House flipping is a real estate term used to describe the process of buying a property and renovating it with the aim of selling it for a profit. In 2021, the average gross profit made from flipping a home in the U.S. was $67,000.
Property investors will usually look for an undervalued or distressed property, often referred to as a ‘fixer-upper’, since it needs varying degrees of refurbishment or maintenance work done to it. These are often properties that sellers are unwilling or unable to renovate themselves as the cost of repair may be too high. In this case, many homeowners sell their homes for cash to businesses such as Element Homebuyers or to property investors who will improve the property to the point that it is ready to move into and will meet a buyer’s expectations.
While house-flipping can be a very lucrative endeavor for investors, it requires a great deal of money, time, and labor. House flipping also comes with considerable risk as an investor may spend months renovating a property at a significant cost without being able to resell it or realize a profit. In this article, we will explore some of the strategies to help you succeed when it comes to flipping houses.
When navigating the housing market to find the right investment make sure you know the value of a potential property to avoid overpaying and reducing your profit. Buying an undervalued property in a great neighborhood is better than buying the best property in a bad neighborhood as the undervalued property can only rise to meet or exceed the value of surrounding homes in the area. You can also overvalue a property by investing too much money in upgrading it. Only spend money on renovations that will add value and allow you to make a healthy profit.
A good tip to bear in mind is the 70% rule which states that you should pay no more than 70% of the value of the property after it has been repaired, the after repair value (ARV), minus the cost of repairs. For example, if a house has an ARV of $250,000 and requires $30,000 in repairs, according to the 70% rule, you should not pay more than $125,000 for the home.
$250,000 x 0.70 = $175,000 – $50,000 = $125,000
This rule can help you avoid overpaying on a property.
Focus on Adding Value
Flipping houses does not require making them the most luxurious or attractive as possible but simply the most marketable. As a result, it is important to focus on upgrades that will add the most value to the property in order to deliver the highest return.
Kitchens and bathrooms will usually be the best rooms for increasing a home’s value and ensuring that it sells. A dated bathroom or kitchen with worn-out appliances or fittings will not attract buyers or the highest asking price.
Sometimes minor upgrades will deliver a higher return on your investment compared to a full renovation. Before beginning your project, ask yourself whether a complete overhaul of one or both rooms is required or whether they can be updated by simply replacing, repairing, or refinishing certain aspects.
For instance, the kitchen appliances may be adequate but the countertops require replacing to give the kitchen a more modern look. If the cabinets are worn out perhaps a fresh coat of paint and new door handles will instantly uplift them rather than changing the cabinetry completely. Similarly in the bathroom, instead of a complete remodel you can often increase the value of a property by installing new fixtures such as faucets, showerheads, a toilet seat, sink, and cabinet handles.
Lighting can also dramatically improve the appearance and feel of a home. Replacing the light fixtures for more modern and energy-efficient alternatives can increase the appeal of a home at relatively little cost.
Consult with experienced contractors before you begin any home improvements to find out which upgrades will increase the value of the property with the least amount of renovation required. You can save yourself a lot of money by carrying out the work yourself. However, make sure you only tackle those projects you are capable of and can do well. For the rest, hire experienced contractors to do the necessary work.
Know Where to Look
An essential part of flipping properties is knowing where to look for a good deal. The usual route of searching on real estate listing sites is unlikely to yield results as these channels are for buyers who are looking for homes that are ready to move into and at market value. There are several strategies to find houses that are below market value such as the following:
· Work With a Real Estate Wholesaler: These investors look for distressed properties, entering into contracts with sellers where they agree to find a buyer for them. Unlike house flipping, the real estate wholesaler will not undertake any renovation work on the property.
· Foreclosure Listings: Foreclosed homes are another way to find undervalued investments and can be found through sites such as Foreclosure.com, RealtyTrac, local newspapers, and real estate listing sites by filtering on “foreclosures.” Another option is to search for a bank that is “Real Estate Owned” (REO) which means that the property failed to sell at a foreclosure auction and is now owned by a bank or mortgage lender.
· Local Auctions: Properties sold at auction are often discounted and there is usually less competition compared to traditional routes. It is advisable to only purchase properties that you are allowed to inspect before bidding.
· Make an Offer: You can target certain neighborhoods and send letters or make door-to-door offers on properties that may be on the brink of foreclosure or are clearly dilapidated or vacant in an otherwise appealing area. This will also eliminate much or all of the competition helping you to get a good deal.
One of the most important elements of finding a good deal is waiting for the right property which may require patience.
By following the guidance outlined in this article you can avoid many of the mistakes that inexperienced investors make when house flipping, ensuring you maximize your chances of realizing a profit.