Flipping Houses For Beginners: 5 Areas You Will Need To Master To Be Successful
Updated: Feb 26, 2019
The model of buying a property at a discount, adding value through repairs and selling for a profit (also known as flipping houses) has gained extreme attention over the past 4-5 years. With increased attention (competition) and decreased supply, understanding the business is more vital in today's market to turn a profit than ever before.
To an outsider, the model of flipping houses may seem like a risky business.
As we do agree, there is definitely risk involved. We also believe that there are specific ways to mitigate that risk and increase your odds of successfully making a profit if proven systems and processes are followed.
Are there going to be unknowns in some of the rehabs you take on?
Sure! But there are ways to protect you and your profit from these unknowns.
Flipping houses is not about luck or speculation. There are systems and processes that need to be put in place and understood in order for you to make consistent profits at scale. In order to become successful at flipping houses, you must treat this venture as a business, as you should because it is!
You must understand the numbers, concepts, variable and systems involved with a successful flip.
By not doing your homework, educating yourself and going into a property blind, you increase the odds of losing money on every deal you take on. Prior to purchasing the property, you should have a good understanding of the profit you will make when the property sells.
In the real estate investment business, you make your money when you buy. That means going into the deal, you need to have a very good understanding of the profit you will make and how you will get from purchase to close in a very organized, systematic manner.
There is money to be made in this industry and if you understand how the game works and have patience, the money is yours to take.
By the end of this post, I want you to understand that each step of the process from purchase to close has specific steps you need to take to ensure you make a profit at the end of the day.
5 Areas Of Focus For Beginners Flipping Houses
This is where it all starts. The most difficult and important piece in any real estate investing business is marketing. The real estate investor’s ability to bring in large quantities of deeply discounted properties will determine their long term success in this industry. I am going to touch on a couple different strategies you can use to find your first deal but also want you to understand that putting together a marketing plan and executing that plan will allow you to test your efforts to determine where the most success is coming from. Within this marketing plan and execution, you need to have a systematic way to measure your marketing efforts in order to determine which mediums are having success and which aren't.
Our goal will be to bring in an abundance of highly qualified leads from specific marketing mediums that work in our local markets. (All markets will respond differently to marketing strategies).
So what strategies can we use to test for our marketing plan?
1A) Direct Mail - The most popular marketing strategy among real estate investors is direct mail. Direct mail is unsolicited mail, specifically yellow letters, post cards, business cards, professional letters sent to a targeted market through mail.
This will consist of purchasing specific lists of potential motivated sellers and sending your direct mail pieces to their homes in hopes of reaching a homeowner at a time when they are considering selling from this motivation.
Direct mail is one of your most expensive strategies but is highly recommended due to the returns on your marketing and the ability to scale this aspect of your plan.
There are several different list companies available but we recommend:
There are several different lists you can mail to and each market will respond differently. All of your direct mail should work off of one variable and that variable is equity. All of your lists should contain homeowners with 40 - 100% equity in their properties. The reason we need homeowners to have equity is because we will be looking to purchase these properties at around 65% of the ARV - repairs, so we need the room to negotiate to this price. These lists include:
60/90 Days Late on Mortgage
Tax Delinquent Properties
Before you begin a direct mail campaign, make sure you create a plan. If you are just starting out, choose one list and create a budget. Determine how you will mail these folks (yellow letters, post cards, professional letters, etc). Determine how often you will mall them (twice a month, once a month, etc)
The key to this marketing strategy is the consistency in which you mail to one specific list. You want to hit one group of people 3-7x to increase your response rate.
As you increase your mailings, test and measure, you will begin to gain a better understanding of which mail pieces and lists are performing best in your market.
Once you profit off of a deal, such as a wholesale or flip then you can begin testing different lists and strategies to find out which one works best.
1B) Inbound Marketing / Internet Presence - This is the strategy that our team is most focused on at the moment. We believe that this strategy offers the most opportunity and is the most cost effictive. There is also the least amount of competition and where the majority of motivated sellers are beginning their search.
Inbound marketing is very complex so we will not get into specifics but we want to give you a little understanding of how this strategy works. The goal of inbound is to attract, convert, close and delight your clients. To do this we will attract them through great educational content by issuing:
This content will be centered on specific keywords that our motivated sellers may be searching for.
Once we attract our motivated sellers and educate them on the solution that they are looking for, we will next want to convert these folks into our sales funnel. We will accomplish this through:
Calls to action
Now that we have attracted and converted visitors into our sales funnel, our next step will be to close them. This lead will be passed onto your acquisition department to handle and will be their job to finish the deal. We will discuss more details about this stage shortly.
1C) Newspaper Ads - Just like with anything there is a right way to market and a wrong way. When placing ads into the newspaper, you have to understand the persona that may see your ad. The majority of folks who read the newspaper are anywhere from 45- 85. So your ads will be targeting an older demographic and you need to create your ads for this specific persona.
Make sure they understand your service and that you do purchase homes but test specific verbiage in your ads. You can try creating specific ads around:
Moving out of state
To many repairs to sell
So get creative with your newspaper ads, this can be a very cost efficient way to generate quality leads.
1D) Bandit Signs - You hear it all the time that bandit signs are illegal and it is not the right way to operate your business. However, if you are just starting out and trying to come about your first deal, you should be creating bandit signs and putting them in your farm area. This is a very cost effective way to bring in leads and evaluate deals.
1E) Qualifying Homeowner - Once we begin receiving leads, we will need to qualify these leads to find out where they are in the sales cycle. From our inbound marketing strategy, we will find out certain information from how they converted but this will still not be enough. Your marketing team will be in charge of qualifying the lead and sending this lead to your acquisition team which will give them a better idea of how they need to approach the close.
For this step of the process, you need to create a specific survey or form. You will use this form to ask specific questions to the homeowner to find out:
Specifics about the property
Why they are selling
Their specific motivation
How much they owe on their mortgage
If there are any liens
If they are the owner
When they need to sell
What price they have in mind
From this information, your acquisitions department where know where they are in the sales process and if they need to set up an appointment immediately to go visit the property.
In this business, we need to be able to acquire excellent deals with large enough margins to meet your required profit. This department will be in charge of:
Offering on Deals
Meeting with homeowners
Let’s briefly go over how your acquisitions department will operate.
2A) Evaluating Deals - We get a lead from our marketing department and we need to figure out if it is a good opportunity. The first step we will take is to run a comparable market analysis to figure out what the ARV of the property is. This will allow us to determine if there is a large enough spread from their asking price and the full market value of the property. Along with determining the ARV, we will also estimate the costs of several other variables, such as:
2B) Meeting with Homeowners - We run the comparable market analysis and determine that the margins are large enough for us to go out and take a look at the property. During this time, we will introduce ourselves to the homeowner, build a relationship and initiate the first step of the due diligence process. Our goal from this meeting will be to build trust with the homeowner and get a good estimate of the repair costs on the property.
2C) Offering on Deals - Every meeting you go to, you want to bring along a completed contract to purchase. This gives you the ability to put the homeowner under contract during your meeting. Before you go into the deal, you should have a good understanding of if you are walking into a great deal or not.
Deals will also be offered on through email with homeowners and contact with real estate agents.
2D) Negotiating - Once your offer is in, your acquisition department will be in charge of the negotiation process if necessary. If the seller does not like your initial offer, your team will have a clear maximum purchase price that they will be able to negotiate to.
2E) Closing Deals - Once you finished negotiations, we need to finalize the contract. This means signing and initialing all the required paperwork. The paperwork required to be finalized will typically be:
Contract to purchase
Lead Paint Disclosure (property built before 1970)
2F) Due Diligence - This will be the last requirement of your acquisition team. You have the homeowner under contract and in your contract you gave yourself a 3-5 day inspection period. During this period you will finalize all of your numbers, tasks and ensure you did not miss anything costly.
For every step of the process that requires a walk through to determine property repairs, we ask that you bring a friend, project manager or general contractor along with you to help evaluate this aspect of the process. (Anybody with knowledge of the residential construction industry)
Without the proper financing in place to fund these deals, there will be no deal. This department will be in charge of finding funding and funding your deals. The good thing about real estate is that you can use other peoples money (OPM) to fund your deals to scale and grow. Although this will reduce your profit per deal, it will increase the number of deals you can do, thus increasing the revenue in your business. Just like with every other stage of this process, this step is not easy. You have to be smart about it and go out and get your hustle on. There are several different ways that you can fund a deal, these funding strategies are:
Private money lenders
Hard money lenders
Conventional bank lenders
Let’s briefly discuss the funding partners that you can use for any given deal.
3A) Private Money Lenders - The best source of funding for your fix and flips is by far the use of private money lenders. With that being said, this can be one of the most difficult forms of funding to obtain.
A private money lender is an individual (family, friends, and acquaintances) who will be willing to lend you money. These loans will generally be secured by a note and deed of trust for the sole purpose of funding your flip. Meaning, they will have first lien position (along with additional security) so if you fail to pay, they can foreclose and take the property. This type of funding will be based on specific relationships that you have or are able to generate.
Private money lenders will typically have the best terms to fund your deals and come with the lowest interest rates. Interest rates will typically range from 6-12% and will require 0-2 points at closing.
3B) Hard Money Lenders - Another source of funding for your real estate investments, similar to private money lending is hard money lending.
A hard money lender is typically a group of private individuals or business that lends money based on the property that you are buying rather than your credit or debt to income ratio. Typically these loans will come with a much higher interest rate and points will be charged at closing.
When dealing with hard money lenders, interest rates can be anywhere from 10-16% consisting of 2-4 points. So use these loans with caution and we do not suggest using hard money for your first deal.
3C) Conventional Bank Lenders - This source of lending is more geared towards long term buy and hold investments. It is difficult to get traditional lending on fix and flip properties since the majority of banks and lenders with not lend on properties in poor condition.
A conventional bank loan is issued from a lending institution based upon specific regulations and guidelines. These loans typically come with lower interest rates and additional points at closing. When obtaining a conventional bank loan, you will typically be putting down 25% on an investment property and will be charged 4-5% interest.
3D) Partnerships - This lending source will come in several shapes and sizes and will allow you to get creative within this one strategy. When creating partnerships you will either be looking for individuals with liquid cash, high credit or both.
A joint partnership consists of one partner either using his income or credit to obtain funding while the other partner will manage and produce the profit. This profit will typically be split 50/50 or 60/40 depending on the specific agreement.
This source of funding will cost you the most profit but will also allow you to fund both the purchase and repairs 100%
One of the most important departments in your real estate flipping business is the construction department. Your construction department will handle several important tasks and ensure that your rehabs run on budget and on schedule. Having an efficient construction department will allow you to increase your profits on every single job. In order to create an efficient construction department, specific systems will need to be implemented for specific tasks. These tasks consist of:
Scope of work
Subcontractor price comparisons/estimates
Vendor material list
In order to build an efficient construction process, you will need to have somebody on your team who has experience with residential construction and investing. This department will take time to build and you will have to learn as you go. The more projects that you complete, the more efficient your systems will become and the more contacts you will gain. So let’s discuss briefly some of the systems involved within the construction department.
4A) Scope of work - This document will begin being produced from the first meeting at the property to when the inspection period comes to a close
Your scope of work will consist of all of the tasks involved in the job. It will be a detailed list of each task with in each phase of the rehab process.
A detailed scope of work will allow you to create your material list, schedule and budget on your project. This is a very important document so be sure to take your time and work with your designated partner to get a better understanding of what your rehab will consist of.
4B) Material List - For each job you take on, you will need to create a material list. This material list will describe all of the material that you will be purchasing for the job. This will give you the opportunity to finalize your budget and get a better understanding of exactly what this project will cost you.
A material list will allow your jobs to run more efficiently because you will be able to purchase and have the material on site before the job starts. This means your contractors will not be running back and forth to the store and finish choices will not be made when the rehab is happening.
Once you have completed a couple flips, consider creating a material catalog/binder that maps out 3-4 choices of material you will use on each and every one of your flips.
4C) Budget - From your scope of work and material list for the job, you will be able to create your budget which will lay out exactly how much your project will cost. This will detail what the labor and material will be for each aspect of the rehab.
By creating a detailed budget you will ensure your profit before the project starts. Be sure to include a contingency in your budget to leave room for any change orders that may pop up throughout the process. Your contingency will depend on how severe the rehab is and how old the property is that you purchased.
4D) Schedule - We want our rehabs to run smoothly and reduce our holding costs and increase the amount properties that we can turn over.
Your schedule will lay out when each phase of your project will start and stop and give your crew a working document to work off of. This will keep everyone on the construction site on the same page and eliminate any confusion between subs.
So we found a deal, put the homeowner under contract, did our due diligence, finished our rehab and now it is time to sell the property. We have reached one of the final steps of the house flipping process.
There are two different ways you can go about selling your properties. These two ways are:
Finding a real estate agent and listing your properties
Selling your properties by yourself
The most common way to sell your properties will be to build a relationship with an investor friendly sellers agent and have them list and sell your properties. This will allow you to delegate another aspect of your business which can allow your business to operate more efficiently. Of course with this approach comes some drawbacks. Every time you sell a property using a real estate agent you will be forced to pay a minimum of 6-7%. If you have not planned for this cost upfront, these costs can eat into your profits. So if you decide to sell with a real estate agent, just make sure that you account for this cost when you purchase.
The second more uncommon way to sell your properties is by yourself. This approach will allow you to reduce or eliminate the commissions involved in the sale. However, this approach comes with its fair share of drawbacks also. If you decide to sell by yourself, you will be responsible for:
Dealing with agents
Dealing with attorneys
Showing the property
Closing the deal
We do not recommend this approach if this is your first deal. If you have a good understanding of the selling process and are a good marketer then consider this strategy.
Wrapping Up Flipping Houses for Beginners
Flipping houses can be a very lucrative business but if you do not have a plan in place, it can become costly. Before you begin flipping houses be sure to educate yourself on the process and everything that it entails. Flipping houses can become very overwhelming if you do not have the right infrastructure in place. Understand what each step of the process consists of and who you can put in those positions to make your rehab run smoothly.
We understand that this may seem like a high level overview of flipping houses however we do feel like this is the way that you need to look at your house flipping business. If you have any other questions on how to flip a house or get started in flipping house, please let us know!
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