Flipping Houses

Flipping houses is one of the more popular real estate investing strategies. However there are several very important things to consider when choosing this approach. There is much more to it than simply buying and selling houses.

For conventional lenders, the term "flipping houses" is viewed negatively. It is crossed-referenced with illegal activities, which I do not care to mention in this website. It is best to refer to this as "quick-turn real estate investing" or simply state that you "buy fix-up and sell" real estate, when speaking with conventional lenders.

Flipping houses is all about numbers. The most relevant number is your projected profit from selling a particular property. To get to that number, you must consider the following:

• Purchase Price
• All Closing Costs
• Number of points charged by your lender (Especially if using Hard Money financing).
• Cost of any renovations
• Your selling price

Let's go over the details of each consideration in flipping a house. I am going in reverse order, because this is exactly the order I use to determine profitability when buying real estate.

Selling Price. When flipping homes, the "flip price" or selling price should be low enough the get a quick sale while yielding a profit acceptable to you. Unless you are in a hot market, you will need to discount the price of the property to get a quick sale. Depending on the activity of your market, the discount may need to be fairly deep. If you purchase at a very good price and can afford to hold the property indefinitely, you can always hold out for full market value.

Renovation Costs. This is a biggie. When flipping houses, underestimating the rehab costs can turn a great profit into a substantial loss. Underestimating the time it will take to rehab a home can also significantly reduce profits. Get, at least, 3 estimates.

As a beginner to real estate investing, I hired property inspectors to comprise a list of what needed to be done to my property of interest. I would withhold that list to check the competency of the bidding contractors. If a contractor did not include something on the inspectors list, I would ask why. A contractor must know that YOU know what is going on with your property. Early on, hiring property inspectors was one of my very best investments.

Do NOT assume the lowest bid is the best. Make sure you are comparing "apples to apples." Meaning, make sure all 3 bids have the SAME items included. Sometimes a bid is lower because needed items where left out....you will pay for these items at some point.

Once you accept a bid, add 10-20% to that amount and be conservative with the estimated time for completion. NEVER, NEVER pay for work until it is done to your satisfaction....No advance payments whatsoever. There are probably hundreds of thousands of stories of contractors who received payments in advance of work being completed, who never returned.

If a contractor does not have the money to begin your project and receive periodic draws for work completed, then do not hire them. It will bog down your project, lengthening the time and dramatically increasing the amount of money you will spend to get it completed.

Flipping a house can easily become a disaster if you do not closely monitor the rehab process.

Points and Closing Costs. Get estimates of the closing costs involved in your property purchase. Attorneys fees, Title Policies, Property Tax prorations, Property Insurance and other expenses. If you are using Hard or Private Money to fund your deals, be sure to account for the number of points that particular lender charges.

Points are the premium a lender charges for using their money. One point is equal to 1% of the amount borrowed. These points could be significant and must be considered as you determine your profit. You could be charged from 1 to 10 points...sometimes more, if a state will allow. It is the lender's choice, so shop around.

Profit margins are tighter when flipping houses. So be careful. I know of several individuals who did not account for the lender's points in their estimates. The cost wiped out their profits.

Purchase Price. This is actually simple. When flipping houses:

• Determine your estimated selling price.
• Subtract from selling price, all renovation costs, plus 10-20% more.
• Subtract all closing costs.
• Subtract all points charged by lender
• Subtract the profit you want out of this project.

Subtracting these numbers from your estimated selling price, will give your purchase price...That is what you will offer the person or entity selling to you.

Follow this process exactly. Be sure to slightly overestimate costs, to allow for mishaps.

Finally, selling houses within a year of purchase, produces income which is taxed under Short Term Capital Gains. You will pay the maximum tax rate allowed as a result. Keep track of this and be prepared to pay the much higher tax rate.

I must repeat a few things because they are crucial to flipping homes.

Please follow the advice on this page. The numbers mean everything if you want to flip houses profitably. Calculate, then triple check you figures, to make sure everything is accounted for. A substantial profit can easily become a substantial loss if you are not careful when flipping houses....Or should I say Quick Turn Real Estate Investing.


From Flipping Houses back to Investing Strategies For Real Estate Investing.