Flipping Houses 101: How to Find a Property, Rehab It, and Turn a Tidy Profit

“A good agent will help you find the best properties to flip,” says McFadden. “When you’re buying with a plan to flip, you not only have to do the financial analysis on the home purchase, but you need someone who can estimate the cost of necessary repairs and predict the potential sale price you can get for the home in that neighborhood once it’s fixed up.”

These numbers and predictions need to be as accurate as possible in order to budget and project your potential profits. You don’t want to be forced to reduce the price after investing money in the home purchase and repairs—or you’ll wind up breaking even or even selling for less than you spent.

Of course, you can’t hire just any agent—even if they’ve been working in real estate for years. You need one who has experience with house flipping.

“When you’re flipping a house, you need an experienced agent that really understands the costs of construction,” advises McFadden.

Profit margins are slim to begin with for house flippers, if you partner with an inexperienced agent who miscalculates the costs of construction or the projected resale price—your margins may just vanish entirely.

“Agents with that kind of experience will recognize the warning signs in homes that may need costly repairs,” says McFadden.

Step 4: Line up your flipping finances

Once you’ve brushed up on your own skills and established relationships with affordable, trustworthy pros—especially a top real estate agent—it’s time to figure out how you’ll finance the flip.

“Typically cash transactions are best. So, you’re going to need cash available, or work with an investor who can cover the cash purchase of a property,” says McFadden.

“You can also try getting a rehab-type loan, but it’s more difficult to roll the cost of your repairs into the actual loan itself that way. Most likely, you won’t have the margins to make a profit if you finance your flip with a rehab loan.”

Making an all-cash deal may be the best way to go, but funding your house flip with a loan isn’t impossible. In 2018, the total volume for financed home flip purchases reached 19.9 billion, an 8% increase from 2017.

There are a number of ways you can borrow money to pay for home renovations, but the two best options for house flippers are: a Fannie Mae HomeStyle Renovation Mortgage or an FHA 203(k) Mortgage.

Both loan types come with their own pros and cons, however the main difference is that the 203(k) loan caps the home repair expenses at $35,000—while the HomeStyle loan allows you to borrow up to $50,000 or 50% of the “completed” appraised value.

These loans may also come with other conditions that you should review with your lender before taking out the loan, as they could hamper your flipping plans.

For example, while HUD doesn’t forbid flipping with FHA loans, you may not qualify for one if you’re within 90 days of purchasing the house.

You’re also required to hire a licensed contractor to make the repairs with a 203(k) loan (so no money-saving DIY), and you may encounter lengthy closing times. The extra time and expertise required by your loan can shatter your finances if you don’t budget properly.

Step 5: Budget for the worst-case scenario

It might seem counterintuitive to budget before you’ve found a property, but the last thing you want is to fall in love with a home’s potential, only to find that you really can’t afford to fix it up.

While you will need to refine your budget once you’ve picked a property, you need to know the basic budget so you’re only shopping for homes that you can afford with your financial plan.

Of course, budgeting to flip a house is a lot more complex than simply buying one you intend to live in.

When you were shopping for your primary residence, you focused on finding a home you could finance on your salary and the features you personally preferred. If any remodeling needed to be done, you knew you could put it off until you could afford it—and you probably never even thought about how much you could sell for in the future.

When you’re financing a flip, planning how much you can afford to buy a home is just the beginning. You’ll also need to evaluate the expense of remodeling the property immediately, project how much you’ll be able to resell for once it’s fixed up—then do the math to estimate your chances of turning a profit.

Unfortunately, budgeting for the remodel is a lot harder when you’re flipping. You can’t spend money on just anything to make it look better—you need to research which projects offer the best return on investment (ROI), and what updates buyers in your area are paying more for.

And then there are all the unexpected expenses that inevitably arise when you’re remodeling a house.

“There’s a lot that can come up during the remodel that you might not have been expecting, such as termite-damaged support beams, or foundation issues,” says McFadden.

“When you’re budgeting to flip a house, you need to expect that it’ll need more work, cost more money, and take a longer period of time to fix up than you’re anticipating. So, I would certainly budget an additional 15% to 20% above what I was planning to spend on repairs.”

Your financial plan also needs to account for other outgoing expenses that come with flipping. For starters, you’ll need to pay monthly housing costs on things like utilities, HOA fees, property insurance, and your mortgage payment (if you get one).

You’ll need to budget for the bite the government will take out of your profits, too. Since this house was never your primary residence, you’ll need to pay capital gains tax on the proceeds, as well as property taxes for the time period you own the home.

On the plus side, there are a number of tax breaks for real estate investors—which is why you’ll need to pay a qualified financial planner to help you budget.

Although, there’s one thing a financial planner can’t help you budget for: time.

It may only take 30 minutes or an hour to see a home go from shabby to chic on TV, but you know it’ll take longer than a TV show to refurb a home. In reality, it could take weeks or months.

Remember, you’re footing the bill the entire time your flip house is under construction, which means you’ll need enough cash to cover time-related expenses. So, you’ll need to create a timeline as to how long you anticipate remodel will take—then tack on 15% to 20% onto the schedule.

Step 6: Research a variety of real estate markets (and current market conditions)

When you’re just starting out as a flipper, you need to break out your school-time homework habits—because success requires a whole lot of research.

Before you narrow in on a specific property, you’ll first need to study up on how well homes are selling in various neighborhoods (by price and days on market).

“Technically, flipping can be done in any neighborhood. But in reality, it’s best to buy the least-attractive house in a relatively stable neighborhood, so that it has the potential to sell at a better price than you could sell at in a not-so-great neighborhood,” says McFadden.

You also need to educate yourself on your area’s real estate market conditions.

Buyer’s Market
In a perfect world, you’d be able to buy a house to flip in a buyer’s market, when inventory is high, buyers are scarce, and prices are low. You’ll get the property on the cheap, but you won’t be able to sell for as high a price as you might like.

Seller’s Market
Then when you’re ready to sell, the market would magically transform into a seller’s market—with low inventory, and plenty of buyers vying to buy your house to drive up the price. You’ll pay more for the house, which means you’ll have less to spend on repairs (and unpleasant surprises), but you’ll sell at a top-of-the-market price.

Balanced Market
Unfortunately, real estate is no fairytale. If you’re lucky, you’ll be flipping in a market where there’s a balanced number of homes for sale and buyers available, although there will be plateauing home prices. You’ll pay a little more for the house than you would in a buyer’s market—but not as much as you’d pay in a seller’s market. When your flip is ready to list, you’ll sell for less than you could in a seller’s market—but more than you could in a buyer’s market.

“Flipping is tricky because you’re essentially putting yourself on both ends of the home sale,” says McFadden. “A balanced market may be the best market condition for house flippers. You can still get a house for a decent price, do a few repairs, and still expect to sell in a reasonable timeframe without it sitting on the market.”

If you had to pick between buyer’s or sellers, you should know that it’s probably easier to flip in a seller’s market—because homes sell faster.

In a buyer’s market, you risk getting into a situation where you can’t sell it, which means you’re carrying that debt and paying expenses for that house indefinitely.

There is hope if you do get stuck with a house you can’t sell in a buyer’s market. You can rent the property until the market turns around.

Step 7: Find a house to flip

Once you’ve settled on a neighborhood and evaluated how the current market conditions will impact your bottom line, you still have a lot of work to do to find the right property.

“When you’re shopping for a house to flip, you can’t just look at how much it costs now, you have to be looking at the potential resale value of that property once it’s fixed up,” advises McFadden.

“So you need to work with an experienced agent who can do a proper market analysis for the final product, too. That way you’ll truly understand whether or not the purchase price plus repair costs will yield you enough of a profit to make it worthwhile.”

An agent is well-equipped to provide a ballpark estimate of what visible repairs and upgrades might cost. However, the best way to avoid those expensive, unpleasant surprises is to hire a qualified home inspector to do a detailed analysis of all necessary repairs.

If he finds major issues that require big bucks to fix, walk away.

“I would be most cautious about trying to flip a house if your inspector says it needs extensive structural, foundational, or major infrastructure repairs to plumbing or electrical systems,” advises McFadden.

For example, simple repairs like replacing a faucet or light fixture won’t require a whole lot of money or technical expertise to fix. But if the home winds up needing a brand new plumbing or electrical system, that gets pricey.

That doesn’t mean you should only opt for homes that need simple cosmetic fixes—as the profit margins are pretty slim when there’s relatively little that needs work.

“If the house you’re considering flipping has a relatively decent electrical and plumbing system, it’s in decent shape structurally, and the roof isn’t bad—that home has real potential to turn a profit,” advises McFadden.

“Even if the roof is bad and needs replacing, you can add that expense into your budget. Of course, if the roof has been leaking and causing other damage inside the home, you need to be aware of it.”

Step 8: Buy—Renovate—Sell

By now you’re probably thinking that this sounds like a lot of work before you even dive into flipping—and you’re right. However all this pre-purchase legwork is the best way to make sure that your house flip is a success.

If you’ve followed all these steps, you can buy with confidence, knowing that you’re purchasing the right property in the best neighborhood—and that you’ve budgeted enough money to cover the remodel, unexpected repairs, and any delays.

You’ll save money by tackling some of the remodel work yourself, and trust that you’re hiring the best pros to complete any jobs that you can’t handle.

With the help of a financial planner, you’ll learn all the financial tricks a flipper needs to know—like taking advantage of real estate investor tax breaks.

And once the home is rehabbed and ready to sell, your agent will help you set the right list price and know how to market the property so that you can sell your flip house fast and for a tidy profit.

Header Image Source: (Grant Durr/ Unsplash)