Thinking about getting into property flipping? Have you received an invitation to a free seminar about flipping? or have you watched any of the long list of TV shows on flipping? They all make it seem so easy and profitable.
Who can resist the temptation to try to “Flip properties without using a cent of your own money?” The truth is that there are private money “lenders” willing to put up the money for you. These lenders are better known in the trade as “hard money,” and there’s a reason for that. They are expensive. With most of these lenders, before you ever see a dime of profit, you will generally have to pay 3-6 points (3%-6% of the amount you borrow) PLUS ½ the profits.
In most of the country distressed properties typically sell for as little as 50% below actual value. But in the Pacific Northwest, distressed properties are usually priced at only 8%-10% below actual value, unless they are major fixers. This makes just finding a suitable flip very difficult. Bank owned properties are often considered the best prospects because they are lower priced; but banks are notoriously hard to deal with and don’t budge much on their prices.
Your best option for actually making a profit on your flip is to find a house that looks terrible. The price will be low relative to the neighborhood values and the profits can be huge because the majority of home buyers prefer “move in ready” homes and are willing to pay for that convenience.
How to increase profits on flipping homes
- If you can pay cash or finance the house yourself, even at investor rates, you are way ahead of the game. You’ll save on closing costs and keep all the profit.
- If you have any cash to put into the purchase or renovations, this is money you won’t have to split with a lender when you sell. Even if it’s just $10,000, that’s $5,000 in savings to you.
- Demolition – can you do some of this yourself? Why pay contractor’s hourly cost for demo you can do yourself or have done by a handyman who is less expensive than a contractor?
- SHOP SHOP SHOP -Go ahead and get a bid for all the work from a contractor. Then see how much you can save if you take on some of the work yourself. Remember that your contractor will charge his/her hourly rate for ALL the work completed, even if he subbed out the job for half his rate.
- Sub out some of the work yourself. Roofers for example are all over the board in their estimates, so get a few bids on your own.
- Put in pre-engineered hardwood floors rather than more expensive hardwoods at about half the cost and have Lumber Liquidators install the floor (again at a lower cost than your contractor). You’ll find pre-engineered hardwoods in many new homes, and they are beautiful and durable too.
- Shop specials at big box stores. They are running sales all the time on just about everything from flooring to appliances so be sure to watch for these sales and save money on your rehab project.
- Buy “assemble yourself cabinets” (Cabinets to Go is a great vendor with really beautiful cabinetry.)
- Granite counter tops? Shop around to see if any vendors have “end pieces” left over from another job. These are often sold at very reduced prices. The trend lately is for mix and match counter tops and cabinets anyway these days.
- Can you re-use some of the materials already in the house? For example, damaged granite in the kitchen might have enough salvageable to use in the bathroom.
- Install energy saving features (such as tankless hot water). Buyers are becoming accustomed to paying extra for eco-friendly homes and it is a great selling feature.)
- Don’t spend a lot of money on plumbing or lighting fixtures or any item that is inexpensive to replace and is subject to personal taste. Buyers won’t walk away from a house because they don’t like the faucets you choose.
- Can you do some of the finish work? Such as painting ?
- Ask your realtor what features are most popular with buyers and what extras you might be contemplating that will result in very low return to you.
It’s important to note that some projects require building permits and licensed professionals to perform the work. Hire a professional to do electrical or plumbing work or other work that requires a permit and final inspection.
If you can afford to purchase in a very popular neighborhood where home prices are much higher than the cost of the house you’re looking at, you can expect to reap more profit than in less trendy areas. Always think worst house on the block for the highest profit.
In the Portland metro area, the biggest profits are often on old craftsman or Victorian houses. Buyers love these homes, but will rarely take on a renovation project themselves. Be careful here though. Look for homes with period features and stay true to the period when renovating. In fact, many old home flippers will keep the original kitchen cabinets and fir flooring and just refinish them.
Always keep your eye on the prevailing price range for the area. Remember, you are buying this property to re-sell as quickly as possible. You don’t have to put in every feature that you would want in your own house. But make sure whatever you do makes the house attractive to buyers.
Flippers, unlike banks, must disclose whatever they uncover during the renovation. While this can be a scary thought, you might also think of it as your best protection from a future lawsuit especially if you take care of the issue professionally and correctly.
And finally – don’t expect huge profits on your first flip. Any cash you make is cash you didn’t have before you started your project. And remember, we are still enjoying a very hot housing market. If you’re going to get into the game, do it while the market is hot. You just might see more profit than you expected.