Last Updated on December 27, 2021
How to Flip a House in 7 Simple Steps
We’ve all been there: watching one of those house flipper TV shows, fantasizing about making $50,000 in two weeks. Well, we all know the “reality” we see on TV isn’t quite accurate.
Nevertheless, there’s a reason they don’t call it “fantasy”.
Two weeks is certainly unrealistic, but real estate investors who flip homes (“house flippers”) can earn a serious profit in relatively little time. Let’s take a look at how.
Don’t get too excited..
It goes without saying that flipping houses is hard work, and TV won’t show you the less romantic aspects: expect late nights spent poring over paperwork, a lot of time spent writing email and making phone calls, and potentially exhausting days if you take a hands-on approach in order to save money on labor.
There’s also a lot of inherent risk in house flipping, as with any investment. You could make fifty thousand dollars, but you could just as easily lose it. It’s not gambling, however: there are very real strategies you can use to mitigate the risks involved, and we highly recommend doing research and performing analyses before committing to a house flip.
Our seven steps will help you understand how to flip houses successfully, providing a foundation of knowledge before you invest tens of thousands of dollars. You could earn a hefty profit, but first, it’s important to look at exactly what house flipping entails, and determine whether it’s a business you would do well in.
So, what’s in a house flip?
Flipping houses entails buying a property, renovating it, and selling it for a profit. You probably knew that much already, but let’s zoom in and look at the finer details.
House flippers purchase properties that most buyers aren’t willing to invest in, owing to the work they’ll take to succeed on the market. The average buyer wants a zero hassle home that comes ready for move-in, which means troubled properties are potentially valuable investments. There’s a huge market, and your role is to connect these comparatively inexpensive properties to buyers who aren’t willing to stomach the renovation process.
That’s the basic paradigm, anyway. The process itself starts with research and analysis, followed by purchasing and renovating a property, then successfully appealing to buyers in order to turn a profit. There are potential pitfalls all along the way, but with our seven steps, you should hopefully be able to avoid the worst of them.
Step 1: Searching, researching, finding the right market.
All markets aren’t created equal, at least not in the house flipping business. If you have a $10,000 budget, you shouldn’t spend too much time following high end markets where even problem properties could start at $500,000 or more. Investment property financing, such as hard money loans, can certainly cover the worst of your expenses— but keep in mind that lenders aren’t an unlimited pool to draw from. What resources do you have available right now? What markets can you afford to flip a house in?
Many investors divide real estate markets into “classes” of neighborhoods. Class A neighborhoods are affluent, consisting of expensive homes owned by wealthy professionals and business owners. Class B neighborhoods are one step down the economic ladder, but still fairly prosperous: these are your solidly middle class neighborhoods, comfortable, but not exactly rich.
Class C neighborhoods are blue collar, working class neighborhoods, but not necessarily a bad choice for investors with limited resources. On the other hand, Class D neighborhoods house the lowest-income residents, and in turn the properties themselves are often the lowest-income of the four classes.
Some house flippers specialize in Class D neighborhoods, but they come with additional risks that a beginner should likely steer clear of. These neighborhoods will often have higher insurance premiums, a consequence of generally elevated crime rates— and even if insurance does have you covered, break-ins or vandalism could seriously cut into your profits, not least of all by slowing the renovation process down. Keep in mind that many residents in these neighborhoods do not own their homes, and you will likely be selling any properties you flip to other investors. These investors tend to know the market very well, which means you could see slim profit margins. However, the flip side of that knowledge is that investors know exactly what and how they want to buy, meaning the sales process could go very quickly.
These neighborhoods can be profitable, but they aren’t for every investor. Consider looking at Class B or C neighborhoods, middle or working class areas with relatively affordable but safe investments. I know I’ve seen many investors regret losing money to the lower-end.
Tip: Your world isn’t limited to your hometown! Suburbs or smaller towns within about an hour’s distance could also be a good place to start, if you know the area well enough.
Step 2: Always have a plan and a budget.
As a real estate investor, and a house flipper no less, you’re in business. You’ll need a business plan, as would any entrepreneur.
You don’t need anything too fancy, certainly no pointless twenty minute meetings or corporate lingo; there doesn’t have to be any football-spiking or can-kicking to speak of. All you really need is a budget, a timeline, and a definite project scope.
How much do you have to invest? How much do you need in reserve? Do you have enough to cover renovation until the lender comes through?
What scope are you comfortable with? The best way to start out is with cosmetic updates. There are plenty of properties out there that are undervalued because of faded paint, dated shag carpeting, and a few dysfunctional fixtures here or there: you can turn a decent profit by updating kitchens and bathrooms, laying new paint and floors, and replacing those fixtures. These renovations are inexpensive and don’t take long.
You’ll want to think twice about houses with structural problems. These can be risky even for highly experienced investors, as it often takes more time and money than anticipated to fix these issues. Avoid mechanical issues, too; for your first flip, you’ll want to minimize the number of permits you have to deal with.
Your margins will be narrower than what TV shows you. You won’t make $50,000 in two weeks. However, with a little patience and determination, you can make sure these crucial early investments turn out well.
Step 3: Check your financing
You don’t want to see your offer approved only to struggle with finding the money to make it reality.
Before even making the offer, you’ll want to have a lender on hand to provide funds. Make sure to be aware of what that funding entails, too. The ideal loan has a reasonable interest rate, low fees, and a minimal wait. You may not be able to find the perfect loan, but you may be surprised what a good lender can do for you.
Keep in mind that your loan repayment period won’t be very long, so high interest rates aren’t a deal breaker if other fees are low. You’ll likely only ever make a few payments.
Step 4: Meet the contractors
You should start building relationships with contractors before you actually buy your first property. Knowing the right contractors can make all the difference, especially if you aren’t going to be working on the property yourself. The ideal case is to have a few competing quotes on the property before you buy.
You’ll want to have a few different business cards on hand, though you shouldn’t need all of them for a given flip. Electricians, roofers, plumbers, painters, and HVAC technicians are all good to know. It’s also worthwhile to familiarize yourself with lower-cost generalist handymen, too.
Step 5: Find the house, then buy it
Among the most important elements of a successful house flip is knowing how to find a good deal. You want to buy below market value in order to have wide margins that cover your expenses— you’re looking at two rounds of closing costs, carrying costs during renovation, realtor fees, and potentially a lot more.
There are many ways you can find undervalued properties to invest in. It’s important to research your market closely, especially keeping an eye on the possibility that any new amenities or employers could move in.
Part of it is patience. You may find yourself sending hundreds of letters, making dozens of offers, but only buying one property. It’s tedious, but finding the right deal is critical.
Once you’ve found it, you need to buy it. Some lenders move faster than others, and hard money lenders in particular offer very fast-paced loans. The process takes time in any case, but you can minimize it by looking into hard money loans.
You may want to hire a home inspector, for that matter: home inspections can be incredibly comprehensive, and an experienced inspector could help you make sure this property is a good idea.
If it seems like there aren’t any dangers lurking in the shadows, you’ll want to call a few contractors and tour the house with them. Ask for multiple quotes, and try to figure out which contractor offers the best service for the price.
In order to move as quickly as possible, it’s best to choose a contractor and schedule the start of renovations for the same day you settle on the property.
Step 6: Renovation, at last.
I would say it’s finally time for work to begin, but if you’re a careful investor, you’ve already put a lot of work in, haven’t you?
The contractors, however, will start work after the purchase. The clock is ticking now: every month comes with interest, taxes, utilities, and insurance. The faster you work, the less money you’ll burn.
Flipping houses has a lot to do with efficiency: you’ll need to choose your contractors wisely, and even then, monitor them carefully. Many contractors have been known to turn a week-long repair into a month-long repair. For that matter, some contractors will try to raise the project’s price after they’ve already started working. You may want to talk to past clients before deciding on a contractor, especially if you’re new to house flipping.
Step 7: Sell the house, count the money.
The seventh and final step is generally the simplest: selling.
This is largely a realtor’s domain, so if you’ve hired an experienced realtor, it shouldn’t take long at all.
However, your realtor isn’t everything. This is ultimately your property, and you need to make sure you’ve priced it responsibly. The 70% rule is a good place to start, even before the property is on the market.
If you feel confident, you may want to pursue a realtor’s license yourself. This could save you a few percentage points in fees, but it does take time and money.
Flipping a house is no small task, but by breaking it down into simple steps, it becomes very possible for a beginner to understand. It’s easier every time, too, as your professional network and experience grow.
Do your research, prepare accordingly, and don’t be afraid to act when the opportunity presents itself. You may not see reality TV returns, but with any luck, you’ll soon be seeing very real profits from house flipping. We all started somewhere, and with these seven steps, you can start from a position of confidence.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.