Beginners Guide: What do I Need to Know About Flipping Houses?
Photo from Unsplash
New real estate investors usually aren’t asking me super specific questions—they usually just want to know a few things that they should know about flipping houses!
I’m going to dive in today to address some of the more common questions/issues I come across, as well as a primer on the step-by-step for what the fix & flip process looks like.
Flipping houses is typically a high risk/high reward proposition! After all, you’re buying something very expensive, rehabbing it for tens of thousands of dollars, and then banking that you’ll be able to sell it at a profit!
It goes without saying that you can lose tens of thousands of dollars on a deal! I’ve seen it before—someone badly mismanages the rehab, they did a terrible job evaluating costs (rehab, purchase price, after-repair value), they couldn’t sell the house for several months, or perhaps they didn’t structure the deal properly.
I’m fond of saying that real estate flipping is simple, but it’s not easy. The overall idea behind it is simple, and one that we see in every industry and every sector—buy something for cheap and sell it for a higher price.
But actually executing it is complicated. Each step of the process has its own pitfalls and potential for ruining the deal. Each state has their own regulations. Each strategy you try requires different knowledge and skill-sets.
Here are some of the things that can go wrong:
- The market swings against you during the rehab after it’s too late to back out.
- The contractor finds massive issues that weren’t seen before purchasing.
- The contractor leaves the project halfway through
- The contractor nickel and dimes you for projects that weren’t line-itemed out ahead of time.
- You spend too much earnest money and then don’t structure the contract so you can get it back if you pull out of the deal
You Can Flip in Any Market (As Long as There’s Movement)
People ask me all the time:
“Should I only flip in a buyer’s market when prices are lower?”
You can be massively successful, no matter what the market is doing. The ONLY thing that is death for flipping houses is when there’s no movement. Think the early days of COVID, or in a rural area where the market isn’t exactly on fire (or no one lives close enough to price out comps).
Here’s the thing…
In a seller’s market, the purchase price might be a little higher, but then you can sell it for more on the back end.
In a buyer’s market, the purchase price will be lower, but then you sell it for lower.
It all washes out in the end.
Of course, there’s always the risk that the market flips from a buyer’s market to a seller’s market, but it has to be a dramatic shift in a short amount of time for it to cause an otherwise profitable deal to lose money. It’s not something you can predict or control, so don’t worry about it.
You Don’t Need to Use Your Own Money
I believe strongly that anyone should have a chance at financial freedom if they’re willing to work for it.
They shouldn’t have to already be rich…
They shouldn’t need great credit…
You shouldn’t already have to be a successful flipper to get a loan…
These are all things I see in the industry, and it frustrates me. That’s why I built my company—to do something about those barriers to entry for new investors.
But enough of a rant…just know that there ARE ways to get started with little money!
One caveat is that I do recommend you have about $5,000 ready in case of emergencies—but even then, you can hopefully get a line of credit or some type of loan.
I just don’t want you to think that you need $20k minimum to get started.
I wrote an entire guide to the 16 Ways to Get 100% Financing… or in other words, how to put together deals that don’t require you to open your wallet!
Credit Score is Less Important
In general when you’re looking to secure funding for a flip, you’re going to look at hard money lending. All this means is that the lender cares more about the profitability of the deal than they do about your credit score or the LTV (loan to value ratio).
Because a traditional bank expects you to pay back a mortgage over 30 years, they want borrowers who are extremely likely to be able to make their monthly payments.
A hard money lender doesn’t care. It’s a 6-month loan, and the decision to loan is based more on the purchase, rehab, and loan costs versus the likely sales value of the home after the rehab. Now, if you’re a higher risk borrower, hard money lenders may turn you away, but often they’ll just raise the rates to cover the increased risk.
For example, Do Hard Money doesn’t even pull credit until a few days before funding. This is to finalize what exactly the interest rate is going to be. At this point, the difference in interest rate doesn’t make or break the deal.
Sometimes You Need Experience to Get a Loan…and Sometimes You Don’t
Here’s another frustration I have with the hard money lending industry as a whole:
Often times, they’ll only lend to people who have at least 1-2 successful flips already done! I think that’s ridiculous. I love being able to help new people get their start. I had someone who helped me at the beginning, and without him, I probably wouldn’t be where I’m at.
For hard money lenders with that requirement, it means that you’ll have to somehow find funding another way—either with a private source of money (like family or friend), or latch onto someone else able to get funding for the deal. So there are ways around it, but I still don’t like that requirement.
To help brand new investors, I’ve created hundreds of videos, downloadable resources, and software to make everything as easy as possible. My opinion is that you don’t need experience because we have it.
You Don’t Need Much Earnest Money
Here’s another important thing that you should know about flipping houses…you don’t need tons of earnest money!
I see investors get caught up at this step all the time. In my experience, a new investor will need to place 25-100 offers in order to get that first deal. So how is this possible if you’re putting down $2k-$5k in earnest money for every offer?
This has been heavily on my mind as I’ve seen would-be borrowers lose thousand of dollars multiple times after backing out of a deal. This should never happen. I’ve never lost earnest money in the 20 years I’ve been doing this.
Just to keep things simple, I put down only a few hundred dollars (for off-market deals, which most of mine are, and yours should be). If it’s a house listed on the MLS, you may need to do more.
But I always structure my contracts so that earnest money will be deposited in their account 3 days after they accept my offer! Before that, it sits in escrow and I provide proof to the sellers.
That way, I can get away with not having to put any money down until I know I’m going to close on the property, and I can place multiple offers at a time using the same money. This is one of the secrets that new investors don’t realize.
You can also watch my entire training on how to place multiple offers and not lose your earnest money!
Pick Your Strategy
Now let’s hop into deciding which way to go and then how to get started! Hopefully after this section, you’ll have a good understanding of which way is the right way to go for you.
- Fix & Flip
What is It – You’re going to buy an undervalued property, likely from a motivated seller who has a property in need of repairs. Then, you rehab the property until it’s in similar condition to other properties in the neighborhood!
At this point, it’s time to resell your property and hopefully make a chunk of profit. As an example, our borrowers average $33,578 per deal!
Level of Difficulty – Medium to High. Any time you buy a property and have to undergo a rehab process, there’s greater potential for issues. The biggest surprises come from unforeseen rehab setback, either underlying issues with the house or the contractor doesn’t do his part.
Use This Strategy If: You are committed, you are someone who pushes through obstacles no matter what, and you either know your stuff or have a mentor to help you. While you don’t need a ton of cash to get started, it certainly makes it easier.
What is it: You’re going to go find deals as if you were planning to fix & flip it. You run your numbers with estimated rehab costs and after-repair value, and figure out how much profit you would make if you were to flip the property yourself.
But then you assign (or sell) the contract to another fix & flipper for a finder’s fee! You’ll often make $2,500-$10,000 for finding the deal.
Level of Difficulty: Low-ish. This isn’t the easiest strategy (that would be bird-dogging) but it’s much simpler than either fix & flips or BRRR deals. You won’t need to use any money—except anything you pay for marketing—and you won’t have to manage a rehab, your loan, deadlines, a contractor, etc.
Use This Strategy If: You’re just getting started. While I know people who do millions per year wholesaling, it’s typically considered more of a starting point to gain some capital and use that as an entry into other strategies. They’re fast and there are fewer headaches…so if that sounds good, this strategy is for you.
What is it: Buy, Rehab, Rent, Refinance. The first two steps are exactly like a fix & flip property, except that you might do slightly different area research as you’re more interested in the long-term viability of a rental vs selling a property. However, usually if it’s a good deal for one strategy, it’s good for the other.
But instead of selling the property, you’re going to find a renter, and then refinance the property into a regular 30-year loan! It’s the ultimate in buy & hold strategies, because you were able to rehab the property and therefore charge much more rent on the back end for a nicer place.
Difficulty Level: High. You do all the hard parts of a fix & flip, but then you have to find a renter (takes time if you do it right) and then you need to refinance your loan. That last step can be trickier than it sounds because many lenders don’t like to lend on these types of deals, and they usually want to see people with experience as a rental owner before refinancing.
We have partners that can help refinance even if you don’t have experience, so that’s always an option for you.
Use This Strategy If: You have experience and are looking to add passive cash flow to your portfolio. I LOVE this strategy as I own many rental properties. There’s nothing to stabilize your future more than monthly cash flow.
- Bird Dogging
What is it: It’s similar to wholesaling, except you do even less. Basically, you just pass leads on to a real estate investor! However, you don’t get paid unless the real estate investor actually puts the property under contract. At that point, you’ll usually make $500 or so.
Difficulty Level: Easy. You don’t have to put down offers or make any contracts. You’re just passing along leads.
Use This Strategy If: You’re brand new or are doing this very part time. For a newbie, it’s much less intimidating to get started with bird-dogging. This way you can get to know the market and the industry without too much risk. Some of the best bird-dogs are people who are in an adjacent industry, such as REO agents, probate attorneys, roof repair or construction workers, etc. It’s not a requirement though.
Moving Through a Fix & Flip
So, you’re asking about what you need to know about flipping houses….
Let’s run through the steps of a fix & flip because they’re the sexiest way for investors to make good money.
I’ll give a brief overview of each step, and send you in the direction of more resources if possible!
Get Funding Ready to Go
When you’re buying a house, you typically go get pre-approved before you start looking seriously at houses, right? That way you know how much you’re approved for.
It’s similar with fix & flips. You need a better idea of what your costs with the lender are going to be, how much they’re willing to lend, and if they have any prerequisites that exclude you—such as a criminal past, bankruptcy, never done a deal before, low credit score, etc.
You can always try to go the private lender route (where it’s basically just an individual willing to lend you money), but the more common route of hard money lenders will usually have a few set-in-stone requirements like that.
You can read more about hard money vs conventional lending here!
This is the real first step that trips up almost everyone! It’s hard to find deals when you’re new to this.
- You might not have the money to mass market
- You don’t have the knowledge/experience
- You don’t have the software that big-time investors use
- You don’t have the confidence (maybe)
- You don’t realize how many offers you need to make to close a deal
In other words…it’s tough. You might luck into a deal that a friend brings to you, but to make this thing work, you need a repeatable way to find deals over and over again.
First, let’s talk about what kinds of properties you need to look for.
In order to have enough margin on a deal to turn a profit, you need discounted properties. How do you find discounted properties?
Here’s the secret:
Discount = Motivation + Equity
Equity – This is the difference between what a property is worth and what the property owner owes on the property. If it could sell right now for $300k and they owe $100k, they have $200k in equity!
Equity is essential to finding good deals, because you need to offer a discount. If the property is worth $300k but they still owe $290k, they’re not going to take a discount. They’d still owe money on a property that they no longer live in. I try to shoot for properties with a minimum of $50k in equity, but $100k+ is ideal.
Motivation – In order for someone to be interested in taking a discount, there has to be a reason, right? People don’t just routinely accept offers for $100k under market value because they feel like it.
Here are a few examples of motivation:
- A father dies, and his 3 kids want to sell the property and split the inheritance
- An elderly widow is moving into a nursing home soon, but the house is in too bad of shape to sell as is.
And tons more. There are many, many reasons people want to sell properties.
Here are two articles that will help you with this:
Market to Those Sellers
Next, it’s time to market to them. Here are a few of my favorite ways:
Door-Knocking – I do what I call a “5-around.” If the owner of a property doesn’t answer, I’ll knock the door on either side, and then the three across the street.
Cold-Calling – Sure it’s scary…but it’s also my favorite strategy for many situations, such as when I drive past a vacant property or see a For Sale By Owner sign. Sometimes you just have to pick up the phone and call someone.
Postcards – Has been my go-to strategy for much of the past 20 years. They’re easy, they produce predictable results, and they’re not terribly expensive.
Ringless Voicemail – A newer strategy I’ve started using to great effect. It’s a broadcast that can go out to many people, but it doesn’t ring their phone. It just leaves a voicemail. It’s less obtrusive than a call, and this way I’m only talking to people interested enough to call me back.
The reason you’re going to pull comps is to try to nail down what the after-repair value of your home is going to be…or in other words, what you’ll be able to sell your home for.
This is the linchpin of fix & flips. If you can’t get this number right, you’ll either never find deals good enough, or you’ll get into bad deals with little to no profit.
Here’s a post about How to Do a Competitive Market Analysis.
Your first rehab estimate! Put simply, you just need a ballpark figure at this point. You just want to know if it’s worth placing an offer.
Here’s a comprehensive post about How to Estimate Rehab.
Next, you’ll actually be putting an offer on the property. This is a formal agreement where you’re going to say how much you’re willing to pay for the property.
This is an important measuring stick for your success. If you want to know how successful you’re going to be, don’t ask how many postcards you’re sending, or how many you’ve talked to on the phone, or how many hours you spent doing XYZ.
Ask yourself how many offers you’re placing.
Nail Down Rehab
Once your offer’s been accepted, it’s time to go to work getting that rehab budget squared away.
You’re going to walk around with a contractor and get him to tell you every project that needs to be done and how much each one individually is going to cost.
Do not settle for a single bid for the entire house. That’s led to more failed deals than almost any other hiccup in the process.
Submit Loan Application
If you’re working with a hard money lender, which I’m going to assume you are, this step is pretty self-explanatory.
Simply fill out an application and they’ll help you with the next steps.
Different lenders have different processes and call it different things. So I can only really explain to you what we do with our borrowers.
First, we do a Desktop Evaluation. One of my in-house experts will do a virtual assessment of the property using pictures of the property, researching nearby comparable properties, and taking a look around the neighborhood (Google Earth is amazing).
If everything looks good and matches closely to the numbers you used in your application, we send out two independent, local evaluators to further confirm the value of the property. If the numbers match up with our Desktop Evaluation, we can move forward with the deal.
Now, there are a few other (tedious) steps along the process, but your hard money lender will guide you through those. I’m taking you through the bigger beats in the process.
At this point, everything looks good on your evaluations and you can get funding for the property! Yay!
Manage Your Contractor During the Rehab
Another big mistake for new investors:
Assuming that your contractor can be left alone to do the work! That’s a huge mistake.
I’ve seen it time and time again:
- Contractors leaving projects unfinished
- Contractors nickel and diming you for every project
- Changes to the rehab plan without your authorization
- Not caring about your deadlines
- Not starting on the project until months after
And so much more. I’ve seen it all.
Managing a contractor is an underestimated part of the project, which is why I wrote a massive post explaining all the ins and outs of how I manage my contractors! Check it out—it’s essential reading for investors.
Sell Your Property Fast for Profit
Did you know that it costs roughly $50 per day to hold onto an investment property?
You have to pay:
- Property taxes
- Interest on loan
- Deadline extensions
Some investors try to hold onto their properties, waiting for an amazing price to come in. This is the wrong strategy!
I like to say:
“First profit is best profit.”
Obviously if you’re expecting to make $50k, don’t take an offer that gives you $10k (unless there are extenuating circumstances). But you might want to accept an offer that gives you $42k profit because it’s still good profit, you avoid holding costs, and you can move onto your next deal faster.
Do it Again!
And last, it’s time to move onto your next project!
If you’re interested in scaling your business and achieving true financial freedom, you can read more about that here!
Thanks for reading…and good luck!