The Fix-and-Flip Playbook for Success
4 Key Points for Successful Flipping
By Darryl Shelton
Buying property, doing some renovation work, then selling rehabbed property is one of the most logical ways for home investors to get started in real estate investing. You likely have heard about this with all the popular press and TV Shows like Flip or Flop…but what does it take to have some success?
House flipping is the strategy of purchasing properties with the intent of selling them for a profit. The key is to buy low and sell high by finding distressed properties, making repairs and updates to the property, and selling for a higher price than your purchase price plus repair costs.
Sounds simple, but not everyone is successful. Here are four key points you must understand for successful flipping:
1. Find the Right Property
Experienced home flippers will tell you that part of finding the right property is having an initial vision for the changes
to be made.
Ask yourself:
» Do you want to change the layout and have potentially significant renovation as part of the project?
» Is this a project that will focus mainly on upgrades?
Focus on networking to help find the right real estate agent, who then will help you locate and purchase properties. The goal is to find a property for which you pay no more than 75% of the property’s after repair value (ARV) minus cost of repairs needed to renovate the property.
When finding your property, do your best to ensure there are no unforeseen structural issues. Have a professional home inspection. It is worth the price when you consider the overall cost of a bad investment.
2. Know Your Lender Financing Options
Managing your budget and the specific costs for each individual project is critical to success in flipping homes. As part of that budgeting process, find a good reliable lender that will work with you to discuss the project, understand your business and its goals, and then recommend financing options for your project. For example, at FMS Investor Financing (where I work), we have multiple funding options for both individual investors and entities, including short-term fix-and-flip bridge loans that may be used for projects.
Additionally, some lenders will provide fix and flip lines of credit options. Setting up a line of credit will allow a borrower to draw down funds needed to purchase and rehab properties. This allows time to purchase, rehab and sell the property for a profit. Lenders will usually work with experienced and non-experienced investors.
Wondering what you need to get funding approved for fix-and-flip projects?
Most lenders require:
A substantial down payment
Most lenders require you to have 20-30% of your own liquid funds to serve as the down payment, depending in part on your investment experience and loan amount requested. Qualified liquid funds include, but are not limited to, depository accounts such as checking, savings, and/or money market accounts; certificates of deposit; and mutual funds. Stocks, bonds and retirement funds could also be part of the mix. Lenders also require FICO scores (in most, but not all cases) and a higher score may get you a little lower down payment, depending on the lender.
Experience
Many lenders factor in experience, looking at how many projects you, as an investor, have completed over the past three years. A completed project is one that you have purchased, rehabbed, and sold. Lenders may use rental properties as experience as well.
You can usually close a loan in your personal or business name. Financing terms are typically 12-24 months with an option to extend the term. This will allow you time to purchase, rehab, stay on budget, and sell the property for a profit.
3. How to Rehab the Property
You do not need to be a home-repair expert to have success as a fix-and-flip investor, but you do need to work with the right contractor. There are countless ways to find a good contractor (websites, local real estate associations, etc.), but the best place to find the right contractor is through referrals from other investors.
Speak with the other investors about the contractor’s ability to stay within the rehab budget, the quality of their work and meeting deadlines.
Once you have identified a short list of potential contractors, set up initial conversations to find out more about their background. Ask about:
» Their experience
» Equipment they own and use
» Whether they have employees, subcontractors, or both
» How many people are on their team
» How to request a bid
» How they approach a project
» Projected time to complete the project
» How they will manage a budget
Once you have selected a contractor, establish a plan to obtain the necessary permits. An experienced, reputable contractor should know what permits you need and how to get them. Do not skip this step. Getting the necessary permits are often even required by law, and you would not want your project to be interrupted or even stopped due to lack of proper permits.
4. Selling the property
After completing all renovations, do a final walk through and inspection to ensure that the project has been completed and the property is ready to sell. You will probably need to stage the house to provide contents and context for the buyers. Make sure you have a good online presence as nearly all buyers today spend part of the shopping process reviewing properties digitally. Set your target price and your minimum based on both the current market as well as how well you maintained your cost structure and budget. The goal is to make a profit. You can also consider using an agent, which will ultimately be your decision.
It’s Time to Put the Playbook in Action
So, now you have the playbook. Fix-and-flip investing is not easy. Activating your plan and seeing it through involves discipline, diligence, some hard work, being smart, and even creativity, but the rewards can be both fulfilling and financially beneficial. It’s time to go out there, find that next property and the right contractor, match up with the right financing partner, and enjoy your next project.
