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So, you think you’ve got what it takes to make a financial gain on buying, remodeling and selling a home. But have you considered the huge commitment and a financial risk associated with flipping a house?
It’s important to know what you’re signing up for if you’ve never flipped a home before. There are precautionary measures that should be taken before, during and after the process. In addition, there are unexpected setbacks and hiccups that you should be prepared for.
Just like it’s critical to know what the steps of buying a house for yourself are, it’s just as important to educate yourself if you’re thinking about flipping a house. Below is our guide for tips and what to know when your flipping your first house!
Knowing the local housing market is one of the most critical aspects for flipping a house since there are several things that make real estate markets different!
When it comes to making a profit on your flip, knowing how to find the right neighborhood is more important than finding the right property. The earning potential for a house in a great neighborhood is one of the most valuable assets in a situation where you’re trying to turn a profit.
Knowing the price that other homes are selling for in the area will be crucial when determining how much you’re going to profit on your project. Always expect to sell your flip on the lower end of what homes in the area are selling for.
This guarantees that you’ll be able to sell the home fast and still earn a profit. Knowing the market can also help you determine what the house needs to be priced at, to be in the green, when all is said and done.
If you find a great project that’s priced at $120,000 but most homes in the area are selling for a max of $135,000 it’s unlikely that after renovations you’ll be able to sell for more than what the rest of the market is priced at.
The best markets to buy a home to flip in are the ones that have more houses listed for sale than the number of buyers looking to purchase, commonly referred to as a buyers market. Buying a home in a sellers market when flipping a house can result in you paying more for a property which ultimately reduces your profit margins.
The bottom line is that when inventory is high and demand is low, you’ve a better chance to find great deals!
Although you may be tempted to gut your entire project, pause before you bring down that sledgehammer. No matter how decrepit your new home may seem, there may be a lot of hidden potential there. When flipping your first house, you should always be thinking about the best budget friendly home improvement projects that can increase the value without breaking the bank.
For example, any wood material that isn’t rotted or infected by termites can often be refurbished to look like new. Wood is one of the more expensive materials to use during a remodel and with a little sanding and a fresh coat of stain, it can be a great “upgrade” to your project.
In addition to reusing any original wood in your home, use sites like eBay and Craigslist for other items. Often contractors order items in bulk and have left over materials. These items end up posted on reseller sites for a fraction of the cost.
There are a lot of resources available to buy reusable materials and complete your remodel while saving money. Try pulling up that old carpet and see if there’s flooring underneath that you can work with. Don’t rule out anything until you know that it’s unsafe to reuse.
It’s still possible to turn a profit if you have to finance your project, but it diminishes the amount of profits you’ll see a return on.
If you’re getting into the house flipping business to truly make a profit, do your best to pay for everything out of pocket. Taking out a loan to finance your project, will cost you a higher interest rate than if you were taking out a loan to purchase the home for yourself. It’s important to keep this in mind while you are shopping around.
The few extra interest points you’ll pay for taking out a loan for a business plan can add up quickly, especially if the turn around time on your flip takes longer than expected. If you are going to finance your flip, plan your project with the absolute shortest turn around time possible.
You’ll save money on paying for interest rates and you’ll save yourself a headache in the long run. Even if you’re not taking out a loan for your project, it’s generally a good idea to plan for a short turn around time. The more time you invest into a project, the less you’ll be profiting.
One common mistake that people make when flipping a home is treating the remodel like it will be their future property. Don’t add all the fancy bells and whistles that you’d want in your own home.
The first reason for avoiding this, is that it will cost you time and money. The second reason is because you don’t know who you’re buyer is going to be. Let’s face it, there are certain features that millennial home buyers look for in a home that a Gen X’er or Y’er wouldn’t want!
There’s no point in adding amenities that the future owner isn’t going to appreciate or want. Keep it simple and stick to the basics. Your remodel is going to need to appeal to a broad audience.
It’s always best to pick standard wall colors and avoid any custom upgrades. Buy a home that needs more of a face lift than a home that needs to be completely rebuilt.
This will keep the cost of the upgrades to a minimum and will also require less time to make improvements. Avoid projects whose structural integrity has been compromised. Needing to start from scratch can be fine for a personal project that you intend to remodel for yourself.
If you find a flip that needs to be completely remodeled, this can end up costing you more in the long run than you may have planned for. Homes that need a complete remodel can end up surprising you with work that you didn’t expect would need to be completed. This can tamper with your budget and ultimately change how much of a profit you may have been expecting to make.
Best rule of thumb, remodel your flip for the largest audience possible.
Flipping a house is not a one man job or process! If you’ve never flipped a house before, don’t expect that you can go it alone.
During your search for a property, it’s highly recommended that you find a buyers agent who has experience helping buyers who flip houses. There are some flippers who believe working directly with the listing agent is a smart idea but it’s actually a terrible idea.
Working with the listing agent results in them taking on the role of a dual agent. Dual agency in real estate is one thing you need to understand and also need to avoid at all costs.
Once you hit the construction stage, even if you have construction experience and are capable of doing the work by yourself, don’t. It’s likely that the extra time that you’ll spend completing the project alone will end up costing you in the long run.
Even if you can do most of the renovations by yourself, there are many other aspects of flipping a home that you may need help with. For example, it’s important before you even make a purchase to have a thorough home inspection.
This can help you to save on remodeling costs in the long run and avoid any potential problems that could sabotage your project. Additionally there may be legal obstacles to overcome which may require you to seek legal assistance.
Lastly, you’ll likely need the help of a realtor to list and sell your property. It’s important that you understand how to interview a real estate when selling a house, whether a flip or not! While planning your budget, you need to take a real estate commissions into consideration.
Completing the most accurate budget possible is a surefire way to guarantee that you’ll make a profit on your very first home flip. Don’t be afraid to ask for help and be sure that you’re going to spend some money on getting assistance.
Regardless of your skill level and amount of research done, flipping a home always has associated risks. Don’t go into this project thinking that it’s a guaranteed profit.
Flipping a house can be a good investment and if you take the necessary measures to ensure that your project goes smoothly, you’ll diminish the amount of risk involved.
Regardless, be prepared for risk and know how you’ll handle your project when things don’t go as planned (which they will).
About The Author: The above article “Top 5 Things To Know When Flipping Your First House” was written by Matt Edstrom, Chief Marketing Officer of GoodLife Home Loans. Matt completed his undergrad at MIT and his MBA at Northwestern University and has experience in real estate, marketing, and finance.
About Rochester’s Real Estate Blog: Rochester’s Real Estate Blog is owned and operated by Kyle Hiscock of the Hiscock Sold Team at RE/MAX Realty Group.
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