Investments in rehab properties began to grow with the recovery of the housing market and fix-and-flip remains a profitable industry today. According to analytics firm RealtyTrac, US house flipping hit a six-year high last June, as a total of 51,434 properties were flipped. RealtyTrac estimated gross profits on flipped homes averaging $62,000, an all-time high for the industry.
TV shows such as Property Brothers make flipping houses look easy, but generating profits from a fix-and-flip requires the right team, plenty of planning and accurate analysis of the financials. To be successful, house flippers must find a property that are priced right, reliable contractors to do the work, affordable financing and a willing home buyer. Here are five steps for getting started as a fix-and-flip investor:
1. Analyze the Local Real Estate Market
Real estate is primarily a local business so it’s important to familiarize yourself with the neighborhoods where you want to invest. You should aim to become an expert on the local schools, areas demographics, neighborhoods that are up-and-coming and sales prices for various types of homes. Much of this information can be obtained from local realtors and visiting the community’s web site. Real estate sites such as Zillow and Trulia can provide data on home selling prices. By analyzing recent sales, you learn the types of properties attracting the most buyers and how much buyers are willing to pay. This will enable you to choose the right projects. Knowing what local buyers want can make all the difference between houses that sit on the market for months versus ones that flip readily.
2. Build Your Team
Surrounding yourself with a skilled team is essential for profitable flips. Your team is likely to include realtors, real estate attorneys, accountants, general contractors and lenders. The best way to build your team is through networking and referrals. A good place to start is by attending meetings of local real estate investment clubs, chambers of commerce and business networking groups. Most cities have at least one real estate investment club that meets monthly. You should also plan on speaking with as many realtors as you can, talking to both buying and selling agents. Realtors can give you access to properties on the Multiple Listing Service and are likely to be your best source of leads on properties.
3. Identify a Flippable Property
You should begin your search by identifying what types of homes are selling best in your neighborhood. If four-bedroom houses are popular, for example, rehabbing four-bedroom homes is likely to give you the best odds for successful flips. It’s also important to know who your potential buyers are. Some neighborhoods attract mostly empty nesters while others appeal to growing families. An older couple may prefer a ranch-style home and an affordable one or two-bedroom while a family with young children may require a three or four bedroom home with multiple bathrooms.
Leads on fix-and-flip properties can come from realtors, banks, lists of HUD repos and trustee sales, and even by talking with friends and family. Another source for properties is foreclosure auctions; however, you should expect to pay for your purchase with cash or a cashier’s check at the time of the sale. There are also potential pitfalls associated with foreclosure auctions. For example, some trustees allow bidders to inspect properties before an auction, but most auction sales are “as is”. Prospective buyers may not be allowed to inspect the property prior to purchase. Other auction issues include hidden liens against home titles. Occasionally the winning bidder must also deal with evicting squatters from foreclosed properties.
4. Structure the Deal
A useful guide for determining the value of a property is to examine data for similar homes in the surrounding neighbourhood that have sold within the last six months. After you have established a value for the property, your next step is to calculate ARV (After Repair Value). ARV can tell you whether the fix-and-flip is likely to be profitable and is also used by many lenders to determine the maximum loan amount for a project. During your inspection of the property, you should work with a general contractor to put together a budget repair sheet that lists all the needed home repairs and their costs. The home purchase price and estimated cost of repairs is used to calculate ARV. Experienced flippers recommend the 70% rule, whereby you only take on rehab projects when ARV is less than 70% of the upgraded home’s estimated selling price.
After you have found the right house at an affordable price, the next step is to write up a purchase contract. The best way to avoid problems is to hire an experienced real estate attorney to write the contract, but if you don’t have an attorney, you may be able to obtain a template for a purchase contract from your realtor, the title company or the local real estate investment club.
5. Manage the Rehab Process
Working with a general contractor is usually the best method for keeping fix-and-flip renovations on track and within budget. The budget repair sheet created during the home inspection provides a blueprint for the specific tasks that need to be done. You can also use the budget repair sheet to obtain estimates from sub-contractors and track their progress, checking off the various items as work is completed. Depending on the scope of the project, you can expect the home renovation to take from one to four months. You and your general contractor should create a timeline for the completion of each project and make sure this schedule is followed. Carrying costs for holding a property can quickly escalate when there are delays. Your repair budget should also take into account unexpected repairs such as faulty wiring or windows that need replacing. Most expert rehabbers recommend setting aside at least 15 percent of the budget for unanticipated repairs.
Profitable house flipping requires analysis, planning ahead and teamwork. Contact Socotra Capital to explore options for financing your next fix-and-flip project.