Flipping Houses for Profit

I’ve mentioned before in a book review that I was, at one point, very interested in flipping houses for profit.  What do I mean by flipping houses?  It means to purchase houses that need cosmetic (or more) work selling for well under market value, upgrade them, and sell them for profit (hopefully) in a relatively short period of time.  Sounds pretty easy in theory, but flippers can get way over their head if they don’t know what they are doing.

From reading a few books on flipping, watching various flipping TV shows and speaking with local investors,  it seems that one critical step is running the numbers as accurately as possible before purchasing the property to ensure that the project is financially viable.  The profit on a flipping endeavor is made when you buy which perhaps makes it the most important step.  That is, the lower the purchase price of the house itself, the higher your potential profit margin.

The Process

  1. Evaluate the House – Once you find a prospective home that needs a bit of work, find out the market value of the home when it is in top notch, fixed up, condition.  A real estate agent, or internet search should help here.
  2. Repairs – Get a contractor to give you an estimate of the repair/materials cost and the approximate time line. Give yourself a fudge factor in this calculation as projects have a tendency to go over budget.
  3. Calculate other Expenses – Obtain the cost of selling (real estate agent commissions, legal fees) and calculate your holding fees (purchasing legal fees, financing costs, utilities).  Figuring out the agent/legal fees should be easy enough, but financing can be a different story.  As a real estate flipper, you want to buy and sell as fast as possible.  Some lenders have a problem with lending money for such a short period of time, which is why the flipper may have to resort to private financing.  Private financing/mortgages generally have higher interest rates, but may be worth it to complete the project.
  4. Add in desired profit – Like any business a profit margin needs to be included.  From reading books  and speaking with local flippers, the profit should always be built into the offer/purchase price.

Purchase Price = Market Value – Repair Costs – Selling Costs – Holding Fees – Profit

An Example:

Here’s the example from my review of “The House Flipping Answer Book

The author explains that the key to flipping properties for profit is that you need to include your profits into your expenses when deciding on your maximum purchase price.  For example:

Market Value when fixed: $200k

  • repair materials/labor cost: -$20k
  • holding costs: -$5k
  • agent selling fee: -$10k
  • closing costs: -$1k
  • profit: -$20k
  • fudge factor: -$5k

Maximum purchase price: $139k

Seems like a large spread between $200k and $139k, but note that houses that are worth $200k in mint condition are typically listed for much less when they need extensive repairs.

There you have it, my big picture thoughts on the process of flipping a house for profit.  Of course, my only experience in real estate investing is with rental real estate (and REITs), but the above is what I’ve come up with based on reading various books and speaking with local real estate flippers.

Personally, I don’t have the guts to do a flip (right now) as it requires a fair bit of risk and a lot of time (that I don’t really have).

Have you ever taken on a house flipping project?  Any tips?

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Robin
5 years ago

Can someone tell me how much time do I have to wait between buying a home and selling it (flipping). 30, 60, 90 days?

Eric
9 years ago

I started flipping houses in August 2011with a partner. We don’t do any work other than finding the properties. We pretty much follow the same plan as noted in that book. We sold our first house at the end of October privately for a grand profit of $3000.00. Our second house we sold in Feb 2012 for a $24000 profit. We are working on the third house and are two weeks away from completion. We just found out the furnace had to be replaced which wasn’t in budget. We purchased are fourth house and took possession today. The biggest problem to date is finding houses fast enough for our renovator and holding three houses at once.

Art
9 years ago

I think the problems here arise from the fact that people just don’t research stuff enough before jumping in. There are several parameters to consider.
Its best if its your main residence. You need a place to stay. If it doesn’t sell next week, no problem. Zero taxation as your primary residence. You need to be able to segregate your living. When there is work being done in one area of the house you don’t go to that area unless you’re working there. It takes flexibility. Living with spoiled people that have to have things “their way” won’t work.

Advantages: Zero tax, no commute time to work, the ability to hire cheap grunt labor for the monotonous stuff. The ability to buy demolition materials when available for pennies on the dollar. If you have a flexible schedule and a loan officer isn’t breathing down your back you can buy what you want when you want. Its about freedom really.

If everyone did this and had basic skills learned in school so they could quickly know an accurate appraisal of a property because of the work involved, the economy would be in a far different state. Imagine if most people were mortgage free by 30.

I find that yes, you can make way more money using other people’s money. But in many ways its cursed money. You don’t have the same satisfaction than if you started smaller and used your own. Its like planting a seed and watching it grow. Using other people’s money is like hiring someone to care and water the plant every day and not seeing the growth until its mostly finished. I just find that people that use their own money seem to enjoy their investments much more. And that’s important. If you’re not enjoying your investments, what are you doing it for? Just the money? That’s shallow and rather unfulfilling. The people that have fun with their money – these are the real financial geniuses.

Noise: If one can do most of the loud stuff together or group as much as possible together this helps greatly with your own family and the neighbors. Or send them away on vacation during the loud times! Noise is hard to live with. You can avoid dust and dirt by being physically away but noise kind of travels…lol.

Chris
10 years ago

I have not done any flips but I am getting ready to. I have 30 years of real estate experience with most of it as a home builder. I am pretty handy and am also a licensed real estate broker.

I am looking forward to it but it is a bit scary in this market if you want to sell. If worse comes to worse, I can rent the property.

Frank
10 years ago

Sorry, I’d like to be notified of any comments.

Frank
10 years ago

Great Post and one that I’ve been interested in for some time. While I enjoy the physical aspects of DIY, it can get old real quick. I’ve managed to satisfy this crave by fixing up my own home with hopes of one day selling it for alot more than I bought it for. But even then, you’d have to get total buy in from all family members as the dust and mess that comes with remodeling can really stress people out. For the passive investor (one having a concurrent job), it’s really difficult because the only time for one to search for properties is during the weekend. Again, don’t think that you’re the only one that knows about this scheme. There are many out there doing this full time and for a guy like me who likes his day job, it’s almost impossible to find deals and complete a flip in a timely manner..unless of course if you’re already a tradesman with many contacts in the building trades that you could ‘sub’ out.

Ryan
11 years ago

My wife and I bought our house in Toronto on spring 2006, not at all intending to flip it. I have always been reasonably handy, so we opted for a home we thought we could improve upon over time. We estimated that we would be in this house at least 5 years. Over the following two years, we were constantly under construction it seemed…
big deck in the yard, opened up walls, refinished floors, torn out carpet on stairs and refinished, finished basement, moved around laundry facilites, replaced all baseboards and door and window casings, landscaping, painted and decorated, etc, etc, etc. This list certainly kept me busy for a long time, as the only thing I didn’t do myself was the refinishing the floors…

In the end, when we decided to move our of Toronto, we put scrambled to finish everything on time to put the house on the market after exactly 2 years. The house sold in 4 hours, for about 105K more than our initial purchase price. A nice little profit, but here are my final thoughts…

Pros –
profits
sense of accomplishment
I enjoyed doing most of the work, but stress to get things finished got to me in the end.

Cons –
living ina construction zone with a new born baby…
leaving the house after having done all that work…

In the end, we bought a lovely house out of town, and I havent picked up a tool since. although I am starting to jones for a project of some sort, I think i will pick up a rental that I can do alittle work on…

Flipping Houses
11 years ago

If you really want the best deals in investment properties, you have to increase your odds by finding more deals. Who is more likely to get a cheap apartment building, an investor that looks through the MLS listings and calls it a day, or the one that uses ten resources?

Canada Deals
11 years ago

The more I read through the posts on this blog the more I wish I would have found it eons ago :)

We tried the “flip a house” thing 2 years ago in the booming Edmonton market. It was the most work I’ve EVER done in my life, *and* we must have done it all wrong because the profit wasn’t what we expected. I think the market was just to volatile at the time. We didn’t lose money but it wasn’t pie in the sky like we’d heard it would be.

Property flippers… I tip my hat to you.

Jeff Logue
11 years ago

Great article. One extremely useful and powerful tool that flippers can use (and that I use for my business) for finding comparables is Realquest. Though you have to pay a monthly fee, this will give you the most up-to-date data pulled straight from the county records. You can track everything from the after repair value to the square footage of a property. This is especially helpful if you plan on flipping houses outside of your local area as well.