Flipping a house is not for the faint of heart.
Yet if done correctly, flipping a house can be a lucrative money-making proposition.
Industry data shows that home-flippers do pretty well, from a return-on-sweat-investment point of view. For instance, home-flippers earned, on average, over $66,000 per flip in the third quarter of 2017, according to ATTOM Data.
Once you climb higher on the home value ladder, to $250,000 and above, there's even more cash to be made by buying a home and cleaning it up. That's especially so when adding amenities like glammed-up closets, high-end mud rooms, and high-tech man caves, among other upgrades.
What's your best move if you've been thinking about flipping homes, but haven't swung a hammer yet?
For starters, you'll need to be handy around the house, familiar with basic home renovation concepts, used to hiring and working with contractors, and have a good financial eye for a home's potential value.
The ability to stay focused and be deadline-oriented is also critical in flipping homes, as is the need to stay within a budget and keep the renovation rolling in bad weather, tough financial conditions, and with time running out on any self-imposed deadlines.
If you pass those tests, then read on - and see what it takes to be a home-flipper with a hot hand.
How to Flip a House
Home flipping is a basic real estate concept, revolving around the quick purchase-and-sale of a home, in order to receive a good profit on the transaction.
That's the simple version.
In order to strike gold and make a big profit on a home flip, you have to do the following things:
- Buy the home at the lowest possible price
- Estimate the total return after you buy the home, fix it up, and sell it, hopefully for a profit.
- Estimate the amount of work, and what budget is needed, to adequately renovate and upgrade the home, while still reselling the home for a profit.
- Vet and hire trusted contractors (think carpenters, electricians, painters, and interior designers, among other home renovation professionals), pay them, make sure the work is done to your satisfaction, and address any problems associated with those repairs and make sure they're addressed.
- Know how to handle local coding and regulatory issues - if you haven't worked closely with a municipal government office, prepare for a load of paperwork and approval headaches.
- Stage and resell the home at the highest possible price, no matter how the local real estate market is faring, and be prepared to keep paying the original mortgage if you can't sell the home.
- Handle the tax issues linked to frequent home selling - again, that means a lot of paperwork, and likely some time spent with a professional accountant, if you're unfamiliar with the home transaction process.
- Rinse and repeat, possibly juggling half-a-dozen home-flipping projects in the course of a year if you want to make serious money.
There's also the gut-wrenching reality of plowing $40,000 into a home renovation project, after buying the home for $160,000, and watching in silent horror as the home just won't sell - maybe for months at a time, and only then at a much lower, market-driven price.
You need a cast-iron stomach and a pragmatic, "there are no guarantees here" mindset to be a successful home-flipper - and not many people want to face that reality.
According to RealtyTrac, the minimum amount of profit you'll need to make on a home flip is $20,000 - and there's no guarantee that's going to happen, either.
Five Steps to Becoming a Successful House Flipper
If you've decided that flipping houses is a good move for you, you'll need to be prepared and take the following action steps to optimize your home-flipping experience:
1. Get Your Credit Score in Order
The number one fact of life for home-flippers is that you need good credit to get into the business. That's not negotiable - it's a fact.
Chances are, you'll need a FICO credit score of at least 700 to get the low mortgage interest rates you'll need to not only get approved, but keep loan rates manageable.
Start by checking your credit score here, where you can get a no-cost copy of your credit report from all three of the major credit reporting agencies: Experian (EXPGY) , Equifax (EFX) , and TransUnion (TRU) . If you see any mistakes or unfamiliar credit accounts, notify the credit agency involved right away.
If you see your credit score is lower than it should be, make sure to pay up any old debts, keep current on active debts, and keep your credit card utilization rate - the amount you owe against the amount of credit you have, below 30%.
Do that and you'll see your credit score move upward in the next 30 to 60 days.
2. Have a Sizable Down Payment on a Home
Any fledgling homeowner knows that you need a good chunk of cash on hand for a down payment - at least 20% - to boost your chances of landing a new home. The more cash you can put on the table, the easier it is to get approved for a mortgage, and the easier it is for a seller to agree that you're the right buyer for the house.
This goes double for home-flippers. Not only will you need the 20% cash-down to land that home mortgage, you might even need a larger down payment to win a bidding war against another competitive buyer. Your best scenario is you have enough money on hand to buy the house with cash, and no mortgage -and that is no easy task.
Consequently, the more cash you have to buy a home, the easier it is to get that home, and stay out of debt as you set out to renovate it, without resorting to credit cards and interest-only mortgage loans, which come with higher interest rates. Those are habits unsuccessful home-flippers tend to exhibit, before they go broke.
3. Know the Signs of a Value-Driven Home
A good home-flipper can see the potential resale value of a property.
That could mean recognizing the value of a home in a good neighborhood, with good access to quality schools, a low crime rate, and access to reliable public transportation and close to major roads and highways for an easier commute. Those are the things your future home buyer will look for when examining your home for sale.
A tip - it's a good idea to identify the lowest-value home in a quality neighborhood and take the steps needed to buy it. Home buyers primarily want to be in a good neighborhood, and will buy a smaller or less-expensive home to do so.
4. Make Sure the Home Is Relatively Ship-Shape
Home-flippers are well known for buying repossessed and foreclosed homes, fixing them up, and selling them for a profit. Even so, there is a downward limit to what you'll buy as a home-flipper in hopes of fixing it up.
In fact, it's always best to take a realistic view of a home for sale and be able to walk away if it's in too much disrepair. You'll want to look for a property with a sound structural foundation, no mold conditions, does not require your replacing the roof, have excessive water damage, or any rodent or termite/pest infestation.
Instead, focus on what you can manage - things like a fresh coat of paint, new doors and windows, an upgraded landscaping program, and repaving the driveway come to mind. Bring a professional home inspector or seasoned contractor along with you when viewing the property, and have your notebook or smartphone ready to record or jot down his or her expert thoughts.
It also goes without saying that you should never buy a home you have not visited. Unfortunately, in this, the digital age, people buy properties all the time based on web page images and mobile app photos and reviews.
Don't do this - if anything, your one rule of thumb is to see the home for yourself and make a judgment based on that visit, if not more visits.
5. Manage Your Purchase Properly After the Sale
Once the home is yours and you're ready to get to work renovating, establish a budget based on what you expect to pay for the home. Then, add 20% to the original figure, and go forward based on that number, as renovation costs can and do rise for all sorts of reasons.
Once you start preparing for the actual renovation, get professional estimates on key projects, like driveway repaving or a full house painting job, inside and out. Also, make sure to focus on the projects that are basically guaranteed to boost a home value (yes, a new driveway and wholesale fresh paint job qualify.)
Once you're underway, keep monitoring the home renovation on a daily basis, if possible, and keep to your budget, as much as possible. While the work is being done on the soon-to-be-flipped home, start spreading the word in the neighborhood and online that the home will soon be for sale.
Fueling early interest in the home will get more buyers out beating the bushes and asking questions. That's a good thing, so feel free to get the word out that the home is for sale, as soon as the renovations are complete.
If you can do a good job of marketing the home and touting its newly-minted condition, you may even get a buyer lined up before the home upgrade is complete.
It's also a good idea to work with a trusted Realtor who knows where the buyers are, can be there in the home when you can't (i.e., for open houses or buyer visits, for example) and can list your home on the Multiple Listing Service database - the bible for new home listings.
A smart Realtor can also help you negotiate a better price for the home.
Success as a Home-Flipper Is Up to You
No doubt, flipping a house really is a risky business, and it takes hard work to succeed.
But if you know what you're doing (and the tips listed above will be a big help) and are disciplined and creative, there's no reason you can't join the ranks of the profit-making home-flipping set.
Maybe sooner than you think.