5 Tips To Flip A House: The Ultimate Guide
Updated: Feb 26, 2019
Are you looking to earn some extra money? Have been hearing a lot about the real estate industry? Or maybe you just want to flip a house because you have seen the TV shows. Whatever the reason may be, I congratulate you for making the decision to begin learning more about the industry.
A lot of new investors have a skewed perception of what it really takes to earn a consistent profit in this business. There several different systems and processes that need to be implemented in order to operate a business that generates consistent profits. Within the process as a whole, there are several variables on the acquisition, rehab and sell that can profit erosion, diluting your profit.
When first starting out, we do not expect you to have all of these systems and process in place but you can have an understanding and a plan. The systems and processes will be created and iterated off of throughout the life of your business. The more projects you complete, the more streamlined your business will become if you are aware of the deficiencies and make the proper adjustments.
Your operation will consist of several key components that systems and processes will have to be built around in order to scale and grow (if that is your goal). Your goals will determine the complexity of your operation. If you only want to Rehab and Sell 1 property a year to make an additional $25,000, your hobby will look much different (with the same fundamentals).
We will not touch on all of these components, area of focus are:
Market Research / Property Criteria
Marketing - Finding discounted properties
Acquisitions - Ability to negotiation and put properties under contract to fit your profit requirements
Construction - Systems to manage and streamline the rehab process
Accounting - Systems to track all costs associated with a project
Financing - Ability to raise capital to fund the purchase and repairs, use your own capital, use other creative mediums or a combination of all three
5 Tips To Flip A House
1) Market Research / Property Criteria
A big decision that you will have to make before you start your house flipping business is where you will invest. Many investors refer to this targeted area as your “farm area”. When first starting out, recommend that you choose a smaller targeted area. This targeted area can be anywhere from the neighborhood you live in, to 1-3 zip codes.
Even though choosing a targeted area can seem overwhelming, it should be one of the easier decisions that you make. No matter what market you invest in, you will have motivated sellers. Some areas will have more competition that others but if you execute your strategy, you will still find success.
Market Research
When it comes to your initial market analysis, you should always start with the area you are most familiar with. If you have lived in the same town/city for several years, you probably have a good idea of the makeup of these areas. This will help you determine which locations are high crime risks, which areas are higher priced and which areas tend to hold their prices.
Investing in your own local market offers several other benefits as well. Once you begin your rehabs, you will find it very convenient to only have to drive a couple miles down the road to look at properties you want to acquire, run your due diligence, check on renovations as well as keeping an eye on the property when it is listed for sale. As you can imagine all of these tasks become much more complicated, the farther you get away from the investment property.
As stated, this is the best place to start your analysis and test your marketing. If after your analysis and testing, you determine that your local market may not be the most profitable real estate investing hub, you can begin analyzing and testing a different targeted area. I do want to reiterate, there are always deals to be found, no matter your specific location. The strategies that you will learn in this book will help you assemble a plan to execute to find success, no matter the market.
One of the key members of your team, your real estate agent/broker will be offer some valuable information on this topic. They should be able to answer a lot of the questions that you have to help you determine if your local market is a profitable market to flip houses. Still, take this with a grain of salt because if the real estate agent is only used to clients purchasing off of the MLS, then they may say it is tough to find deals. You will learn that in this business, you make your profit when you buy and we will be buying where there is less competition.. off the market!
Here are some of the key points/ concepts to consider when analyzing your market
1) Target Area Real Estate Supply
Your monthly real estate supply is common verbiage among real estate professionals. This essentially means how long it will take a property that is currently listed to sell given the current rate of sales in your area. If the monthly supply is high, this means that sales are slow, and it is taking several months for a property to sell in the current market. This is commonly referred to as a “buyers’ market”. Essentially if the number of months of supply is large, you will have a market that has more sellers than buyers, thus giving buyers more houses to choose from. On the opposite side of the spectrum, if the number of months of supply is small, you will have a market that has more buyers than sellers, giving buyers less houses to choose from. This is commonly referred to as a “sellers’ market”. This principle follows the guidelines of simple supply and demand concepts.
Since we are house flippers, we primarily want to be working in a seller’s market. This means that there will be much more demand for the properties that we renovate. Remember, you are renovating these properties, so you will have the leg up on a lot of your competition (other houses on the market) when it comes time to sell, no matter if you are in a buyers’ market or a sellers’ market.
ACTION STEPS:
If you do not have access to the MLS, you can utilize sites like Zillow, Trulia, Realtor etc. Let's take Zillow for example.
a) go to www.zillow.com
b) We want to find out the total number of listings for a specific zip code.
c) Type the zip code in the search box, and click only listings for sale.
· Zip Code = 11111| Total Houses for Sale = 73
d) Determine how many houses were sold in the past 30 days
e) Change for Sale Listings to Recently Sold Listings
f) Click More - Move to Sold in last 30 Days
· Zip Code = 11111 | Total Houses Sold in Last 30 Days = 8
g) Divide the total number of houses with active listings by number of houses sold in last 30 days
· For Sale = 73
· Sold Past 30 Days = 8
· Month Supply = 9.125
2) Number of Active Investors in Your Area
In any business, you must know and study your competition. Your competition will tell you a lot about the opportunity in the specific area that you are researching. By discovering your competition and determining your success, you will feel more comfortable that the location you are researching can be a potential targeted area for your investments.
This is just one of the tools that you will be using to determine if the targeted area that you are researching offers opportunity. Do not get discouraged if you only find a small pool of investors that are working in this specific area. You need to use some of the other metrics, so you can cross-reference your data to make a final decision.
A quick google search of “We Buy Houses + Targeted City” will give you a good idea of local investors who are marketing to distressed home owners in your area. There are always going to be a hand full of investors who are not actively marketing to purchase off market deals, but count on having relationships with agents and purchasing off the MLS as there only stream of potential rehabs.
ACTION STEPS:
1) Create an excel document with columns labeled: Company Name, Owner, Address, Website, Email Address, Phone Number, Facebook Page
2) Do a google search for “We Buy Houses + Targeted City” or “Real Estate Investors + Targeted City”
3) Fill in all of the information on your excel document for the competition in your area
3) Does Your Targeted Area Have the Necessary Information
One of the biggest hurdles I have discovered is that the area you are looking to invest in does not have the information you need to successfully market to distressed home owners. To be successful in finding off market deals, we have to make sure our the list sources (which we will elaborate on later) have a good number of counts for the lists we are looking to market too. In some smaller cities, this information may be less prevalent. If this is the case, it will be much harder for you to scale within this local city you are researching.
4) How Much Are Homes Selling For
In order to understand if you have a great deal on your hands, you must be familiar with the market resale value for homes in your targeted area. To further break this down, we want you to understand what style, size, bedrooms and baths are the most desired in your targeted area. This will help to quickly determine an estimated purchase price that you need to be around when buying at a discount. Also, as we get into the financing aspect of this book, you will learn that you will typically still need to have liquid cash to flip houses (real no money down deals are hard to come by).
2) Marketing Plan / Strategy
The success of any real estate investor will lie on his ability to get deeply discounted deals off market. Now I am not saying that you will not be able to find a property to flip through a real estate agent on the MLS (foreclosure | REO's) but these avenues are very saturated, competition is very high and deals that fit your model may be hard to come by. I am going to touch on several different marketing techniques, both that can give you an immediate deal and some that will take longer but will benefit your investment career for years to come.
1) Outbound Marketing - is the traditional form of marketing where a company initiates the conversation and sends its message out to an audience. This has been the standard and typical forms of marketing within business for year.
Outbound marketing techniques consist of:
Direct Mail
Bandit Signs
Brochures/Fliers
Television Ads
Radio Ads
Billboards
Newspaper ads
Magazine Ads
Cold Calling
Door Knocking
These marketing avenues are a great way to get immediate leads, brand exposure and an understanding of your market and buyers persona. Your marketing plan will consist of both Outbound strategies & Inbound strategies (to be discussed next) to allow you to fill your pipeline to meet your revenue and profit goals.
Creating A Marketing Budget
Before we begin marketing to our motivated sellers, we first must come up with a plan and a marketing budget. It happens a lot and I am sure you guys know what I am talking about. You jump right into some marketing medium, you lose your ass and then you are out of the game. Without new leads and leads to follow up with, we have no business. So, we must develop a strategy before putting our hard-earned money to use.
First, let’s start with our marketing budget. How much money we should use to market to meet our goals. The marketing budget/spend for your specific business will depend on the current activity in your business (how much profit you are generating or if you’re just getting started). A simple, short cut tool that some marketers work from is creating your marketing budget off a % of your total gross revenue. For example, if your company generated $100,000 in gross revenue, you will want to spend anywhere from 7-9% of this amount on marketing (for the year). To find out your monthly spend, you would simply divide this amount ($7,000 - $9,000 by 12) or ($583 - $750) per month.
This is a good rule of thumb for an experienced marketer who has a couple of years of business revenue to work from. However, when you are first starting out, we are not lucky enough to have that information. But don’t get worried, we have a strategy for you as well to implement to give yourself a budget to market.
Let's get a more detailed look at creating a marketing budget. When it comes to creating our budget, we will work backward from our goals and figure out our numbers to help produce a budget to work from. Here are some of the questions that we will answer to help determine the numbers we need to calculate a budget.
A) What is your average profit per deal?
We need to know on average how much money we are going to make on each one of our deals. If we are a flipping houses, you need to know that you are going to make $20,000 on average per deal. If you are just starting off, study your market, make some phone calls and find out what your competition is making per deal or make a reasonable forecast as to the profit you will expect per deal from any analysis you may have ran on previous properties. Once you determine this number, move on to the next step, but make sure you put some effort into this first step and try to be as accurate as possible.
B) Average # of leads before you close a deal?
How many leads do you need to generate before you put a property under contract? If you have not been tracking your marketing mediums, this number will be difficult to arrive at. Also, each one of your marketing mediums will have different outcomes, so take that into
account. Calculate this number for inbound mediums and outbound mediums. You can then assign a budget for each medium you use. This is a difficult number to forecast, so if you are just starting out we recommend, using three different numbers; 15, 20 & 25. As you begin marketing and completing deals, revisit this section to put together an accurate number for this step.
Example) You send out 1,000 postcards, you get 25 calls and out of those 25 calls you close 1 deal. That would mean for your direct mail medium, it takes you 25 leads to get 1 closed deal.
C) What is your conversion rate?
Let’s just keep it simple and work off our past example. For our direct mail medium, we sent out 1,000 postcards. From those 1,000 postcards, we produced 25 leads and from these 25 leads we produced 1 closed deal. Our conversation rate is 2.5%
For our inbound efforts, how many site visitors does it take to produce a closed deal. On average we attract 100 visitors to our site monthly. From these 100 visitors, we get 15 people to fill out a form to sell their house. From these 15 leads, we close 1 deal. Our conversation rate for this medium is 15%.
D) Determining Your Cost Per Lead
To finalize our marketing budget, we have to know how much it costs us to bring a lead into our funnel for each one of marketing mediums. Let’s stick with our direct mail example from above. It costs us $1.00 to send out a postcard to a motivated seller. We send out 1,000 postcards, costing us $1,000 dollars. From this campaign, we produced 25 leads. For this specific campaign it costs us $40 dollars to acquire a lead.
Here is a working example of assembling a marketing budget
In the current market, we are averaging $20,000 of profit per flip.
When we close on a project, it is safe to assume that we will collect on average $20,000 of profit after we rehab and sell the property.
From tracking our marketing, we understand that it takes us 25 (direct mail) leads to close on (1) deal
We now know that we need to generate 25 leads from our direct mail campaign to make $20,000 of profit
Conversation Rate: We send out 1,000 postcards, we get 25 leads. Our conversation rate is 2.5%
Mailing Costs: Each postcard that we send out is going to cost us $1 (postage and delivery)
Goal: You set a goal that you want to make $200,000 in profit for your house flipping business this year
For this example, let’s assume that direct mail is the only marketing medium we will use to reach our goal of $200,000 in profit for this given year.
From all the above information, let’s determine our marketing budget to make our $200,000 in profit.
1) Number of Properties We Need to Buy & Sell That Year: $200,000 (Annual Profit) / $20,000 (Profit Per Deal) = 10 Properties
2) Since we have to buy and sell these properties, we are going to base our acquisition year off of 8 months. This will give us the extra 4 months to account for the selling process. We want to determine how many properties we will have to purchase in these 8 months to reach our $200,000 annual profit goal: 1.25 Properties Per Month
3) Number of Mailers Per Month to Acquire 1.25 Properties: From our data it takes us 1,000 mailers to produce 25 leads to close 1 deal: 1,000 (mailers) x 1.25 (Properties Per Month) = 1,250 Mailers Per Month
4) Cost Per Mailer: We determined that it costs us $1.00 to send out a direct mailer postcard : $1.00 (Cost Per Mailer) x 1,250 (Mailers Per Month To Produce A Deal) = $1,250 (Cost Per Mailer Each Month)
Direct Mail Budget to Produce $200,000 in Profit in This Market: $1,250 (Cost Per Mailer Each Month) x 8 (Total Months of Acquisition) = $10,000
To produce $200,000 in profit this year to reach your goal, you will have to spend $10,000 in direct mail. Seems, like a pretty fair-trade right.
Use this example as a tool to work from when creating your own marketing budget. If you are using multiple marketing mediums to reach your goals, run through this same process for each of your goals.
ACTION STEPS
1) Determine your marketing budget (use the example above to help create a starting point)
2) Contact list providers to get a count for the following lists:
Tax Delinquent
Absentee Homeowners
Vacant
90+ Days Late on Mortgage
Code Violations
Bankruptcy
Probate
High Equity Lists
Evictions
Divorce
Yard Sales
Arrest Records
3) Determine which lists you are going to mail too and how many mailers you will send out
4) Create a CallRail account
5) Create phone numbers within CallRail for all the different mailing lists that you are going to mail to.
6) Create A Podio Premium account to gain access to both Podio & Globiflow
(Our Podio automated system will be accessible to all people who purchase)
7) Determine your mailing schedule (every 30 days, every 3 weeks, etc)
8) Determine the marketing pieces you will send out, for which campaigns and in which order
(Example, Vacant Campaign #1 – Postcards, Vacant Campaign #2 – Yellow Letter, etc)
9) Create your marketing message for each mailing
10) Determine who you will use for your Direct Mail Services (creati