The home flipping fad isn’t just an increasingly binge-worthy obsession among reality TV addicts. The number of people flipping homes in real life is also on the rise. In fact, a recent report by NPR indicates that house flipping has hit an 11-year high.
Problem is, those half-hour shows make flipping look easy, exciting and profitable, but the reality isn’t so glamorous. It takes a lot of money and manpower to transform an outdated house into a showplace home—especially if you plan on turning a profit when you resell the property.
It’s not all throw pillows and vintage dresser transformations. We’re talking about a high risk business with as low as 10-15% profit margins.
Just ask Bryan Lebo, an agent with over 10 years of flipping experience and who ranks in the top 1% out of 9,196 of sellers’ agents in Las Vegas:
“The most important thing you need to realize is that profit is not guaranteed. Just because you’re buying a house to flip doesn’t mean that you’re going to make money.“
Before investing in home flipping, do your homework on this high risk business offering as low as 10-15% profit margins.
Here we’ll dive into advice from the pros on how to get started flipping houses that you’ll never find on TV.
The house flipping experience isn’t ‘as seen on TV’
As successful as home flipping shows seem, you need to remember that their primary profit comes from the show (through advertisers), not the home sale itself. Plus, those shows have two things you won’t have: a studio-backed budget and a paid crew to do the major construction work off-camera.
When you’re putting up the capital and handling the remodel yourself, it only takes a few mistakes or bad breaks for your margins to shrink from sizable profit to selling at a loss.
New flippers aren’t the only ones facing a thin margin between profit and loss. Statistics show that most flippers sold for a high gross profit margin at 49.8% in 2017.
But their net profits were actually lower than in previous high home-flipping years. Why? Because as-is properties typically cost more now, and they’re putting more money into remodeling the homes before flipping them.
So, what can you do to ensure that your first flip turns a profit?
While there are no guarantees, these are 5 things you need to do to set yourself up for home-flipping success.
1. Hire a top-notch agent with flipping experience
For your best chance at turning a profit, the first thing you need to do is team up with an expert real estate agent.
And not just any agent. You need one that has experience flipping houses.
According to flipping experts, partnering with the wrong agent is one of the biggest mistakes rookie flippers make.
Remember, when you flip a house, you’re both buying and selling it in a short amount of time. An agent experienced in this process is in a position to help you figure out the right price to pay for an as-is house so you can sell it at a profit once the remodel is done.
An experienced agent can also advise you on the other financial aspects of house flipping.
When you become a home flipper, you’re essentially starting a self-employed business.
Agents with flipping experience understand the financial implications of that—such as self-employment tax laws and how to track business expenses.
An agent with recent flipping experience is also a great resource to help you with the other four must-haves on this list.
2. Gather solid intel on your local real estate market
“If you’re looking to get into flipping, you truly have to educate yourself on the market very quickly,” says Lebo.
It might surprise you to learn that where you flip has a bigger impact on your success than what you do or what you know.
No matter how good of a bargain you strike when buying an as-is property, or how good of a job you do on the remodel—you won’t make a significant profit on your flip if the real estate market conditions aren’t right.
If these two things aren’t happening in your area, you’ll have a hard time making money as a home flipper.
(Not sure which is better, this one of 2017s flipping stats, OR,)
Understanding your local real estate market trends is an absolute must, according to the experts. You need that same level of expert knowledge about how much money you’ll need to become a home flipper.
3. Save enough working capital to cover unexpected expenses
In regards to financing your flip, Lebo identifies three questions you need to ask your flip-experienced agent:
- “Am I buying the house for the right price?”
- “Can I make needed repairs within my budget?”
- “Will I be able to sell the home for the price that I’m expecting to?”
The answers to these questions are key to planning the finances for your first flip. Just don’t let those answers fool you into thinking that the purchase price of the house and the remodel budget is all the money you’ll need.
Many first-time flippers forget to account for Murphy’s Law: “Anything that can go wrong, will go wrong.”
Maybe the HVAC system conks out right before listing, or perhaps vandals break into your vacant property and steal your new appliances. These things happen, and when they do, you’re on the hook to fund the fixes.
Each unexpected expense not only eats into your future profit, it can wipe out all of your current cash flow. And flippers who become cash-strapped during the remodel process often find themselves needing to cut corners just to make ends meet.
If that happens, you are no longer selling a superior product from a financially secure position that allows you to wait for the best offer that’ll net you the greatest profit. Instead, you’re selling a low-quality remodel from a financially weak position, desperate to just break even.
“The last thing you want is to not have enough working capital,” says Lebo. “Make sure that you have more cash than you think you need. That way, if there are complications, or it does take longer to sell, you can still survive.”
4. Gain ROI-savvy knowledge of interior design and home repairs
No matter how much working capital you have to make repairs and upgrade to your flip, it’s not going to be enough if you’re spending it in the wrong place.
“Just because you’re remodeling a property doesn’t mean you’re remodeling it correctly,” Lebo advises. “It doesn’t mean that your market is going to like what you’re doing. If you don’t choose the right materials, or the right look, you actually devalue the house in the process.”
Picking the right renovations that’ll bring in the best return on your investment (ROI) can make or break your flipping success.
It’s so important that the National Association of Realtors put out an Remodeling Impact Report in 2017, detailing which renovations are the most profitable.
Unfortunately, first-time flippers fail to think about the ROI.
Inspired by the trendy remodels on house flipping shows, too many beginner flippers treat the process like they’re playing “dress up” with the house, and make design decisions based on what they like.
Expert flippers who net the biggest profits know remodeling isn’t about what they like design-wise, it’s about what the market wants. That’s why it’s so important to work with a real estate agent who’s currently active in your local market. They are best-equipped to know what buyers are buying in your area.
Of course, which repairs and upgrades to make is just the first decision you need to make during the remodeling process. Which contractor you hire to do the remodel is just as important.
5. Hire a reliable contractor who’ll buy the right materials
Have you ever watched a movie or TV show with a storyline about someone getting ripped off while making home repairs? The crooked contractor became a well-recognized trope for good reason.
Thanks to some unreliable contractors, the profession has earned a reputation for spending more time and money than promised to complete a job. Some dishonest ones will even insist on money upfront, then shutter their “business” and skip town without doing any work.
If that happens on your first flip, you’ll be lucky to break even.
Luckily, there are plenty of good, reliable contractors out there who are licensed, bonded and insured—the trick is finding them. That’s where your agent comes in.
Good agents know how important a reliable contractor is to the success of a home flip.
With every home that expert agents sell, they take note of the contractors who complete work on-time and on-budget—and pass the contact information for the best contractors on to their sellers.
Flipping a home successfully isn’t as fun and easy as the TV shows make it look.
However, with a solid plan, substantial capital, some market-savvy smarts and an excellent agent with house-flipping experience, your very first flip will be a profitable investment.
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