Looking to get into the game?
Already in the space, but need to sharpen your sledgehammer?
It’s no secret: the real estate market is on fire. Fixing and flipping homes has become particularly profitable, and even famous reality TV shows are covering the subject. Of course, distressed real estate deals are increasingly hard to find, with foreclosure inventory drying up from the Great Recession, but the inventory of houses is still growing older, and in desperate need of rehabbing.
Interestingly, more home buyers are fixated by visuals rather than traditional metrics such as price-per-square-foot. That is, they are willing to pay more for value-add options—think stainless steel, smart technology, Uber access, etc.
Here, you will learn the basics of fix and flip, the more intricate parts, and most importantly, how to profit.
Step 1: Overcoming Self-Doubt
Fixing and flipping homes is an entrepreneurial endeavor. Before we go into any elaborate step, you must rid yourself of all fears, especially of failure. And this is not easy. Don’t just scroll to the next step thinking this is a trivial matter. This is a prerequisite, and not doing this will lead to certain failure.
Most people don’t get into this lucrative business, simply because they are scared of losing money, disappointing others, disappointing themselves, learning new crafts, hustling for the next deal, and more commonly, scared of the unknown. Much like a tech startup must perpetually reinvent itself, you must unremittingly overcome impediments to remain competitive. And this is your first task. You can do it.
Believe me: I’ve lent out tens of millions of dollars to flippers, and it’s not rocket science. And the uncertainty of not getting a steady paycheck can be mitigated. You can start flipping on the side until you’re ready to quit your job. I am personally more risk-tolerant. And I know the feeling; I quit my 6-figure private equity job. But the road is a much more rewarding one.
No one is ever 100% ready. In fact, nothing is usually 100% in this world, except for the amount of rehab we fund! Regardless of when you start, you will face obstacles, so why not now? Why not learn early? Everyone had to start somewhere. A child does not immediately walk from the nursery. Yet, through endless crawling and perseverance, walking, running, and eventual sprinting can be achieved.
Step 2: Get Out There
You’ll want to network as soon as possible. Start talking with people in the industry: flippers, contractors, realtors, attorneys, brokers, lenders (guys like me), and so on. You’ll want to establish strong relationships with them, so that when you have a deal, you’ll close it. You are only as strong as the weakest part of your relationship chain. Go to conferences, events, and even chamber of commerce networking groups. You are scouting for all the best players in the area. As always, feel free to reach out to me if you need a specific vendor. I’ve worked with many over the years, and happy to introduce.
Step 3: Build Your Dream Team
I understand your frustration. But if you’re feeling self-doubt, refer to Step 1, and start over. This is crunch time. Keep your eye on the prize.
Fixing and flipping is a group project. You don’t go at it alone, and building the right team will catalyze your business, and make you a reputable firm.
I would recommend first getting a competent lawyer that is familiar with the space. I’m happy to refer you someone if you aren’t sure. You’ll want to decide between business structures—S Corp, LLC, C Corp, LPs, and so on. There are huge tax implications. The money you spend here is well worth the money you’ll lose otherwise. Believe me. You will keep this legal connection for life.
Secondly, I would recommend hiring a knowledgeable accountant, if you don’t already have one. He can work in tandem with your lawyer, and tell you what expenses to deduct, etc. A good accountant will pay for himself. Same goes for insurance agent, realtor, private lender, contractor, and title companies. You will need arespectable party for each one. Again, happy to help if you reach out to me. This is a group project; so don’t think about going at this solo.
Realtors will be needed for both buying and selling properties. And you will hopefully be doing that quite a lot (volume is the name of the game in flipping).
Finally, it is absolutely crucial that you get a preferred private lender. Banks do not lend in two weeks, so unless you are swimming in cash, you will need a lender that can execute quickly. Anything else, and you will lose the deal to an all-cash buyer. I finance these properties, so be sure to reach out to me. You will find I have the most competitive products out there.
Step 4: Locate a Property
A fantastic buyer’s agent can make your business that much easier. I learned in private equity that you make your money when you buy. So if you buy high, good luck. This is why an agent that knows off-market deals is paramount to your success. Luckily, there are quite a lot of them, so I’m happy to introduce.
If you’re going on MLS and Zillow to find listings, you can rest assured everyone already saw them. This is a competitive space. There’s a reason real estate agents make a commission: they add that much more value. So don’t expect to suddenly develop underground connections for off-market listings. Get yourself a trusted agent to help you with this part. They are doing this full-time.
It’s important to note people are getting increasingly cunning in how they find deals. Whether it’s off-market, for-sale-by-owner, nearing foreclosure, short sale, or other, there are deals to be made.
Step 5: Analyze the Deal
This is where people often go wrong, but luckily for you, you’re reading this post. A property is often valued using comparable (similar) properties that have sold and are listed in the area. Then adjustments are made to the comparables to come to an appropriate value for the subject.
You are not an appraiser. I know you think a specific property is worth so and so. The fact is, there are numerous variables to a valuation. Believe me; I’ve analyzed over 8,000 properties.
A realtor can help you with doing a CMA (comparative market analysis) or BPO (broker price opinion). I would be wary about real estate agent valuations as well. This is not their job. Their job is to help buy and sell properties, not determine reasonable prices. The incentives are not aligned here.
Make sure your comparable properties are over the last 4 to 6 months. You will need to estimate the after-repair value of the property (ARV)—the value the property will be worth once it is rehabbed and sold. It is important you use conservative numbers to buffer for price drops and unexpected items.
You should bring a contractor with you when you visit the property to estimate the repairs. This way, you can gauge the profitability of the deal—since you know the purchase price, rehab money needed, and ARV.
As a rule, you should pay up to 70% of the ARV (including loans and rehab) on a deal in total. If you are doing a property for $150,000, and you expect to put $50,000 in rehab, another rule of thumb is to net out the rehab costs. That is, you need to make $250,000 net, after closing costs.
Remember, when you sell the property, you will have closing costs including taxes, realtor commissions, loan prepays, and more. You need to take these into account. Lastly, remember the time value of money principles I detail in my book. Money now is worth more than money later, since you can earn interest on it. Discount your cash flows in your calculations, including all your holding costs throughout your project. It’s a little bit too complex to cover in this post, so let me know if you have questions. I’ve even written a book on this.
Step 6: Buy It
Once you found a property that makes financial sense to fix and flip, put it under contract. It’s important to come to the table with a hard money lender, or you will lose your offer to an all-cash buyer. This is where I come in as a lender, if you decide to use me. I do, after all, have the most competitive products.
You will need to overcome the fear of purchasing a house needing rehab. In the end, that is why you are purchasing it at a discount. You did your analysis, you negotiated hardball with the seller, and now you need to execute. You are ready.
Note that various offers don’t go through. This is life. Move on and make more offers on other properties (that make financial sense, of course). Your agent, lawyer, and lender will guide you through this process. You don’t need to be experienced at closing legal docs.
Step 7: Rehab the Beast
So you finally bought this diamond in the rough, very rough. Now you need to manage the rehab, with the aid of your general contractor. This, along with the deal analysis and financial risk, is what you’re getting paid for. If you have a private lender that funds draws (like me), there will be oversight of these repairs, which is to your benefit.
Some markets may be too expensive for a contractor, depending on the size of the deal. You will then need to do it yourself. Get estimates from subcontractors like electricians, plumbers, painters, A/C specialists, and so on. Make sure that each repair you do adds more value to the ARV than the money you’re paying. Easier said than done. But try not to put more features in your home than most nearby properties.
You need to create a scope of work that details the costs, materials, tasks, and timelines for your rehab project. Stick by it throughout your project.
Step 8: Sell Your Property
So your house is now fully rehabbed. It’s time to sell.
Wait. If you rent it out, you could sell it at a cap rate to an investor. Or maybe the area warrants first-time homebuyers? You need to do your research. These are important decisions affecting what’s left. This is the gravy. This is the profit.
Selling through a broker is simply the best way to get the optimal price. I’ve seen for-sale-by-owner (FSBO) situations that turn lamentable. Market your own property as well: Zillow, MLS, Trulia, Facebook, etc. A good agent will do this for you.
Make sure to price your property correctly. Being listed too high will deter buyers altogether. Being priced correctly will bring more buyers, and potentially a bidding war. Get rid of it quickly though. The longer you hold your property, the more the holding costs, the lower your profits.
Once you’re done and sold at a profit, rinse and repeat. Your first flip is likely to be your least profitable one, but as you find ways to cut costs, the business starts raking in money.
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Written by Warren Ifergane.
To learn more about Ifergane Consulting Group, or to submit a deal for consideration, contact info@iferganeconsulting.com, or call 954.798.0726.
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