Home flipping has come back into fashion thanks to TV shows purporting to earn house flippers tens of thousands of dollars per episode. The reality is that many house flippers barely break even, and too many lose money because of mistakes. Here are four essential home flipping tips for beginners to prevent you from losing your shirt or your own home because you lost money trying to renovate and sell a property.
Your Profit Is Made at the Buy
Your profits are made and lost by the purchase price of the home in need of work. Your profits are determined by the sale price minus the purchase price and the cost of renovations and real estate transaction fees. You can’t do much to reduce real estate agent and legal fees, but you can negotiate hard for the distressed properties. You have to learn when to walk away instead of bidding up a fixer-upper to the point you cannot sell it, after the cost of repairs, for enough money to break even much less turn a profit.
Know the Numbers
Before you buy the home, have it thoroughly inspected. Determine the repairs that must be done and the modest upgrades that would allow the home to sell for a premium. Generate ballpark estimates of these repairs and improvements. Then determine what the likely sale price of the improved home would be. Next, run the numbers. The likely sale price minus renovations, real estate transaction costs and the purchase price gives you your potential profit. Note that you may spend more than your ballpark estimate, so if there is already a narrow margin, walk away from the deal unless you can scale back the scope and thus the cost of the renovations. Or use those numbers to challenge the sale price of the home and demand a lower price.
Contain Your Costs
The goal of renovating a home for sale is to bring it up to the standards of the community, and ideally, a few little touches that are affordable in and of themselves but make the home seem upscale. For example, two tone walls stand out in a neighborhood with plain white walls. Accent tiles on the backsplash stand out but cost little money. However, you’ll lose money if you don’t pay attention to the neighborhood and use the dream of selling the house for a fortune to put a gourmet kitchen in a cozy three bedroom house or installing a luxury bathroom in a neighborhood where that is unusual enough that no one will pay more for it.
One word of warning – don’t try to cut costs by doing all the work yourself. You won’t do the work as well as the pros, it will take you longer, and the result may sell for much less than you hoped to receive for the home because the work seems amateurish.
Sell the House as Fast as Practically Possible
Financial advisor Dave Ramsey jokes that the word for fast selling real estate is “cheap”. Too many house flippers end up selling the house at a loss because they have personal bills and contractor bills coming due. Others list the home for the price they want to have others pay regardless of market value and pay carrying costs like mortgage payments and taxes waiting for it to sell. The best compromise is to list your home on a site like wallerrealestate.ca so you can sell it quickly at a reasonable price instead of seeing your profits eaten away each month or losing out on other opportunities waiting for the renovated home to sell.
You can also accelerate the sale by educating potential buyers. Tell them about everything you replaced so that the renovated home seems more attractive.
Buy the house as cheaply as possible, and be willing to walk away if the house costs more than what it would take, after repairs and transaction costs, to make money on the deal. Get estimates for the repairs to do the math before you commit to buying the house, and don’t try to save money by taking shortcuts or doing the work yourself. List your home on sites that will let you sell it as fast as possible so that your profits aren’t eaten up by carrying costs.