Flipping is a fast-profit strategy where an investor buys real estate at a discounted price and then enhances the property to offload it at a better cost. Rather than purchasing a property to live in, you buy a home as a real estate investment. The primary goal of flipping is to buy low and sell high.
Be ready to take down notes because, in this episode, Lauren Hardy will teach you how to profit in flipping houses. Today, she will give you the key numbers you should know when doing house flips and the red flags to watch out for that could result in you losing that hard-earned money. Her mission is to make sure that you’re consistently profiting when flipping houses. So what are you waiting for? Click that play button now!
Can You Still Make A Profit Flipping Houses
Do you want to know how to make a profit flipping houses? Is flipping houses something that you want to do but don’t understand the numbers? I started flipping houses when I was 25 years old. I’m 35 now. I have been self-employed for the last couple of years and I started out as a real estate investor primarily flipping houses so I know all about it. I’m going to teach you how to profit when you’re flipping houses. I am going to give you the key numbers that you want to make sure you get right when you’re flipping houses. I’m also going to teach you how you could lose money when you’re flipping houses. I’m going to give you some tips to make sure you are always profiting when you’re house flipping. Let’s get into it.
What are the key numbers that you need to make sure you get right to profit when you’re flipping houses? The first number is the purchase price. You want to make sure that you are buying low and selling high. You want to make sure that you are buying at a level where you could purchase the property, remodel the property, pay all the expenses that are included with remodeling and selling a property and still have room at the end to profit.
The next key number is your rehab estimate. You want to make sure that you get your rehab right the first time or at least close. One way that I have had deals go South is when the rehab was estimated much lower than it was and there were unforeseen costs in the construction. The best way to ensure that you have properly budgeted your rehab expenses is to get three contractor bids. If you have three contractors bidding on the property and these are contractors that you know and trust, likely they should all fall within somewhat of the same range. In that way, you’ll know that you are on the right track with that property and having three people look at the property ahead of time is a great idea because what one contractor might miss, another one might find.
You want to make sure that you are buying low and selling high.
One thing you might not realize is when you are in escrow on a property that you’re thinking of flipping, you likely have an inspection contingency. You want to make sure that you put that in your purchase agreement and in that inspection time is when you can walk those three contractors in. You do want to make sure ahead of time you put that inspection contingency in there and you have at least a couple of weeks that you can have those contractors go through the property and get you those numbers.
The next number you really want to make sure you get right is the holding cost. A lot of people don’t realize that there are several holding costs that are included when you are house flipping. These are things that you might not think about like vacant dwelling insurance. A lot of people don’t realize that vacant houses need a different type of insurance than a house that has a tenant or an owner occupant in it. You want to make sure you get a vacant dwelling policy from your insurance carrier. You also want to budget any holding costs like utilities or the interest you’re paying on your loan if you are getting one. If you are getting a loan, they say a hard money loan or a private money loan might have some interest payments that you need to pay. You want to make sure that you include these costs in your calculation before you purchase this property.
The next number that you want to make sure you get right is the sales cost. This is like your real estate or realtor commission. This is any type of fee that you’re going to pay in relation to purchasing the property or closing the sale. Often, that is a termite inspection, any termite repairs that might come up at the end of the transaction or maybe some escrow repairs. The buyer that is buying the flipped property at the end might do an inspection, find new things that are wrong that you didn’t see with the property and they might request that you make some repairs. We call those inspection repairs. You want to make sure that there’s a little cushion in there for those repairs.
Next, I’m going to talk about how people lose money when they’re flipping houses. I see this a lot especially with people who are newer to the business. The first biggest mistake that people make is they buy speculatively. What that means is that they have a subject property and they put their little rose-colored glasses on and they think that this property is going to sell for maybe $25,000 more because of some future event. They expect the market to go up or they think that their house is better than all the ones in the neighborhood because it’s the big corner lot or there’s something special about this property that makes it different from the others.
Essentially, they are pulling a number out of thin air that they think the property is going to sell for because they think that their property is the best. Instead, you need to buy based on actual numbers and actual sales in the area. Do not buy a property based on the listing prices. Instead, look at what has sold in the last 90 days and what sold in the last six months. I’m not that concerned with anything much further out than that. I want to know what has sold in the neighborhood and if you are going above those numbers, you are buying speculatively.
Another reason that people lose money is that they don’t understand the other fees involved. We went through those fees. That’s the loan interest, any points you paid on the loan. Inspection repairs are also a big thing that newer flippers don’t foresee and the termite issue. There are a lot of unforeseen costs and if you haven’t been doing this long enough, it is understandable that these things might come up and you weren’t anticipating them but a huge way that people lose money and I am guilty because it has happened to me is unforeseen construction costs. This happens to the best of us. In fact, I always say if you haven’t lost money on a flip, you haven’t flipped enough houses.
The biggest mistake that people make is they buy speculatively.
You will buy a property from time to time that has construction costs that are higher than you estimated because once you get into a property, you start finding things. You find things behind the walls or you start making improvements that maybe you didn’t originally think about before in the initial bid so unforeseen construction costs come up. It’s very common and it is wise to try to make sure that you have enough cushion in the deal that if this comes up, let’s say there’s an extra $5,000 to $10,000, there’s enough room in the deal. You’re not going to go in the red. You’re not going to lose money but maybe you’re not going to make as much profit as you thought.
Another common way people lose money is they don’t understand how to comp a house. If you don’t understand the basics of looking at property values in the area and estimating an after-repair value for your subject property, you’re going to lose money so I highly recommend that you take some time and learn about after-repair value and how to estimate after-repair value. This leads to having some blind optimism.
It’s common that you want to deal or flip a house so bad that you go into it very optimistically and when you are coming up with your after-repair value, you really have blind optimism. You’ve put on your rose-colored glasses and you refuse to take them off. That’s a very costly mistake. I have seen people lose tens of thousands of dollars because they want to do a deal so bad that they are refusing to see the truth about that house’s value so take away the rose-colored glasses. Don’t have blind optimism because trust me, once you sell that house, you do that deal and you end up losing money, you’ll never want to flip a house again.
Another way it can be very easy to lose money is you become a designer. You think you are on HGTV and all of a sudden, you are Chip and Joanna and you want to over-improve this house. I personally have been there. I completely get it. I’ve wanted to over-improve homes. Especially if you’re naturally creative, you go in and you want to do some cool things because the pictures are going to look awesome but you have to remember that you’re not going to live there. You’re not a designer. You are an investor and your job is to make this property hit the numbers it needs to hit to make a profit so try to not be a designer. Leave that to HGTV and focus on the numbers that will make you profitable.
Lastly, this happens to the best of us. The market moves on you, meaning that the market changed. We saw a lot of this during the recession where people bought homes thinking they would sell for a certain value and then poof, the recession hit, the bubble burst and houses were dropping in value by 20% to 30% within a month. That has happened. That does happen and it happens to the best of us. My best advice on that is that if that does happen to you, don’t quit because there are going to be good deals around the corner.
I haven’t been in the industry at that time. I got into the industry right after the recession so prices were already rock bottom but the people that I know who survived that time just waited. The prices got to the bottom then they started buying flip projects again and they made a ton of money at that time. It could happen but you have to have a backup plan that you’re not going to quit and when there is a good opportunity, you’re going to seek it and make up for any money you might’ve lost.
How do we ensure that we’re always making money flipping houses? You want to make sure that your after-repair value is based on three comps in the area. I want to always make sure that my ARV is matching three comps in the area that those houses are model matches or they look very similar and I can honestly say that house is very comparable to these three homes that sold at that price.
Also, make sure you’re using a flip calculator every time that maps out all your fees. Make sure you get that contractor to bid the property before you close escrow during your inspection period and be prepared to walk away from a deal that does not meet your goals. If the deal’s numbers do not make sense at the time of purchase, do not buy it. Take those rose-colored glasses off. There is another deal around the corner that does make sense. Make sure you are not desperate for a deal because I promise you, you will regret it.
Also, remember to stop watching HGTV. You are not a designer. Learn about market cycles so you can get better at predicting if the market is going to move on you or not. We’ve all lost money on deals. I always say if you haven’t lost on a flip, you haven’t flipped enough homes. It’s a rite of passage and it happens to the best of us.
If you want to learn how to start your virtual wholesaling business, I want to help you. Make sure you check out www.VirtualInvestingMastery.com where I’ve got an amazing group of students, a great tribe of virtual investors all helping each other. I am here to help you in your virtual investing journey. That’s it. Thank you so much for reading. I will see you next time.
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About Lauren Hardy
Lauren Hardy is a Virtual Investing expert and Real Estate influencer who owns multiple companies in the real estate industry including real estate investment, coaching, and software companies. She is also a Wholesaling Inc coach and co-host of the Wholesaling Inc Podcast.
Her experience in the last decade has been focused on real estate investing and creating products and services to serve the real estate investing community. If you are interested in investing in real estate virtually, house flipping, or virtual landlording, Lauren’s your girl.