If you’ve watched any HGTV lately, you’ve probably heard the term fix and flip more than a few times. Watching people purchase, improve, and then sell homes has become a pastime for many Americans. And for good reason: fixing and flipping is a great way for a new real estate investor to grow their cash position quickly. Holding onto an investment like an apartment building or retail location can take a long time to pay off. Fix and flips can generate cash much faster. This lower barrier to entry is attractive to many investors as they start their careers in real estate.
But how do you find the right house to flip? And once you’ve found it, how do you purchase it, fix it up, and sell it?
What is a Fix and Flip?
A fix and flip is the process where an investor buys a property, fixes it up, and then sells it at a profit. This strategy has been popular for many years, especially in years when the housing market offered low property sale prices.
The principle is pretty simple: Find a home that needs some work, do the work that needs to be done to increase the value, and sell it for a much higher price than you bought it for. This is pretty simple to understand, but the execution requires a complete understanding of the process, especially how to find houses that are good fix and flip candidates.
Why Fix and Flip?
When done correctly, a fix and flip can result in large financial gains. For example, let’s say you purchase a property for $200,000 and make renovations that cost you $50,000. If your cost to sell (real estate agent commissions and closing costs) is $30,000 and you sell it at a price of $350,000 that’s a profit of $70,000. Not bad for 6 or so months of work.
Beyond the financial gains, many people enjoy the process of fixing and flipping as well. Searching for that “diamond in the rough” and turning it into one of the nicer homes in the neighborhood can be very rewarding.
How to Fix and Flip?
Start by creating a fix and flip business plan. This includes analyzing the market where you are looking at property, creating a timeline for the flip, crunching the numbers to create a financial plan, securing financing, and trying to foresee any obstacles that might arise.
Learning how to fix and flip also means learning how NOT to do it. There are quite a few pitfalls to avoid (more on those later) so learning about them upfront will set you up for success.
Find the Right Property
As you might imagine, the most critical part of the fix and flip process is finding the right property, to begin with. The key is finding a property that needs enough work that you can increase the value but not so much work that you are going to sink too much money into and not make enough profit when you sell.
Beyond the house, the location is just as important, maybe even more. Flipping in a desirable neighborhood is a great way to ensure that a large swath of potential buyers will be interested in the home once you fix it up and list it for sale.
When a homeowner can’t afford to pay their mortgage, sometimes they go into foreclosure. This means the bank puts the home up for auction to try and recoup the money they lent the borrower to buy it.
The auction is offered at your local county courthouse. This is a good place to find potential flip properties because they are often priced well below their market value. Before you attend a courthouse auction, check the local papers for the properties that will be auctioned off. This way you can research the properties ahead of time.
When a homeowner stops paying their property taxes, eventually the county tax collector will sell the property at auction to recuperate what the county is owed in delinquent taxes. These auctions are published online and in local newspapers. Often times houses sold at tax auctions need a lot of work and are good candidates for a fix and flip.
Sites like Zillow and Realtor.com take listings from the multiple listings service (MLS) and feed them into their sites for consumers to peruse. The MLS is the real estate agent online system where agents list properties for sale.
For sale by owners (FSBOs) can list their properties on the consumer-facing websites as well. In addition, listing agents and home owners can promote their listing on these sites up to 30 days before they officially go on the market.
When a home listed for sale sits on the market too long without an accepted offer it can sometimes expire. Searching for these on the MLS can result in great possible fix and flip properties.
When a listing expires, sellers often become anxious and more motivated to sell. This means they may accept an offer at a reduced price. If you go this route, make sure you research why the home didn’t sell when it was originally listed. If the house needs to be fixed up to sell, that’s a great flip opportunity. If the lack of selling had to do more with the location, not so much.
Leverage Your Network
For any success in the real estate industry, networking is critical. The grocery store, golf course, community groups, and any other places people gather are full of potential property buyers and sellers.
For flips, network with the types of professionals likely to have the inside track on a possible deal. This includes attorneys, lenders, and real estate agents, among others.
Local government records indicate when houses were sold, the price, and any foreclosures or distressed properties that might be available. In addition to foreclosures, these records will have a list of short sales and pre-foreclosures as well.
Location is Everything
You have probably heard a real estate agent or two say “location, location, location.” Well, it’s true. The condition of the house is not really all that important compared to where it’s located. After all, you can fix up a home, but you can’t move it (in most cases).
Look at recent sales in the neighborhood and try to find out how many offers were received on them. If the property you are considering flipping is in an area with a large pool of potential buyers you are more likely to get top dollar when you list the home you are flipping for sale.
Purchasing your flip costs money, of course. If you are paying cash, the transaction is pretty easy. If you need a loan, be sure to shop at a number of different lenders to find the best option for your fix and flip loan.
Make an Offer
With financing secured and your target property selected, it’s now time to make an offer. A real estate agent is a great resource for this stage in the process. They will know if you need to come in at, below, or above the asking price to help your offer get accepted. They will base this on their expertise in the local real estate market.
The seller can accept your offer as written, decline it, or make a counter offer. Negotiations may go back and forth a few times before you settle on a final sales price.
Once your offer is accepted it’s time to inspect the property before you seal the deal. Hire a professional, reputable inspector (your real estate agent can provide recommendations) to look over the property.
The inspector will be looking for major defects or safety issues that need to be addressed. If you find them, you have a few options for your next move. You can walk away from the deal, ask the seller to fix the items found during the inspection, have the seller contribute to your closing costs, or ask them to reduce the sales price. Usually, some more negotiation occurs and once a solution is agreed upon you are on your way to the closing table.
Once you are through inspection and your loan gets final approval (also known as lender clear to close) it’s time to sign and take ownership of your new property! You should receive a closing disclosures package a few days before the closing that outlines everything you will be signing at the closing table so there are no surprises.
Your real estate agent and lender will tell you everything you need for the closing, including the amount of money you need to bring (or wire). For all closings, make sure you bring your driver’s license or another form of identification.
Make Improvements (The Fix)
Focus on the big stuff first. Foundation or roof issues, for example, should be taken care of right away. Remember that list you got from your inspector? Use it. Identify the most important fixes and get them done.
Next, focus on kitchens and bathrooms. These are the number one and two rooms prospective buyers look at when forming their opinion of the house. Work with a designer to determine what the most popular choices are for finishes. You want the details to appeal to a large group of potential buyers.
Don’t ignore the other rooms though. New wood flooring and fresh paint can go a long way in improving living rooms, bedrooms, and other spaces in the home.
Finally, review the landscaping. Curb appeal is critical, so make sure the view when you walk up to the house is appealing and inviting. Keep it simple with backyards, as buyers often like to envision how they might make it their own.
Sell at a Profit (The Flip)
As you make improvements to the home, keep a running list of the items and their price. This will give you a sense of how much value you have added to the sales price since you purchased the house. Work with your real estate agent to review the improvements as well as the local market to determine a listing price that will generate interest and get you the price (and profit) you are looking for.
Of course, you may decide to hold onto the property and rent it out. In that case, you may want to refinance any fix and flip loan you took out to conventional financing.
Fix and Flip Mistakes to Avoid
It’s easy to get excited and think you can get your fix and flip done quickly. After all, the sooner you finish the sooner you enjoy the profits. Don’t fall into the trap of having an unrealistic timeline though. Be aware of the current labor shortage and be realistic about how long things will take.
Lack of Knowledge
If you are doing your first flip, lean on the professionals. Real estate agents, contractors, tradesmen, and accountants can help facilitate a smooth flip. People often think they are experts in fields they know little about. Don’t fall into this trap.
Lack of Funds
Be honest about your budget and financial readiness for a fix and flip. Always leave a cushion when crunching the numbers. You don’t want to get halfway through and run out of money. You also don’t want to overestimate profits. Better to be pleasantly surprised at the end instead of disappointed.
Lack of Skill
As previously mentioned, tradesmen such as electricians, plumbers, painters, etc. are experienced and skilled at what they do. Some DIYers are perfectly capable of doing the work themselves, but seriously assess your skills before undertaking any task.
Lack of Due Diligence
The due diligence period is a critical part of your fix and flip journey. This includes the inspection, reviewing the loan terms, and researching neighborhoods before finalizing a sale. Be diligent with your fix and flip business plan as well. The fewer surprises the better.
Finding, fixing and then flipping properties can be a rewarding experience, both personally and financially. Use these methods for finding the best properties and pay attention to the details throughout the entire process.