How to Flip Properties

House “flipping” is a colloquial term for a certain form of real estate investing.  To flip a house means to:

1.  Buy a house that is in some degree of disrepair, that the owner – perhaps due to being in a situation of financial distress – has not maintained and now is needing to sell,

2.  Pay to fix up the house, and

3.  Sell the house for what you paid for it, plus what you paid to fix it up, plus profit.

Most house flippers agree that the first step is the most important.  If you’re not buying houses well below market rates, you’re going to struggle as a house flipper.

The first thing you need to research when you’re considering buying a house is what a house of that type in good repair in that area would likely sell for.  Don’t assume that you’ll be fixing it up so well, and adding so much value, that it’ll sell above that norm.  Use the market value of a typical relevantly similar house as your base, and if you do indeed end up with something better, consider that a bonus.

Most experienced house flippers figure they need to obtain a house for 25%-40% below that base.  More if the house is in horrible shape and will be unusually expensive to bring up to snuff.

If you’re not a good enough negotiator, or the seller isn’t motivated enough, or desperate enough, for you to get it at that price range, walk away.  There are plenty of other houses.

What kind of house can you get for that kind of discount?  Well, it won’t always be the cheapest.  If you can pick up a house for $20,000, that’s not necessarily a great deal.  It may be in a terrible neighborhood, and it might be so decrepit that you’re going to have to bulldoze it, and really about all you have is a lot that’s worth less than $20,000 anyway.  On the other hand, a $1,000,000 house could be a spectacular deal if it needs only a moderate amount of work to bring it up to market value, and market value is closer to $2,000,000.

Some flippers comb through foreclosures and probate to find possible desperate sellers.  It may sound funny, but some flippers use a “smell test” as a key factor.  If a house has the kind of odor permeating it that no ordinary buyer would even consider purchasing it because they know they could never live in such a place, it can be easier to talk a seller down.  It may be no more expensive to fix than a lot of other less obvious things, but it’s the kind of flaw that a seller can’t help but be self-conscious about.

Once you’ve got your property, now it’s time to fix it up.

Approach this with the right mindset.  You’re not an ordinary homeowner who’s going to be living in this house.  Everything you do must be justified by the fact that it’ll increase the value of the house more than what it costs.  For someone intending to live in a house, it might make sense to spend $10,000 on an improvement that will only increase the value of the house $8,000, as long as they stand to get more than $2,000 worth of additional enjoyment from living in the improved house than the pre-improvement house.  But that doesn’t apply to you.

Nor are you fixing it and decorating it according to your aesthetic preferences.  It’s irrelevant what style and colors and such you like.  You only care about increasing what you can sell it for.

With that in mind, here are a few rules of thumb:

* Externals over internals

How a house looks from the outside is especially important psychologically in what people think it’s worth.  Even cosmetic things like putting some money into landscaping, and placing flowers in appropriate places can make a big difference.

* Kitchens and bathrooms are the most important rooms

Investing money in repairing and upgrading these rooms consistently returns more than it costs.  Research what kind of kitchen flooring and other material impresses buyers of this level house.

* Don’t decrease the number of bedrooms

Even if you think a renovation that takes away a bedroom improves the house overall, don’t risk it.  The number of bedrooms is too important to the value of a house.  If anything, consider adding a bedroom if feasible.

* Time is of the essence

When deciding what repairs to make, which contractor to hire, etc., remember that you’re trying to get in and out and move on to the next deal.  Every month the process drags on and the house isn’t ready for resale is hurting you.  Don’t be indecisive, don’t be a perfectionist – just get it done.

Finally comes time to sell the house.  If you’ve done everything right as far as buying the property and fixing it up, there should be no problem making a tidy profit on the sale.

Here you need to balance the time factor.  Yes, you still want to get it done and move on to the next deal, but by the same token, you need to be patient enough to get your price.  Make sure you don’t put yourself in a position financially where selling it quick is a higher priority than selling it at the right price.  Ironically that’ll turn the tables and put you in the position the seller was in when you bought the house.

So you don’t want to dawdle indefinitely with a house you have no intention to live in or own long term, but you don’t want to behave like a desperate seller.