HOW TO FLIP – A GUIDE FOR BEGINNERS
April 1, 2022
If you're looking to make some extra money, buying a property to renovate can be a worthwhile option. When flipping houses, there are many important things to consider before beginning this sometimes long and arduous process. Whether it's a specific real estate market or your home needs major upgrades, every flipping move can impact the price of your home. Read on for a helpful guide that includes some house flipping tips and things you should know about pre-inspecting your home before it goes on the market.
What is flipping?
The concept of "flipping houses" is that you buy a house with a short holding period and the intention of selling it quickly. While most homeowners buy properties as a long-term investment, flipping houses offers a faster way to earn money after the initial purchase. This short-term real estate transaction allows you to leverage your existing assets to earn money after the flip and sale. Many investors seek houses that require basic upgrades and repairs at low costs. As with most other investments, the idea is to "buy low" and then "sell high" once the changes are completed. While house flipping can certainly be lucrative, it's important to remember that there are never any guarantees, as the real estate market is constantly changing.
How to start?
If you are interested in flipping, there are a few basic things to keep in mind, and each of them will play a role in determining whether you are making a wise investment.
Start by thoroughly researching both the national and local real estate markets. You can consult a real estate agent who can provide you with several comparable prices for homes sold in the area (or neighborhoods) you're interested in. It's also important to determine what buyers are looking for in a given location, based on property condition and square footage. Planning and research will help ensure you're making a wise investment in a home that should sell quickly.
Always start by budgeting your flip to avoid paying too much for the home. Set a limit on how much you're willing to pay upfront, and never exceed it when making an offer. It's also important to budget for all renovations, repairs, and upgrades. Finding a decent home at a reasonable price is the best way to ensure a good return.
Hiring a home inspector is crucial to help you pinpoint any necessary repairs and issues. A preliminary inspection is highly recommended, as the inspector's findings can be the difference between buying the home and moving on.
After purchasing the property, deduct the cost of the home and the cost of any upgrades and repairs. Your final amount will be the floor that shows you how much profit you will make when the flip is complete and the house sells.
70% rule
The 70% rule of real estate investing should serve as a guide when looking to flip a house. This rule states that you shouldn't pay more than 70% of the home's value after repairs, minus all repair costs. ARV, or after-repair value, refers to the estimated value of a home after all repairs and improvements are completed. For example, if a home is valued at $1 million and requires $250,000 in repairs, the rules state that you should pay no more than $450,000. This gives you about 30% leeway to pay for miscellaneous items, such as minor repairs and other costs, and also takes into account the amount you'll gain when the home sells. Here's an example of how the 70% rule is calculated:
ARV PLN 1,000,000 x 70% = PLN 700,000 – PLN 250,000 = PLN 450,000
Meaning of the limit value
Once you've found a house to flip and are ready to put it on the market, make sure you understand the "limit" value. This term refers to the maximum asking price for which a house can be listed. If the asking price is too high, it may remain unsold for a longer period of time, causing more buyers to hesitate to make an offer. Always speak with a local, experienced real estate agent who can help you determine fair market value. You can always start by listing your house for a little more, as you can later negotiate the final price down with potential buyers.
Structural improvements to consider
Even if the home you're buying appears to be in excellent condition, there are some significant upgrades you should consider. For example, if it's an older home with old wiring, a complete electrical upgrade is highly recommended. Hire an inspector to inspect the plumbing to determine if there are any signs of rust, wear, or damage. The home's insulation should be in good condition, and when the HVAC system is running, it should feel like a comfortable temperature. Inspect the roof to ensure it's in good condition, with no signs of leaks, missing tiles, or other damage. It's always a good idea to inspect the home's major components and systems first to determine which improvements are most important and most needed.
Room-by-Room Renovation Guide
Here are some suggestions to help you renovate every room in your home to get a higher asking price .
Outside:
Paint or plaster your home's exterior to improve its curb appeal. Remove dead tree branches, add fresh sod and grass, and update landscaping to enhance your entryway. Repair broken outdoor lighting or replace fixtures and worn-out bulbs. You can also paint your front door a bold new color for a simple update.
Bathroom:
Install new flooring and fixtures in your bathroom to give it a fresh new look. Inspect the plumbing to ensure it's working properly and there are no signs of leaks. Quickly tiling around the shower or bathtub can be a simple yet effective solution.
Living room:
A fresh coat of paint and new flooring can instantly transform an older living space. If your home is divided into separate rooms, consider knocking down a wall to create the open floor plan that many buyers love.
Kitchen:
Replace old, outdated appliances with modern stainless steel ones. Replace old countertops and install solid surface materials like granite or quartz. If the cabinets are in good condition, you can repaint them and add new hardware for a more modern look.
Garden:
Look for signs of pests, remove weeds and dead plants from landscaping and gardens. Plant new shrubs and flowers around your home to give it a cheerful, vibrant look.
Bedroom:
These rooms are easy to update with fresh paint and new flooring. If your bedroom has a small closet, consider rearranging it to make it larger.
Laundry:
If you have the budget, install new tiles and a new washer and dryer in this room. If possible, install a sink to make the room even more functional.
Add-ons: If you have a lot of money to spend, consider adding an extension to your home to increase its square footage and command a higher asking price.
Increasing the value of your home
Most homebuyers today want to spend money on unique properties. To add maximum value to your home, make upgrades that appeal to younger buyers and modern families. A sleek glass railing on the stairwell can be a modern alternative to a traditional railing. Install a few high-tech devices, such as a smart thermostat, security camera system, or doorbell alarm camera. An upgraded garage door with frosted glass panels can give your home a modern look. If your windows are old, install new, energy-efficient windows to make your home look new. This is also a great incentive for buyers. If you have room in your budget, consider installing a new deck or covered patio, as many buyers enjoy spending time outdoors.
Real estate sales
Once all the renovations are complete, it's time to list your home. Make sure you hire an experienced, qualified real estate agentwho knows the local market well. Make sure your listing includes important details, such as square footage and any special features that make the home unique. Hire a professional photographer to take beautiful, detailed photos of every room and the home's exterior. A proper marketing plan will help you sell your flipped house quickly and profitably.
The Importance of a Preliminary Inspection
You should never buy a flipped house without hiring an experienced home inspector. A preliminary inspection will help you determine if the property is worth the investment and will also give you a clearer picture of any upgrades and repairs you may need to make.
Inspection Checklist
Here are some key elements to consider during your pre-inspection:
Inspect the exterior and make sure the lawn is level, all exterior structures are solid, and the siding, roof, and driveway are in good condition.
Inspect the electrical system thoroughly to ensure it has been properly installed.
Inspect all plumbing, pipes, and components for damage, broken parts, or leaks.
Thoroughly inspect the foundation for cracks, buckling, water damage, or uneven surfaces.
Ensure the home's HVAC system is functioning properly or requires only minor repairs.
Inspect the attic to ensure there are no signs of leaks and that the home has adequate insulation.
Inspect the interior of the home and look for uneven flooring, signs of water damage, or peeling paint.
Quickly inspect each appliance to ensure it is in working order.
Minimize risk
Conducting a pre-inspection before purchasing a flipped house can minimize the risk of losing money. Here are a few things to keep in mind that can help keep your risk as low as possible.
Serious problems, such as extreme roof damage, can be costly, so make sure your roof is in good condition or repairable.
If the house has a basement, look for signs of previous flooding or foundation problems, which can be expensive to repair.
Only hire a qualified inspector to inspect the house. They should be fully licensed and experienced in conducting pre-inspections for investment properties.
Always vet contractors before hiring someone to carry out improvements and repairs. Review customer reviews and ask for references before signing any contracts or agreements.
Most common findings after a home inspection
Here are some of the most common things inspectors find during a property inspection:
Water leaks in the basement, on interior walls, and signs of mold;
Plumbing leaks;
Faulty electrical wiring, exposed wires;
Non-functioning appliances and/or HVAC systems;
Roof problems, such as missing tiles, leaking gutters, damaged or missing flashing;
Foundation problems, such as cracks, buckling, or shifting foundations.
Recommendations
A home inspector will make some recommendations for repairs. These recommendations will help you determine if the investment is worth it. Here are some of the recommendations an inspector may make:
Completely replace your electrical system
Repair or replace your roof
If your home has asbestos or mold, professional removal services are necessary
Upgrade your HVAC system, insulation, and windows
Level your lawn and remove any dead trees or tree limbs.
If you're looking for ways to make money flipping houses, keep the tips in mind. Flipping can be a great way to make money quickly if you plan ahead and do your research. With a quality pre-inspection and working with a trusted real estate agent, you'll have peace of mind knowing whether the property you're interested in is worth the price.
Photo credit: Master1305
