Fix and Flip. Did you know that more and more people are now “flipping houses” – renovating distressed properties and selling them for a profit – than ever before? Thanks to TV shows like HGTV’s “Flip or Flop,” “Home Town,” and “Property Brothers,” over the last few years, house flipping has become an increasingly popular venture in the U.S.
In 2017, only 5.7% of all home sales were “flips.” However, by the first quarter of last year (2022), that share had nearly doubled to 9.6%, as more and more people – predominantly ambitious millennials – take up house flipping as a professional career.
If you’re considering entering the “fix-and-flip” world and looking for expert professional guidance on getting started and making a profit, you’re in the right place.
We’ll show you exactly:
- How the practical process of flipping a house works
- What kind of resources do you need – financial and otherwise
- How to build your own “fix-and-flip” team of professionals
- Warn you of the potential ways you could “flop.”
- And much, much more
Fix and Flip Boom. : Profiting from Flipping Houses
- Flipping Houses: Profiting from the Fix-&-Flip Boom
- What Do “Fix-and-Flip” and “Flipping Houses” Mean?
- Flipping Houses: The A-Z Guide to Flipping Houses in 2023
- Setting Your Budget
- The Importance of the ARV Model
- Identifying Suitable Properties to Flip
- How to Build Your House Flipping Team
- House-Flipping Loans: How to Get One
- The Types of Insurance You Need for House Flipping
- How to Sell a Flipped House
- The Pros & Cons of Flipping Houses
- Flipping Houses: Common FAQs
As we stated earlier, the U.S. house-flipping industry is witnessing a boom in popularity, with more and more people trying their entrepreneurial hand at fix-and-flip projects and more and more houses every year being sold as a direct result of the practice.
In 2021, flipping houses in the U.S. saw a significant rise, with 323,465 homes in total being fixed and flipped – the most flips in a year since 2006 and a 26% increase from the previous year, 2020.
However, if you’re considering trying out a “fix-and-flip” project, know this: it pays to plan ahead, plan well, and protect yourself as far as possible from the unforeseen. As one highly experienced house flipper once said, “the worst way to learn how to flip houses is by losing 100K on a flip.”
What Do “Fix-and-Flip” and “Flipping Houses” Mean?
Fix and Flip and “flipping houses” terms are used in real estate to describe buying a property, making appropriate renovations and repairs to increase its value, and then selling the same property for a profit.
The primary objective in flipping houses is to buy low and sell high, and as a short-term investment strategy, it is considered both high-risk and high reward.
The practice of flipping houses requires just six steps in total – but each of them is critical to the success of the flip. It’s best to view the steps as six individual projects that all require your very best due diligence and your best planning:
How to “Fix-andFlip” a House in 6 Steps
|Find a Property||You need to look for real estate properties that are either undervalued or in need of repair. You can locate these properties at house auctions, through real estate agents, or by networking with other investors/house flippers|
|Conduct Due Diligence||Once you have found a suitable property before making the legal purchase, you must carefully evaluate the property to determine the exact repairs needed and how much they will cost. The potential resale value of the property – to be 100% confident the property is a good investment.|
|Finance the Purchase||You can finance the property purchase using cash, a traditional mortgage, or a “hard money loan.” A hard money loan is a short-term loan secured by the property and is a financing method often used by real estate investors.|
|Repair & Renovate||You need to hire contractors to make the property repairs, renovations, and improvements. You must stay within your budget and timeline.|
|Sell the Property||Once the repairs are fully completed, list the property for sale. You can sell the property as you would your own – through a real estate agent. Alternatively, you can sell it directly to an end-buyer already in place or another investor.|
|Close the Sale||Collect your profit, and repeat!|
Once again, flipping houses can be a high-risk, high-reward investment strategy. It requires a significant amount of capital or access to funding, knowledge of the real estate market, and a willingness to take on the apparent risk. It’s also important for you to familiarize yourself with all the relevant local laws and regulations and have a team of trustworthy and experienced professionals to carry out the necessary work.
Profiting from the Fix and Flip Boom in 2023
Although it’s impossible to discuss how much you would personally make from your own fix-and-flip real estate business, let’s look at recent and relevant statistics about the profitability of flipping houses in the U.S.
Flipping Houses Profitability in the U.S.: Facts & Stats
- The U.S. sees around 5-6 million house sales every year. In 2017, just 5.7% of these home sales were flips. By the first quarter of 2022, that percentage had risen to 9.6%.
- On average nationwide, house flipping generated a gross profit of $65,000 in 2021, on a par with gross profits in 2017. However, its return on investment (ROI) has shrunk from 51% in 2017 to 31% in 2022.
- Gross flipping profit rose to $67,000 in the first quarter of 2022, but the ROI declined further – to 26%. In part, this decline has been caused by rising home values.
- In 2022, the most profitable state for house-flipping was Pennsylvania. In the first quarter of that year, Pennsylvania had the most significant gross return on investment (ROI). The average fix-and-flip investor received 78.9% ROI, down from 92.6% in 2020.
- Idaho was the least profitable state for house-flipping, with just a 10.1% ROI in the first quarter of 2022, down from 15.6% in 2020.
Fix & Flip: The A-Z Guide to Flipping Houses in 2023
Before we begin, here’s some advice to take to heart and always keep in mind with every fix-and-flip project you start:
The primary objective of any fix-and-flip is to simply freshen up a property, and give it a light, clean appearance. You want the house to be considered by potential buyers as in “move-in condition,” and entirely up to market standards.
Don’t waste your money by over-improving a property – it’s a common mistake and not worth it. If you’re choosing a property in an area where homes sell for an average of $150,000, it’s doubtful you will be able to sell your property for more than that.
Remember – invest only enough money to bring the property up to market standards.
Setting Your Budget
Calculating the actual budget for flipping a house involves estimating the overall costs of the purchase, the costs of the repairs and renovation, and the sale of the property. Here are a few pointers to ensure you calculate your budget as accurately as possible:
- Estimate the Purchase Price: Determine the property’s purchase price, including all of the closing costs and associated fees.
- Determine the Repair & Renovation Costs: Get detailed quotes from contractors for the cost of repairs and improvements that will be made to the property. Include the cost of materials, labor, permits, inspections, and insurance.
- Calculate Your Holding Costs: The costs you incur while the property is in your possession – include property taxes, insurance, utilities, and mortgage payments.
- Determine the Estimated Resale Value: Research comparable properties in the area to determine the estimated resale value of your property, as this will inform you of your likely profit.
- Consider Marketing & Selling Expenses: Determine how much you will spend on marketing and selling the property, including real estate agent commissions, closing costs and fees, and other expenses.
- Calculate the Total Budget: Add up all the costs from the above steps to calculate the total budget for the flip.
- Add a Contingency Fund: It’s advisable to add a contingency of 10-20% to your budget to cover unexpected costs.
There’s simply no way around it – budgeting for a house flip is an estimation, and there is no guarantee that the property will sell for the predicted price. Additionally, many outside factors can affect the budget, such as the economic outlook and the current housing market conditions.
As a rule of thumb, it’s far better to overestimate your project costs than to find you have come up short at a critical stage.
The Importance of the ARV Model
To assist you in working out whether a specific property will generate a reasonable profit and to help with your budget calculations, there is the ARV (After Repair Value) model. The ARV model is a popular method of determining the potential resale value of a property after all the repairs and renovations have been made.
How Does the ARV Model Work?
To use the ARV model, you must first estimate the cost of all repairs and improvements you intend to make to the property. This is normally done by getting quotes from contractors and then factoring in the cost of materials.
Once the cost of all repairs is determined, you then need to research comparable properties in the area. These other properties are known as “comps” to determine your resale value.
You can subtract the estimated repair cost from the resale value, giving you the After-Repair Value (ARV) of the property. From this, you can determine your potential profit from the flip.
Within the ARV model is the “70% rule,” which states that you should pay 70% of the ARV of a property minus the cost of the repairs that are needed. The 70% rule helps determine how much you should pay for a property.
Here’s an example of the 70% rule in practice:
- Let’s say you find a property you’re interested in, and assume the necessary repairs will cost you around $25,000.
- Once the repairs are completed, the property will then sell for around $100,000 – the ARV.
- Taking the ARV and applying the 70% rule to it results in a figure of $70,000.
- Subtract your repair costs – $25,000 – from this, and you get a revised figure of $45,000.
- In this example, you should only pay $45,000 for the property. If you cannot get the property at this price, move on.
Identifying Suitable Properties to Flip
The following factors should be considered every time you select a property for purchase and flipping:
- Location: Look for properties in desirable neighborhoods that are likely to appreciate over time. Properties that are located near amenities such as schools, parks, and shopping centers are often in high demand. Look specifically for “dontwanners” in the area – vacant, unkempt homes the owners simply “don’t want.”
- Condition: Look for properties that require repairs or that are outdated. These properties can often be purchased at a discounted price, and the potential for profit after repairs is higher.
- Price: Look for properties that are priced below market value. This will give you more room to profit after repairs and improvements are made.
- Potential Resale Value: Research comparable properties in the area to determine the typical value of similar properties. This will help you determine the property’s potential resale value and profit from the flip.
- Property Size & Layout: Consider the size and layout of the property, as larger properties or unique layouts can be more challenging to sell.
- Property History: Check the property history, if there are any liens, lawsuits, or other legal issues that would need to be resolved before the property can be sold.
- Zoning Restrictions & Local Laws: Know the local zoning laws, building codes, and regulations that may impact your renovation plans and potential resale value.
As one experienced house-flipper once stated:
“Look for the ugly. Look for the house with disgusting landscaping, a terrible kitchen, or a bad layout. These things typically scare away buyers, but if you know what you are doing, they can lead to the best flips.”
How to Build Your House-Flipping Team
Building your own professional house-flipping team involves bringing together the right people with the skills and expertise needed to flip a house successfully. Your house-flipping team needs to include these key members:
- Contractor: A contractor oversees the renovation work and manages the subcontractors. Finding a contractor with experience in flipping houses that is trustworthy and reliable is essential. Alternatively, you can assume this role yourself.
- Necessary Tradesmen (Subcontractors), such as electricians, plumbers, carpenters, and others: These professionals will handle the specific tasks required for the renovation, such as electrical, plumbing, roofing, and HVAC.
- Real Estate Agent: A real estate agent can help you find properties to flip and assist you in pricing and marketing the property once it is ready to be sold.
- Home Inspector: A home inspector will conduct a thorough certified inspection of the property and identify any potential issues that need to be addressed before the renovation begins.
- Accountant: An accountant can help you manage your finances, create a budget, and ensure that you keep accurate tax records.
- Real Estate Attorney: A real estate attorney can assist you with the legal aspects of the flipping process, such as title transfer and contract review.
Remember to do your due diligence and research when looking for house-flipping team members, such as checking their references, confirming their state licenses and insurance, and asking to see their portfolio of work before hiring them.
House-Flipping Loans: How to Get One
Unless you have the capital available in cash, you will need a loan of some description to finance the purchase of the property. There are several ways to get a loan for house flipping, including
- Traditional Mortgage: You can apply for a traditional mortgage from a bank or other lending institution, as you would for buying your own home. This type of loan is based on your credit score and income and can be used to purchase and renovate a property.
- Hard Money Loan: Hard money loans are short-term loans that are secured by the property and are often used by real estate investors. They are easier to qualify for than traditional mortgages but incur higher interest rates and shorter repayment terms.
- Private Money Loan: Private money loans are similar to hard money loans, but they come from private individuals or investors rather than banks. More flexible than traditional mortgages, they usually come with higher interest rates and fees.
- Home Equity Line of Credit (HELOC): A HELOC allows you to borrow against the equity of your primary residence. This is a good option for investors who already own a property and have equity.
- Partner with an Investor: As a solution, you could partner with an investor who can provide the capital for the flip and split the profits.
- Crowdfunding: With crowdfunding platforms, you can raise capital from many investors who can provide small amounts of money to fund your flip.
These options come with different qualifying rules, interest rates, and term lengths, as well as potential risks and rewards. Try to work with a lender or financial advisor who can help you navigate the process and choose the best loan option for your needs.
The Insurance You Need for House Flipping
Even though you are only renovating the property, you still require insurance for the time it’s in your possession. Additionally, you will need insurance to cover the renovation work you carry out.
To ensure adequate coverage, you need three types of insurance when flipping houses, and these are
- Builder’s Risk Insurance
- General Liability Insurance, and
- Vacant Building Insurance
With these policies, you should expect to pay 0.5% to 1% of the property’s value (per policy) in insurance costs each month.
How to Sell a Flipped House
The repairs are completed, and any renovations are done. Regardless, the hard work continues. Even though the property looks great and is now ready to be sold, you still need to work hard to market the property as well as you can to ensure the maximum ROI possible on your investment.
So what do you need to do now?
Staging the Property
You should now concentrate on making the home feel inviting. You want potential buyers to picture themselves living there easily. The best way to do this is through staging the house.
Staging a house for sale involves making the home as attractive and appealing as possible. This can include decluttering and deep cleaning. It can also involve rearranging furniture and decor and adding personal touches such as fresh flowers or a bowl of fruit. Hiring a professional home stager can help achieve the best results, but it is possible to do it independently.
Check out these stats on staging a house:
|of buyers increased the offer on their home by 1-5% because it was staged||of buyers felt they were better able to see themselves moving into a staged home||of buyers were more willing to visit in person if the home had been staged|
Source: National Association of Realtors
Furthermore, here are several creative steps you can take to market the home:
- Take professional-looking photos with good lighting
- Advertise extensively on social media
- Create a walk-through video tour, and
- List online on various real estate sites
The Pros & Cons of Flipping Houses
There are some important advantages, as well as disadvantages, to the fix-and-flip business that you need to understand to help you to decide if flipping houses is the ideal career for you:
The Advantages & Disadvantages of Flipping Houses
|1. Potential for High Returns||If done correctly, flipping houses can provide a significant return on investment.|
|2. Flexibility||Being a house flipper allows for flexibility in terms of the number of projects undertaken and the location of those projects.|
|3. Control over the Renovation Process||As you are responsible for the renovation, you have complete control over the design and quality of the finished product.|
|4. Opportunity to Improve Neighborhoods & Communities||By renovating and updating older homes, flippers can help improve the look and feel of a neighborhood or community.|
|5. Potential for Passive Income||Once the fix of a property is completed, you could choose to hold onto the property yourself and rent it out, creating a source of passive income.|
|1. High Risk||Flipping houses is a high-risk venture, and there is always the possibility of a project not being completed or not turning a profit.|
|2. Large Investment of Time & Money||Flipping houses requires a significant investment of time and money, and there is always the possibility of unexpected costs arising during the renovation process.|
|3. Difficulty in Predicting Market Conditions||Flipping houses requires a good understanding of the local real estate market, and market conditions can be difficult to predict.|
|4. Difficulty in Finding the Right Properties||It can be difficult to find properties that are in both the right condition and the right location to flip for a profit.|
|5. Stressful & Time Consuming||Flipping houses can be stressful and time-consuming, as it requires constant attention to detail and the need to manage multiple projects at once.|
Better Off Home Buyers: We Fix-&-Flip Houses, Too
If you are serious about getting into the field of real estate house flipping, be prepared for hard work, diligence, setbacks, and more than a little stress – certainly at the beginning of your new career.
However, as we have shown, there are many opportunities to enjoy the healthy profits that each project has the potential to generate.
At Better Off Home Buyers, apart from being experienced house flippers, we also have our primary business of purchasing residential properties for cash, regardless of any required repairs and renovations. This provides a valuable service to many customers facing foreclosure and other legal housing problems.
Call us today to learn more.