5 Components You Need To Know To Successfully Flip A House
Flipping a house is not that difficult. I want you guys to understand that.
To create a scalable, efficient real estate investing business can be a little more difficult.
Rehabbing and selling a property can not only be fun but also very profitable. This is where having a basic understanding of how this works will help you mitigate your risk and prevent you from losing money on your first couple flips.
I suggest you get a basic understanding of a couple key components then go out and try and execute. The best way to learn about this business or any business in fact is to go and take action. The people that take action are the ones that will separate themselves and have no problem finding the single most important aspect of any flip........ GREAT DEALS
5 Most Important Components Of Your House Flipping Business
How you market and find properties in this business will determine your success. Great Deals are hard to come by but if you can produce a backlog of these great deals, you can profit in so many different ways in this industry. So without a doubt the most important aspect of flipping a house is marketing to find a great deal. This is very important when you are first starting out because it is going to give you more room to make mistakes. Making mistakes are inevitable and it is how we learn to develop certain systems in the business so we don't make these mistakes again. To have an advantage, you need to be using both outbound and inbound marketing techniques to increase the number of leads you bring into your sales funnel. Productive marketing brings more leads, which gives you a better chance to land a great deal. With a great deal you will be able to make mistakes, find funding, learn valuable lessons and still make a profit.
2) Evaluating Deals
So how do you know if you have found a great deal? You have to learn the numbers and some basic formulas. The good news is that these formulas are very basic and if you have some knowledge of basic math, you will have no problem evaluating properties. I want to touch to touch on some important terms that you will need to know to understand these formulas.
ARV (After Repair Value) - After you make the necessary repairs, this is the price you will be able to sell your home for.
Repairs Costs - How much money it is going to cost you to make the necessary repairs.
Holding Costs - During your flip you will accumulate costs along the way. These are your utility costs, insurance costs, taxes and we include commissions in this category
Profit- The best part, how much money do you want to make off of the deal.
MOP (Maximum Offer Price) - After your calculations, you will get a MOP that you can offer the home seller. This number gives you a better idea to work negotiations and ensure you will make your set out profit.
Ok, so let's go over the basic formula that we use to calculate our deals.
ARV - Repair Costs - Holding Costs - Profit = MOP
So once we find a great deal, how are we going to finance it? Here's the thing, no matter if you have tons of money or no money there are ways to purchase the home and fun
d the repair costs. If you have a great deal, it will be much easier to obtain the funds needed to start your flip. Here are a couple different ways you can go about financing your rehabs
Cash- Cash is king. If you have the necessary funds to purchase these properties in cash, you will get the best deals and keep the most profit. Obviously you will not be charged any interest on a loan and you will have leverage in negotiations because you can close much faster than if you were going through a bank.
Traditional Bank Loan - When I say traditional, I mean any type of bank loan. Conventional, FHA, 203K loans are all different bank loans you could look into to finance your property. Each will require different down payments and a degree of difficulty to obtain, since banks have tightened up their lending requirements recently.
Private Money Lenders - These lenders act like a bank to fund your projects but you will not have to take out a mortgage. They will most likely charge you high interest rates and also a couple points on top of the total loan upfront. You will be required to pay back this loan in a certain period of time (balloon payment). This is a risky option, if this is your first flip.
Hard Money Lenders - This is a quality option if you are just starting off. You will be raising money from people you may know. Whether it be your relatives, friends, lawyers, doctors or anybody else in your area with money. You can work these deals out in a couple different ways. You can treat them as hard money lenders do and let them charge an interest amount on the total amount loaned to you. You can also have them fund the total project with no interest and work out a % split on the total profit.
Finding quality contractors who are experienced working in this niche is very difficult. There are hundreds of local contractors to choose from and maybe 1% of these contractors are of high quality, fairly priced and work at a good pace. These are all qualities that you will need out of the contractors that you hire. I have found success by hiring 1 general contractor to complete about 40-60% of the scope of work and then hire some contractors to complete the other 40-60%. I suggest that you go out and find some contractors that specialize in HVAC, Plumbing and electrical work. Some areas that you should look into subbing out are driveways, windows, concrete work, refinishing hardwoods, paint and any other area your hired general contractor doesn't feel comfortable completing.
5) Scope of Work
The most important document that you create for your rehabs is the scope of work. This document will assign the construction work that needs to be completed by each contractor. You will begin creating your scope of work immediately after you sign the contract on the house. (if you can start developing the scope before you close do it - just make sure your going to close or you will be wasting your time). This scope of work will allow you to get apples to apples estimates from all of your contractors and work with the best contractors at the best prices. This will also allow you to develop a schedule to keep your rehab on track and on budget. From this scope of work, you will be able to create a material list for the project which enables you to purchase all needed material prior to work beginning. This scope of work will allow you to put together detailed contracts for each of your contractors to hold them accountable for the work that you agreed upon. So basically your scope of work controls your whole rehab. So make sure you take your time with this item.
Tip: If you can get help from your GC putting your scope of work together - do it - and learn from it
Wrapping Up Tips To Flip A House
Now you have a decent understanding of the most important aspects of a house flip. I truly believe that if you understand these 5 steps and take the time to educate yourself a little more on them then you will be able to profit off of your first flip. Flipping a house is not that difficult. Mastering the art of flipping can be. Make sure you take action, learn a little bit about how it works and then go out and try and do it. It may take some time for you to find that first Great Deal but do not give up. I promise you that all the hard work you put in will eventually pay off.
Let us know what other areas of flip you find important & what strategies you have had success with. We would love to hear!