With existing home prices lower than they were a year ago, more people are starting to flip houses again.
Experienced house flippers make it look easy. They buy a house, fix it up, and sell it for a big profit — sometimes within months.
Their secret? Preparation. They have a plan — their own ‘flipping a house checklist’ — and they stick to it.Submit your fix and flip scenario.
Flipping a house checklist: 10 steps
If you’re ready to give house flipping a shot, here’s a checklist to keep in mind.
Step 1: How will you finance the project?
Accomplished house flippers might have cash on hand to buy a fixer-upper and to pay for its improvements. If you don’t, that’s OK. You can find another way to fund your project — likely with a mortgage loan.
It’s usually best for house flippers to get a temporary mortgage like hard money loans. The most popular type, though, are fix-and-flip loans that partially cover the home purchase and renovations in one loan.
Whatever loan you choose, you’ll need a general financing plan in mind before looking at homes or pricing out plumbers, electricians, and new countertops.
Step 2: Who’s on your team?
Few house flippers can do the entire project by themselves, and most of those know it’s better to get specialized help.
So before making an offer on a home, make some calls and meet with some skilled trade pros in your area. Not sure where to start? That’s OK. Talk to Realtors, home inspectors, home appraisers – anyone who’s connected to the real estate industry in your community.
Public officials can help too. Your city’s housing authority may have recommendations for contractors and skilled tradespeople. Or, if you know about a successfully flipped home in your neighborhood, find public data on that project. Public records will show who bought and flipped the home. You can usually see which contractors worked on the project too.
Speaking of contractors, you’ll need licensed contractors and sub-contractors. These are people who can pull a permit before doing the work and then complete work that meets local building codes.Request your fix and flip loan.
Step 3: Find the right property
At this point, you have an idea how you’ll finance your project. You know who you want on your team. Now it’s time to start shopping for the right home. This requires some market research if you don’t already know the area well.
You want a home that has the potential to turn a profit after you complete renovations. This seems simple enough, but homes can vary by neighborhood. You might want to avoid homes in neighborhoods whose low values will limit your profitability. At the same time, you don’t want to pay too much for the home pre-renovation.
Some experienced flippers look for the cheapest home on a street with high prices. For example, on a street where homes routinely sell for $750,000, can you find a home that’s listed for, say, $450,000?
If you can, the home will likely need some TLC, but that’s the point of your renovation project. That’s the value you’re adding so you can turn a profit.
Make sure any planned renovations are allowed by city codes and the homeowner’s association, if any.
Step 4: Make an offer and apply for financing
You’ve found the right house. It’s time to make an offer to buy the home. You’ll want to make an offer that’s low enough to leave room for maximum profits. But you also need to make a serious offer, one the owner won’t ignore.
Some investors like to apply the 70% rule before making an offer. This rule says you should never pay more than 70% of a home’s after-renovation value and that you should also subtract the cost of the renovations from your offer.
For a home that will be worth $750,000 after renovations, 70% is $525,000. Then subtract the renovation costs. In this case we’ll estimate costs at $75,000. Based on the 70% rule, you shouldn’t pay more than $450,000.
This is a general rule. Not all investors follow it. If nothing else, the 70% rule shows a ballpark figure to work with. A local Realtor who knows the nuances of your local market can help tailor your offer.
After you make your offer, the owner may counter with a higher offer. This is good. It means the seller is interested. You should consider the seller’s counteroffer. But, again, keep your eventual profit in mind. The more you pay for the house, the less you can earn when you resell it.
When you agree on a price and go under contract, you can officially apply for financing and start following your loan officer’s approval process.
Step 5: Inspection time
Any home buyer should make an offer to purchase contingent upon an independent home inspection. That way they know exactly what they’re getting into before buying the home.
For a house flipper, the inspection is even more important. It creates a way to find the precise scope of the renovation project before buying the home. Your inspector should check out all the home’s systems, from the roof vents to the sump pump in the basement. This will show exactly how much work there is to do so you can make a precise budget.
Can you really add a bathroom in that basement? Will you need a full HVAC replacement? Can the existing roof last two or three more years? With the inspection report in hand, you’ll know these answers. You’ll be able to budget repairs and see whether you really want to take on the project.
If the inspection finds problems that undermine your ability to make a profit, you can still pull the plug. For example, if the inspection found structural problems that will make putting a half bath in the attic impossible — and if that half bath was essential to achieving your ideal post-renovation value — you’ll need to find another property.
Step 6: Start scheduling the work
Let’s say the home inspection didn’t uncover anything alarming — just the routine problems you already, more or less, knew about. You’d like to move forward with the purchase.
The home still isn’t yours until closing day, but it’s not too early to get started on the renovation project. Skilled tradespeople schedule their work weeks, if not months, in advance. Why not get on their calendars?
The first order of business will likely be demolition. You could schedule a Dumpster rental for the day of your closing. Will you need trucks to haul away debris? If so, it’s time to look into renting or borrowing those. Or would you rather hire a demolition crew? It’s up to you, but it’s time to plan, either way.
Step 7: Close and start work
On closing day, you’ll sign the papers, and the home will become yours. The hammer swinging can start before the ink on the paperwork dries if you’d like.
Many experienced flippers do start working as quickly as possible. That way they can complete the project and earn a profit sooner. If they can avoid making an extra payment on a loan by selling the home a few weeks earlier, that adds more profit.
Also, the longer you own the home, the more you’ll pay in taxes and insurance which also adds to your profits.
At this point, all those plans you’ve been thinking about so far will start to pay off.Get your fix and flip loan quote.
Step 8: Keep your plan on track
With your renovation project in full swing, it’s time to focus on keeping it on track. Something unexpected will happen, most likely, once the walls come down. You’ll discover a kitchen exhaust vent that goes nowhere or a tangle of two-way electrical wire that has to be replaced.
Stay calm. If you’re working with a general contractor, he or she will schedule and reschedule the skilled work as needed. If you’re acting as the contractor, build a little wiggle room in your schedule. That way, one delay won’t automatically spark a domino effect that adds months to the project.
It’s better to have a day here and there with no marked progress than to lose a month because your original schedule was too rigid.
Step 9: Inspect and list
Most likely, your city or county will need to inspect the home before and after your renovation work. This is different from the home inspection in Step 5. In this case, the city or county needs to make sure your home meets the local building codes that help keep residents safe.
It’s easy to feel annoyed by building inspections, especially when you have to wait for them before moving forward with a project. But a home that meets local codes should sell more easily and hold more value. As the seller, you’d have to disclose unlicensed work, and this can turn off future buyers.
Step 10: Show and sell
Now you have a turn-key property. In many markets, buyers will be lining up to see it. In other markets, it may take a few weeks or a few months to attract the right buyer.
The same Realtor who helped guide you through the buying process can help you sell it, too. Or you can sell the home yourself as a for-sale-by-owner and avoid paying commission. However, know that you may have trouble selling it for top dollar on your own.
Or, maybe you’d like to refinance it into a permanent mortgage and keep it. Short-term rentals can earn ongoing profits for investors.
In any case, you own a more valuable asset which means you have options for capitalizing on it. Of course, an experienced flipper sells and invests part of the profit into the next project.
Historically, real estate has been a reliable investment. Sometimes home prices go down, but as time passes, most housing markets grow in value.
That said, individual homes have their own, individual stories. When you rehab a home that has a story of disrepair, you flip that home’s story, catching the home up to market values while earning a profit from the sudden increase in value.
Do you have enough patience, know-how, and planning ability? If so, flipping a home can be fun and profitable — especially when you’ve maximized profits with the right kind of financing.
Talk to a loan expert today about your fix-and-flip options.Submit your fix and flip scenario.