Flipping Houses 101
There are a couple of ways to flip a property. The first is to negotiate a deal and then sell the contract for a fee without doing any improvements on the property. This type of flip will net you some cash, but not as much as doing the full renovation and selling the fixed up property. The idea on this type of flip it to sell the contract before you close on the deal, so you will probably need to have a network of investors that you can contact to see if they are interested in the property.
See the instructional video at the end of the article.
The question here is what if I can’t find someone to buy the contract? Well the answer is you will have to close on the property, if not you will lose your deposit that secured the contract.
If you use “And or Assigns” on the contract after your name indicating you intend on selling the contract to someone else, this may cause some problems. Some sellers may not want to deal with this, since the next buyer may not be a qualified buyer, and the property will have to be put back on the market. This a is red flag to many realtors, and they will probably shy away from this kind of deal, remember they make money when the deal is finalized at the closing.
The contract to buy is assignable unless it states in it that it is not assignable. To wholesale a property properly you will need to have a simultaneous closing. This is where you have lined up someone to buy the property for a higher price. Then at closing you will have one party in one room and in the second room your buyer. After closing on the deal with the seller you will go to your buyer and close the second transaction and pocket the difference. This type of transaction will require you to be able to close the deal on the property. For more details see this article.
The second type of flip you will take possession of the property perform the needed improvements and put it back on the market for sale. We have all seen the shows where the investor buys a fixer and turns a good profit, but they usually run into some unexpected problem. So, be prepared you will too, and don’t expect this to be easy, however it can be a rewarding experience.
Money is the first thing you want to line up before you start. If your just starting out you may want to focus on lower priced properties to start off. Do you have enough cash to start flipping? If not you will need to line up investors or better yet try to partner with someone who has the cash and work out an arrangement with them to split the proceeds while you will be the one responsible for getting the work done. If you get good at this you may have enough cash to do one on your own, and bring in your partner for bigger deals.
Have an exit strategy, whenever you are investing. What can the property your thinking of flipping return when it is fixed up? Use realtors to give you comparables in the area. You will need to have a good idea of four variables to know if this property will work. The first variable being the expected sale price of the property. You can use a range or an average if you have a range, and the high value can be your optimistic target.
The next variable is the cost to fix up the property to an acceptable standard for the neighborhood. To know this you should have a contractor or handyman on your team. If you don’t ask your realtor for someone they have used before. This will give you a ballpark estimate for how much you can expect to spend on your fix ups. Keep in mind you will want to add a buffer or contingency in case of unexpected issue that may arise.
Depending on where your cash is coming from (i.e. hard money loan) you will need to consider the time required to do the flip and the cost involved if any.
Your third variable will be the expected purchase price, what is the highest you will be willing to pay for the property. You will try to get a much better price, but you want to set a target for you cut off or walk away price.
At this point you have enough information to calculate the last and most important variable your profit. Run the numbers is this deal worth your time? Please share your experiences both positive and negative with us.
For additional information see this article on flipping.