Home improvement TV shows have made house-flipping look like a dream payday. You buy a house that needs repairs at a low cost. You make the repairs. Then, you sell the home to an eager buyer for a huge profit.
Flipping homes can be a great way to build your wealth through real estate investment. But, in reality, there are several considerations to keep in mind before you dive headfirst into house-flipping.
Here’s a quick guide to house-flipping that answers some of the most important questions you may face as a new investor.
One of the golden rules of real estate is location, location, location. It comes as no surprise, then, that where you buy a home to flip can impact your bottom line.
If you have flexibility in geography, a WalletHub study found that the top five best cities for flipping homes in 2021 are Sioux Falls, S.D., Missoula, Mont., Peoria, Ariz., Nampa, Idaho, and Tampa, Fla. The five worst cities are Bridgeport, Conn., San Francisco, Youngers, N.Y., Oakland, Calif., and Newark, N.J. The study came to these conclusions by factoring in elements such as quality of life and the cost of products.
Whether you’re investing nationwide or locally, make sure to strike a happy balance with the location. Choose a home in a desirable neighborhood close to schools, grocery stores, and restaurants.
Though you may find some bargains through listings on websites such as Zillow, Redfin, or Trulia, shopping at auctions typically offers a greater potential for return on investment. In an auction, home bids will start much lower than in a traditional real estate transaction.
It’s important to note that in some auctions, you may not have much information available before you buy the house. In foreclosures or property seizures, you may only see a home’s exterior before you buy. Budget accordingly for any big-ticket items such as installing new plumbing or a roof.
Try checking out estate sales or homes being sold by their owner. Also, some real estate agents and online brokerages specialize in pairing sellers with home-flippers.
If you are not experienced at major home renovations, then you will need to hire experts to help you do the job right. Remember, the most important part of house-flipping is taking a poor-condition property and turning it into a beautiful home. You want the right people on the job.
Do your research to find the best contractors who will work on your timeline and budget. Ask for references from people who have successfully done work on their homes, and check reputable sources for reviews. Before signing any contract, interview multiple contractors and ask for licenses, references, and a formal bid.
Unless you’re planning on buying your new investment property with cash, you’ll likely need to use financing to complete the purchase. Most home flippers secure hard money loans.
A hard money loan typically comes with a higher interest rate than a conventional loan. However, you can also get your cash in hand faster, and many hard money loans will cover the costs of renovation.
Although a high-interest loan may be scary, remember that the sooner you flip your home, the faster you can pay off the loan. Budget your time and expenses accordingly to strike a balance between completing any repairs well and on schedule. Before signing a loan agreement, make sure there aren’t penalties for paying a loan off too quickly.
One approach to selling your completed home is to do it yourself, which is also known as for sale by owner, or FSBO. With FSBO, you can avoid paying a real estate agent a 2% to 3% commission fee, giving you more profits.
It’s worth noting that homes sold without a real estate agent typically spend more time on the market than their counterparts — and tend to sell for less. With your loan payments due, the sooner you list your renovated home for sale, the faster you can sell it and settle your loan.
To get the best of both worlds, consider working with a top-rated low-commission agent. For example, Clever Real Estate will connect you with an experienced agent from major brands — such as Century 21 and Keller Williams — who will work for a flat rate of $3,000 or 1% of the home sale if your house sells for more than $350,000.
For more tips on house flipping, check out these posts.