House flipping is a type of real estate investment. Investors would buy a property, but they do not have the intention of owning the property. The investors’ main goal is not to use it. Their plan is to renovate the property, and then sell it and get a profit out of it.
The profit investors get will come from price appreciation. This is a result of many factors, such as the real estate market, appraisal, and the cost of renovation. Extra renovation expenses are also added to the after-repair value for a return of investment.
If you want to make a career out of house flipping, this guide provides basic information about it.
3 Basic Steps in House Flipping
#1 Make Your Spending Low
You want to buy a property at a very low price. Negotiation is the key. Then you need to put in some time, a strict amount of budget, and enough manpower. Then the end goal is to sell it at a high price.
The normal cycle is investors will look for a home that is either abandoned or foreclosed. Then one of the investors will contact the bank or previous owners about the asking price. Then a home visit follows. Here, they will do a round of inspections inside and outside the house. They will look for hidden value, and possibly integrate unused space into the house for added value.
#2 Plan Wisely With a Team
After this session, investors and a team of builders and designers should come up with a plan. They need to create a blueprint of all the possible renovations they will do in and outside the house. The plan needs to be specific for each corner of the house.
Then based on the asking price, they will come up with a budget for all the renovations they will do. The main target in this meeting is to come up with a good “ARV” or “after repair value”. The ARV is the worth of the home after it is fully renovated. They will think of many possibilities to maximize the ARV. Plans such as adding square footage are among the best ways to do that. Especially if you want to sell the renovated property as per square footage.
It is also important to focus on the speed of the renovations. This should be measured with equal importance as that of the maximum profit. Your goal is to keep the house flipping on schedule. You want to avoid “carrying costs” during house flipping. These are expenses that go with a house from day to day. These are mortgage payments, electricity bills, water, gas, and insurance. Keep in mind that these bills are already running as soon as you purchase the house. And paying these will have an impact on your budget.
A good building commissioning service is also an essential part of house flipping. It covers what your current builders and designers cannot do in the long term. So it will play its part for your future clients.
#3 Execute the Plan Systematically
This part is directly intertwined with Steps 1 and 2. First, one suggests spending the least amount of money. Because this is the time you will talk to the bank or the property owner to buy the house. Here is where negotiation skills will be tested. Here is where you show them why you can only pay much lower than what they are asking. If they ask for $325,000 then start negotiating with $275,000 and come up with good reasons why. Remember that is not the only amount you will spend. So any significant amount you will save on the asking price can be added to your renovation budget.
After a deal is made, be aware of other legal documents you need to accomplish. One of them is title insurance. This protects you as the new real estate owners and your incoming clients and lenders against any property loss they might experience because of “construction liens”.
Construction liens can be filed by contractors. This is to ensure payments of the previous homeowners for any work that had been done in the house. And if liens are unpaid, recalling any item connected to the house is beyond the flipper’s control. You wouldn’t like it if previous contractors would suddenly come in the middle of the house flip. If liens are in place, they may take the roof of the house as payment for unpaid work. And there is no way to stop them.
When all of the above is done, then you can make substantial renovations. Make the house very beautiful. Schedule an open house where you can tour potential buyers and then offer it at a price that reflects its brand new appearance.
Here is a Sample Computation for a House Flipping
For an 1100 square feet house. $325,000 is the possible asking price of the owner or the bank. Try to negotiate to buy the house at $275,000.
- Renovation: $50,000 for 5 weeks only.
- Total All-In Costs: $325,000
- Sale price after renovation (or ARV): $395
- Potential profit $70,000
Home renovation requires hard work, patience, careful planning, and wise decision-making. The result is very profitable. But it also gives a feeling of satisfaction and fulfillment. Just the thought of rebuilding a rotting house and making it beautiful provides the feeling that you will want to do this again and again.