How to Make Money Flipping Houses

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inside houseThe following is a guest post from Mark Ferguson, a seasoned house flipping professional.

Making money flipping houses appears to be a straight forward process; buy a house cheap, make repairs and sell the house for a profit. I fix and flip 10-15 houses a year and that is basically how you make money flipping, but there are many details that will cause projects to either lose or make money. The tricky part is making sure you know all the costs involved besides the repairs, because those costs are what get people into trouble. You also have to make sure you know the value of your houses, plan for the unexpected and know how to repair a home.

Make Money Flipping Houses: It starts with buying houses cheap

During the last house crisis many flippers went bankrupt when prices dropped. Many people assume every person flipping houses at that time lost money. I have been flipping houses since 2001 and I kept flipping right through the bad and good markets. The key is buying homes cheap enough to make a profit in today’s market or even if prices drop, not hoping for appreciation.

Many of the flippers that went bankrupt bought marginal deals and hoped for appreciation to make a profit. This was more speculating that the market would continue to increase and is not how long term flippers make money. A professional flipper buys a house that will still make them money, even if the market decreases five or even ten percent.

How Can you Get a Good Enough Deal to Flip?

I used to buy most of my flips at the foreclosure sale where I had to pay cash within 2 hours of bidding. I could not see the interior of the houses in many cases and sometimes the houses were still occupied. It was very risky and more than once I was burned by houses needing more work that I thought and occupants who caused major problems. One occupant ended up having a meth lab, went to jail, then the house was lit on fire by one of his buddies. It worked out okay in the end because our insurance covered the rebuild, but it was an interesting experience.

Now I buy 90 percent of my flips off the MLS; I get to see a house, use financing and I get an inspection period in some cases. The reason I started buying off the MLS more was because competition got so intense at the foreclosure sales that prices were close to MLS prices. With less risk the MLS is a much better option for me.

How do I buy a house off MLS that I can flip?

  • I am a real estate agent which allows me to view houses and make offers very quickly. This gives me a huge advantage. Plus I can pay more than other investors because I save a commission when I buy the house as an agent.
  •  I check MLS five times a day to see deals come up right away.
  • I also look for houses that have been on the market for over 60 days and make lower offers (20 percent below list).
  • I look for house that have had a contract fall through and come back on the market.
  • I look for homes that need repairs. The more repairs the better deal I can get. Old homes do not scare me, but I have a lot of experience with repairs.
  • I am not deterred by listing comments that say a house is uninhabitable or needs scraped. I have bought many houses that the listing agent said needed scraped that I saved.

What Are Other Ways to Get a Great Deal For Flipping?

There are many more ways to buy a house than off the MLS. It takes more work and more experience to find great deals off MLS.

  • Foreclosure sales: I still attempt to buy at the foreclosure sale in case a deal is missed. I would not discount the foreclosure sale in your area just because it is hard to get a deal in my area.
  • REO auctions: Sites like homesearch.Com, auction.com, Hubzu and others sometimes sell houses without listing them in MLS. If they aren’t in MLS that means less people will know about them and you may get a better deal.
  • Direct marketing:  Sending letters to absentee owners or probate owners who do not have their houses listed. “We buy ugly houses” signs are direct marketing.

How Do You Decide If a House Can Be Flipped?

Many people look at the purchase price, the repairs needed and the selling price to determine if they can flip a home. They forget about many other costs involved like selling costs, financing costs and carrying costs.

A great rule for flipping a house is the 70 percent rule; a house can be flipped if it can be bought for 70 percent of the repaired value minus the repair costs. For example, a house is worth $150,000 after it is repaired and needs $20,000 in work. The house could be bought for $85,000 according to the 70 percent rule and still make a good profit. $150,000 x .7.  – $20,000 = $85,000.

The reason a house has to be bought so cheap to make a profit is because of the costs involved in flipping.

  • Financing costs: I have a great local lender who lends me 75 percent of the purchase price at a 5.25 percent interest rate and I have to pay a one percent origination fee. This is extremely cheap financing for flips. Hard money lenders will charge three times this amount. Financing costs can be four to ten percent of the selling price.
    Here is an article with much more information on financing fix and flips.
  • Buying costs: When you buy a flip you will have to pay closing costs, inspection costs and possibly loan costs. This can add up to be two or three percent of the purchase price.
  • Carrying costs: When you own a house you have to pay for insurance, utilities, HOA, yard maintenance and more that could add up to be thousands of dollars.
  • Selling costs: When you sell a house you have to pay a Realtor if you want top dollar, you may have to pay closing costs for the buyer, you also have closing fees, recording fees and title insurance. These costs can easily be ten percent of the selling cost.

All of these costs can add up to $15,000, $20,000 or more on a relatively low priced fix and flip. As you can see, the repairs are not the only costs you have to worry about when flipping a house.

house

What Do You Repair on a Fix and Flip?

When I flip a house I am usually dealing with lower end properties. I tend to make more money on them, because I can find more deals and the repairs cost less. I have 9 flips right now and they all have after repaired values of $225,000 or less.

When I repair a flip I always fix any major problems so that an owner occupant can get a loan. I fix or replace the plumbing, electrical, heating, roofing, foundations, etc. I also always paint the interior, add stainless steel appliances, put in new lights and hardware and new floor coverings. I make many other repairs depending on what a house needs: kitchens, baths, windows, doors, etc.

I usually spend anywhere from $15,000 to $25,000 repairing a home. Whenever I consider a new flipper, I get a bid from a contractor and assume I will find $5,000 more in repairs before the project is complete. Things always cost more or we uncover something we did not see when the bid was done.

If you are a beginner I would get multiple bids from contractors before you buy a flip. I would also start looking for contractors well before you buy a flip because that can be one of the most difficult parts of the process. Always expect to pay more than the bid actually is and expect the work to take about twice as long as the contractor says it will. This happens because the contractor will find things that you or he did not know about, not necessarily because the contractor is dishonest.

How to Sell a Flip For the Most Money

Finding a fix flip, calculating the repairs, and figuring out the carrying costs is all part of fixing and flipping homes. You also have to sell a flip, which takes a great real estate agent, great pricing and good marketing. Many people want to save money by selling a house themselves, but if you aren’t an agent it usually costs you more money than you save.

Under pricing or overpricing a home can cost you more than the commission you think you are saving. An overpriced home usually sells for less than it would have if it was priced right to begin with. Houses that are on the market for a long period becomes stigmatized and people wonder what is wrong with them. Houses that are underpriced will get multiple offers right away and some buyers will raise their offer. In the end it is unlikely that a raised offer is as high as an offer would have been if the house was priced right.

Don’t try to overprice your home to make up for the unexpected costs you incurred, the market doesn’t care how badly you miscalculated. The longer you hold a property the less money you will make. Holding out for a higher price may cost you any profit you have left.

Conclusion

Fix and flipping can be a very lucrative business, but it is not a way to get rich quick. It takes a lot of experience, planning, budgeting and patience to make money flipping. You have to know when to cut your losses and let professionals help you.

About Mark Ferguson

Mark has been a licensed Realtor since 2001, has a real estate team of 10 that sells over 200 homes a year, owns 11 rental properties, and fixes and flips 10-15 homes a year. Mark has a business finance degree from the University of Colorado and boy/girl twins who are three. Mark also runs and writes www.investfourmore.com, a real estate blog that chronicles his rentals properties, fix and flips and being a real estate agent.  Follow Mark on Facebook: https://www.facebook.com/InvestFourMore

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Housing Make Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

12 Comments

  1. “It was very risky and more than once I was burned by houses needing more work that I thought and occupants who caused major problems. One occupant ended up having a meth lab, went to jail, then the house was lit on fire by one of his buddies.”

    What an experience! This is definitely something I hope to do some day. Not the meth lab part, the flipping houses part. 🙂

    • The bad experiences are rare, but you have to ready for them. That was a crazy experience, especially being interviewed by the police to see if I set the house on fire!

  2. I’ve always been interested in flipping houses but there are so many things that can go wrong that I just pass on the idea. Maybe if I have a veteran to go in with or take me under their wing it would be a different story.
    Jon @ Penny Thots recently posted..How To Make Money Illegally

  3. I am very interested in the idea of flipping properties but I imagine it’s a steep learning curve in the beginning and very expensive if you make mistakes. It is something I want to learn more about though because there is clearly a profit to be made if you know what you’re doing and if you have a good team of people working with you.
    Myles Money recently posted..Banana Milkshake #FrugalFriday #Video

    • It can be risky if you don’t do your homework and even if you do. It all boils down to getting a house cheap enough that if you do make some mistakes you still make money
      Mark Ferguson recently posted..Is it Better to Rent or Buy a House?

  4. Thanks again for the post Mark. Since I am a long-term thinker, I always assumed that renting out a home was the better option – Less risk of losing money, more tax benefits, consistent passive income. Would you say this is the case? Flipping sounds exciting, but it takes a lot of work to both fix the house up and to find a buyer.

    • I use a lot of the income flipping to buy rentals. Flipping is like a job, not really investing. I agree the long term wealth building of rentals is superior to short term profits of flipping.
      Mark Ferguson recently posted..Is it Better to Rent or Buy a House?

  5. I’m a fellow Realtor and I have to say, I LOVE THIS POST! It’s so meaty, yet concise! However, I think it’s worth mentioning that going into debt to finance a flip can have disastrous consequences, especially if the repairs are under budgeted or if the sales price is less than projected.
    Kenny Schneider recently posted..Your House, Your Style

    • Thank you! I finance 75% of the purchase price. Even if I have to sell for less than I bought it for I can still sell the house. It’s all about buying at the right price. Financing the property allows me to complete 2-3 times as many flips. Yes it does add some risk and newbies should be very careful.


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