How do you know a house is right to be flipped? If you’ve Googled “how to flip a house” you’re probably not right for this venture. Flipping a house is not as easy as a web search. Flipping a house should not be considered a hobby or pastime. Flipping houses is serious business, and if you don’t know what you’re doing you’ll be highly disappointed and possibly stuck with the first house you attempt to flip.
If you haven’t already, we recommend checking out our free real estate course Buying a Home. It covers the basics of working with a buyer’s agent and different methods you can use to find a house. A buyer’s agent will be your best resource if (and only if) you can find one who isn’t already working with someone else who’s flipping houses. Many realtors actively flip houses. Some house flippers offer realtors a cash bonus if they find deals on houses they can flip. Finding a buyer’s agent who isn’t already involved in flipping houses is a tough task but you can find one.
Long before you start searching for the right house to flip, you MUST negotiate the financing. Most banks are well versed in flipping houses and have requirements that are outside the norm of financing a traditional house. In most cases you won’t be able to live in a house that you’re renovating to flip. Also, banks won’t offer a traditional mortgage on a house that isn’t livable. Most houses are flipped using short-term financing such as 6 or 12 months. If you don’t renovate and resell the house within the allotted time frame, you’ll have to renegotiate your financing with the bank.
Aside from working with a buyer’s agent or using online real estate services such as the MLS or Zillow, you have the perfect search tool parked in your driveway. Drive around and look for houses! In some areas, vacant properties are overly abundant. Here’s where you need to do some legwork. If you locate a house that looks like it’s vacant, go to the registry of deeds in your county or parish. The registry clerk will help you locate the name of the property owner. Go to your town or city tax assessor’s office and ask about the property. Learn all you can about the property and the owner. In some cases the property owner might’ve passed away with no heirs and left the house in limbo. Perhaps the owner passed away and the children now own it. If the property is vacant, chances are the kids don’t want it.
While you’re at the town or city clerk’s office, ask for a list of the town or city-owned properties. In most cases the municipality assumed ownership over the houses over unpaid property taxes. You’d be amazed how cheaply you can purchase town or city-owned properties. Towns and cities have different methods by which you can purchase its properties, but the town or city tax assessor’s clerk can usually provide the information. Although it’s rare, in some cases you might be able to purchase a house or empty lot for pennies on the dollar.
Once you’ve located a house to flip, you’ll need to determine exactly how much the renovations and other expenses will cost. Don’t overlook the property taxes. If you hold a house for 6 or 12 months, you’ll be liable for the property taxes during that period. You must add the estimated property taxes to the renovation costs in order to know how much you’ll need to borrow from the bank. There are also expenses you’ll incur when selling the house, but we’ll get to those later. You must add the selling expenses to the amount of financing you obtain from the bank.
Whether you plan on hiring contractors to do the renovations or intend to do all the work yourself, you MUST have the property inspected by a professional. In fact, you’ll probably need several professionals. Don’t assume anything in the house, on the house, below the house, or outside the house is in good condition. You’ll need a licensed electrician to inspect the electrical system and provide a detailed list of the items that need to be fixed or replaced. You’ll need a licensed plumber to inspect the water and sewer systems and provide a detailed list of the items that need to be fixed or replaced. The plumber should also be able to inspect the septic system if the house doesn’t have city water and sewer. You’ll need a termite expert to inspect the property. You’ll want a general contractor to inspect the structural components of the house such as the foundation, roof, walls, ceilings, floors, windows, and doors. If the yard is in lousy condition, you might want to have a landscaper inspect everything and provide a detailed list of possible work to be done.
Did we forget anything? You bet. Upgrades! Whether the house is currently vacant or occupied, chances are you’ll want to install new appliances and completely renovate the bathroom. The kitchen and bathroom are the two most critical rooms home buyers look at. While you’re installing new appliances you might want to replace the kitchen cabinets with something more modern. If the house is more than 10 years old you’ll probably need to replace the carpet and linoleum.
Outside the house you’ll need to look at everything from a buyer’s point-of-view. Does every other house in the neighborhood have a 2-car garage? If so, then you probably want to build a 2-car garage. Your house will be worth a lot less if it’s the only one in the neighborhood without a garage. What about the deck or porch? Families with children love spending time on the deck in the summertime. If the house has a deck or porch, make sure it’s not sagging or appears unsafe. Nothing sticks out like a sore thumb worse than a sagging roof, porch, deck, or stairway.
Once you’ve received all of the estimates to renovate, remodel, and upgrade the house, add the selling costs, which we’ll cover later. Take your total estimate figure and add at least 25%. The additional 25% will cover unforeseen surprises such as rotted floor joists discovered while replacing the carpet or water damage in the attic because the previous owner had the roof shingles replaced but didn’t repair the actual water damage. If you think these surprises won’t happen, you’ll quickly discover that they will.
The final step in finding the right house to flip is estimating your profit. Add the cost of the house to the estimate (plus 25%) to fix it up. Also add the selling costs. Chances are a seasoned appraiser will be able to estimate the market value of the house after all of the renovations and upgrades have been performed. The worst mistake you can make is to not look at the potential sales price of the home after it’s fixed up. Some people blindly buy a cheap house and dump a ton of money into having it fixed up. Then when it comes time to list the house for sale, they discover the market value is less than put into the house. It happens more often than you might think. Always work up the figures before you buy the house. Estimate the renovation costs, property taxes, and selling costs, then decide if you can make a profit based on what the house should be worth in the future.