s the holdup? Well, there are several usual suspects in this case. Appraisals may not match up, funds take time to clear, and insurance issues can crop up. Occasionally there are also issues involving a seller moving out of the home if they lived there as a residence or some other unforeseen problem.
There are ways to cut down on the timeframe. A lot of it is merely putting in the footwork in advance. Working with realtors or through auctions can make things take longer. Both those options do have advantages, however. Realtors are licensed and do much of the work for you, even finding the homes. Auctions are often cheaper, but you may have to wait to take possession for as much as a year because in some states the former owner has the right to repurchase the property as long as they compensate you for your payment. Alternately you can look at a quick sale with a specialty business that buys homes to sell to people like you who want to become real estate investors. This can cut your time down to as little as ten days.
Insurance and Clear Title
Sometimes buyers wait until the last moment to get the necessary insurance. This is a terrible plan if you want a quick flip. Another matter that can slow the process is the clear title. If you take the time in advance to make sure that the title belongs wholly to the seller it can help cut down the time. Sometimes sellers can have liens against the property which gives someone else a prior claim. In rare cases, they may even have a co-owner, such as when spouses sign for a home together and then later divorce.
When you get your funding through a bank, they will want to have the property appraised to make certain they’re loaning the correct amount. If the appraiser comes up with a different value than you applied for this can cause a hangup while you renegotiate the sum. You don’t have to work with a bank to secure your funds, so there may be ways to avoid the appraisal discrepancy problem.
Other problems can occur with funding. Due diligence takes time. Not only do you have to perform due diligence, either personally or through an intermediary like a real estate lawyer, but so does a bank. If you work with a major financial institution, they are likely to be more cautious and take more time to complete any necessary tasks. This means it can take a month to get your funds for the purchase released if they find nothing objectionable.
Making the Repairs (1.5- 3 Months)
Lots of people who want to get into the real estate repair business already possess some of the skills to do repairs. Depending on the nature of those repairs; however, this can be more trouble than it’s worth. Merely knowing how to wire an electrical box or put in a pipe doesn’t necessarily give you the legal right to do so. Some states allow homeowners to make repairs. Alternately, some states require a professional assessment or expressly forbid certain types of repair from being done by anyone who isn’t licensed and bonded. In South Carolina for example, a homeowner can self repair many things, but they can’t sell the house for a couple of years after making their own repairs.
If you have the skill set, and you own all the tools, then some types of repair may be cheaper and even faster than working with a repair crew. It all depends on what the house needs. For example, if you used to be a professional house painter and you have a decade of experience, you may very well be able to make a cosmetic paint repair or update faster than the new person on your favorite repair crew who just doesn’t have your level of skill.
On the other hand, if the repairs are extensive, you may want to have your chosen crew on standby the day you get the title in your hand so they can get right to work. Though sticking to cosmetic-only repairs is ideal, issues can come up. Sometimes a house that needs wiring is worth the price, or you discover a new problem after the fact. Don’t forget about that extra 20-25% time add on in case you or your workers need more time.
Bonus Tip – Always do your homework when it comes to hiring a crew. Watch out for anyone who demands to be paid in cash or up front. Those are situations that are more open to abuse.
Selling the Home (4-10 weeks)
Once you have everything fixed and ready to go, there are just a few things left to consider for the sales process, but selling is the most time-consuming part of the process. Decide whether you plan to sell it yourself as the owner, or work with a realtor. From staging and showing the home to open houses, there are a few considerations. Fortunately, this stage is more about patience than anything. Once you find a buyer and accept their offer, you’ll get to see what the other end of the sales process looks like.
Bonus Tip – Don’t forget about the time and money it takes to handle closing a second time. Check your local laws on who pays for what exactly, and make sure you put in writing what you and the buyer are responsible for covering.
Like all good things, getting into business for yourself, be it fixing and flipping homes, or any other business, takes time, patience and a solid business plan. You need to secure financing, materials, and handle both purchasing and selling the home. It’s not a quick process, but it can be lucrative. The reality is that people will always need homes, and that means homes will always be used, get worn down and need repairs. You will always have a job if you’re careful and make sure to do an excellent job at it. In the end, if you want to make money, real estate has always been a great way to do that. Don’t expect to make a mint your first day and you’ll be more likely to succeed.