1. Assemble a team
Before starting, assemble a reliable team of professionals to ensure quality and safety. This means house inspectors, builders, contractors, plumbers, electricians and others. “Interview contractors you may want to work with,” advises Evan Harris, co-founder of rehab lender SD Equity Partners. (Rehab equity lenders are an alternative to banks, and often specialize in property flipping.) “Tell them you plan to enter the industry. They can point you in the right direction and help you make other industry connections.”
2. Know your market
The adage that the three most important things in real estate are location, location and location is as true for successful house flippers as it is for everyone else. "Regardless how nice the new flooring or countertops are, if the home is in a terrible location nobody will buy it," cautions Eric Workman, vice president of marketing at residential rehab lender Renovo Financial. “Choose a house in a good school district, with access to transportation and employment corridors to attract more potential buyers."
While buying the worst house in the best neighborhood is tempting, first-time real estate flippers in particular should avoid homes that need significant structural repairs. Replacing a roof or repairing a foundation "costs more money than something like replacing cabinets, and can delay projects if there are issues with permits or contractors," Workman says.
Before rehabbing, know your market and its expectations. Your flip should match the style and finishes of competing homes in the area, without over-improving.
3. Finder’s fees
To find good candidates for house flipping, offer finder’s fees to realtors and other house hunters who find a property you actually purchase. “This helps you find properties to flip that may not be easily accessible on the Internet. It’s also an excellent way to network with others in the housing industry and helps build your reputation as a winner,” Harris says.
“A good finder’s fee could range from $250 to $1,000 or more, depending on the value of the property,” Harris adds. The fee is based on the expected profit when the house is eventually flipped. Alternatively, finders may share a percentage of the profit after resale. “This amount usually is between 5 and 10%, which could be $1,000 to more than $3,000. It’s usually paid about six months after the house was found.” That delay allows time for the initial purchase, rehab work, sale and closing.
When you buy a house to flip, the terms of payment will vary by seller and situation. Home foreclosure sales typically expect payment in cash. Sometimes sellers are willing to wait for a traditional loan to be approved. There are alternatives to traditional 15- or 30-year mortgages, however.
Financing options include:
- The seller, who acts as the bank and finances the loan in what’s called a seller carryback
- A home equity line of credit if you have equity in assets with value
- Traditional banks for loans exceeding 90 days
- Private or hard money lenders that provide capital fast, using the property being rehabbed as the security
- Family and friends
“Private and hard money loans can help you finance the entire renovation process, including closing costs,” Harris says. Typically, a hard money lender will loan 80% of the expected resale value of the property, although some will fund up to 100% of the expected future value—called the loan-to-value ratio-the home, he explains.
Use family and friends as a last-resort source of financing. “Flipping doesn’t always go as expected, and money issues can divide cherished relationships,” Harris points out.
Before a mortgage lender will complete your mortgage loan, they will likely require proof of homeowners insurance. In most cases, it is required before you can close on your home – even if no one will occupy the home during the remodeling period.
5. Put terms in writing
Before working with anyone, including family, friends or any other third parties, sign a written, legally-binding contract that clearly states the terms of the relationship in plain English. For example, for finders, a contract should specify the finder’s fee not only when you succeed, but also in case you lose money on the house or it sits on the market for several months. This is especially true if friends or family are involved in any aspect of the flip.
Especially with family and friends, have a written agreement that spells out the business relationship, their expected returns, contingencies and their involvement in the flipping process. For example, everyone needs to be clear that just because your family or friends loaned you money, doesn’t mean they get to control the flip. They should also know what to expect if the house flip loses money.
6. Time frames
"Time is your enemy," Harris says. Successful real estate flippers refurbish and sell each house as quickly as possible to minimize the time their money is tied up in any one property.
"The perfect scenario is to have the home sold within 30 days of being listed, and at the asking price," Workman says. "If the home sits unsold for more than 90 days it might end up being sold at a break-even price or even at a loss.” Often, a slow sale can be avoided by choosing a property in the right neighborhood and inspecting the property inspecting the property before closing.
If you have a reasonable offer, don’t try to hold out for a better one, Harris advises. The goal is to make a profit. “In the house-flipping world, you want to field an offer, take it, and move on to the next project,” he stresses.
After the flip, remember to thank your team, and let them know if you plan to work with them again. Successful house flipping depends on a fast-moving team, and having professionals who will take on your projects quickly is invaluable.