There is a lot of money to be made in real estate and there are lots of ways to make it. While the previous statement is very true, let me also say that making money in real estate is not easy. It is very competitive and although one good real estate deal may make you an equivalent of a year’s salary at a corporate job, one bad real estate transaction may lead you to lose just as much. Real estate is risky, but what is life without risks.
There are three steps in flipping a rehab property. All of the steps have to be done right or you are not going to come out with a profit when you are finished with the real estate transaction. The Three steps are:
Find and buy the property.
Rehab the property.
Sell the property.
If the three steps above are done correctly and efficiently then you will come out with a whole lot of money when you are finished. Let’s look at the steps in detail. Also, I have included an excel spreadsheet that I use when flipping properties at the bottom of this article. Feel free to use it.
Find and Buy the Property
Personally I find this step to be the most important. There is a rule in real estate that I believe applies perfectly here. The saying goes, “You make all your money at the purchase.” There are many reasons this statement is true for flipping a rehab property. You could over pay for a house, or buy a house that is not right for rehab (too updated or too outdated).
Before you can buy a house you have to find the perfect house for your rehab. It is very important at this point to know your market. If you are in a city that has many sections of town that differ in value, I would suggest picking one section and getting to know the prices in the area. You can do this by getting yourself on a real estate agent’s MLS email list. Get comfortable with all the prices in your market.
Next you would want to find a house that is perfect for rehabbing. My advice would be to get a list from a real estate agent that lists the price per square foot of all the properties in your area. What you are looking for is the few houses that have a low price per square foot number when compared to the other houses in the area. Try to make sure the properties acreage, bedrooms, and bathrooms match up with the other houses you are comparing them to. If they have more acreage, bedrooms, or bathrooms then that is great, but if they have less then it is not a good comparison because the property would be worth more because of this fact alone. If you do find a house that seems to be comparable with some more expensive houses then you may have found a decent rehab property.
The next step would be to make sure houses like it have sold for more in the past. You can do this by using a site like www.Zillow.com, which will list the past sales of properties in the area. If Zillow is not in your area your real estate agent should be able to get you a list of properties that have been sold recently. If the property you are considering rehabbing is less than the properties on the market and less then the similar properties that sold in the past then you may have a perfect match, but there is still work to be done.
Before you buy your rehab property you must see how much work the house actually needs. Stay away from any structural work. You best bet to improve the value is something simple like a total kitchen rehab, bathroom rehab, painting, and new floors. Once you calculate how much this work is going to cost add that to the price of the property.
Next you have to add in the costs of holding the property while you rehab and sell it. Let’s set this number at six months. So you must pay six months of the mortgage, the taxes, and utilities.
Last thing before you buy. You have to add in the real estate agent’s fee to the cost of the house. By doing all this up front you minimize the risk you are taking when doing the rehab.
So let’s figure out the total cost of the property when all is said and done. Add all the totals below:
Sales price of the property.
Estimated Rehab cost of the property.
Holding Costs of the property.
Selling cost of the property. (Real Estate Agent Fee)
Now if you add all the above numbers up you will get your total cost. If you still have a number lower than the sale price of previous houses in your neighborhood take the average sales price of previous house in your neighborhood and subtract it from your total cost. This will give you your profit on the project.
Average Sales price of similar properties – Total Estimated cost of Project = Profit/Loss
If there is a loss then try another house. They all don’t work out. If the profit is high enough for you to give the rehab a go, don’t forget this will be around a six month project consuming lots of time, then give it a shot. Negotiate the price and buy the property.
Assuming you are not paying for the property in cash, when deciding on a type of mortgage the best bet is to go with something short term. I would suggest something like a three year interest only arm. That way you are locked in for the entire duration of the rehab process, but still will get some of the lowest rates available in the market.
Rehab the Property
Ok now for the fun part. It is certainly not easy to rehab a property. You most likely will spend more than you thought you would, run into problems that you did not count on, and get frustrated by constant construction delays. If you do it right however, there is a lot of money to be made and that will make it all worth it.
At this point the most important part of the flipping process, the purchase of the property, should be behind you. If you took the advice above you should have stayed away from structural damage and stuck only to cosmetic problems. The reason for this is buyers are most impressed with things like a new kitchen or bathroom and not as impressed with things like new plumbing on the bathroom or a new electrical service in the house. I would suggest not going too high end on your rehab. You do not need the most expensive cabinets, granite countertops, or marble flooring. Mid range cabinets, less expensive granite, and tile flooring are most likely going to get you more of a return for your dollar. It is important that you do not out price the houses in the neighborhood. It is ok to be in the same range as the higher end houses in the neighborhood, but you would not want your house to be the most expensive on the market when it comes time to sell it.
If you have a carpenter or contractor that you trust I would call him tell him what you want done and ask him for an estimate. It is ok if you don’t know a contractor. When I first started flipping rehabs in real estate I would go down to my local Home Depot or Lowe’s and talk to the people in the kitchen department and had them design the kitchen according to my budget. The same can work for you. Your goal here is to make the house look as presentable as possible for the least amount of money. A fresh coat of paint, updated kitchen or bath, and new flooring are all rehabbing project that should increase the value of the house more than it will cost you to do the project. Be careful not to overspend though and be patient this stage will probably take the longest time.
Sell the Property
Now that your property is looking great thanks to all of those newly updated features it is time to sell the property and finish the flip. Selling real estate is not easy and can be quite expensive. The easiest and least involved way to sell real estate is to get an agent to sell the property for you. It is also very expensive to sell real estate this way. You end up giving them 5% of your final sales price in commission. An agent’s argument would be that they can most likely get you 5% more for the property than you could get selling it yourself. Real Estate agents have many tools at their disposal to advertise your property and give your property the best chance at selling. It is very tough to keep up with the types of marketing that an agent does. If you can afford the 5% commission, then my advice would be to use a real estate agent. I am a big fan of the saying, “Work on your business, not in your business.” If you cannot afford to pay the commission then you will need to sell the property yourself. If this is your plan then my advice would be to use the fact that you are a For Sale By Owner property. Buyers like FSBO properties. They think they can get a good deal. Use it to your advantage.
Once you have sold the property sit back and celebrate, but not for too long. The next flip is out there waiting for you. Good luck!