The First 7 Steps to Start Flipping Houses
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Originally Posted On: https://www.dohardmoney.com/the-first-7-steps-to-start-flipping-houses/
Flipping houses can help you build serious wealth, which is part of the reason why I love this investing strategy. But, for new real estate investors, doing that first deal can be a daunting task. I want to help! As such, I’ve put together the first seven steps to start flipping houses.
Before looking for properties, investors need to confirm a hard money lender. With financing confirmed, you reverse engineer success. That is, you build a blueprint working backwards from a successful flip to the present. Most of your time and effort flipping houses will involve finding deals.
In the rest of this article, I’ll dive into these first seven house flipping steps. Specifically, I’ll cover the following topics:
- An Overview of Flipping Houses
- Step 1: Find a Hard Money Lender
- Step 2: Create a Blueprint
- Step 3: Get the Necessary Investing Software
- Step 4: Identify Target Zip Codes and Drive
- Step 5: Call Potential Leads
- Step 6: Make and Go to Appointments
- Step 7: Put the Property Under Contract
- Final Thoughts
An Overview of Flipping Houses
Broadly speaking, flipping houses falls into four major stages: 1) find a deal, 2) close on the deal, 3) supervise the rehab, and 4) market and sell the finished property. The first seven steps will focus primarily on the “find” stage, but I want to provide a brief overview of the entire process. In working with new investors, I’ve found that people grasp house flipping processes more effectively when they see where they fit into the big picture, that is, the entire deal:
- Find a deal: During this phase, investors link up with a hard money lender and then begin the process of finding potential deals. This will primarily focus on identifying off-market properties, as opposed to ones already posted on the Multiple Listing Service, or MLS. More precisely, investors look for distressed properties that wouldn’t qualify for traditional financing. This stage concludes once you have found a suitable deal and signed a contract with the homeowner.
- Close on the deal: Going under contract with a homeowner is a critical step in the house flip process, but it doesn’t mean you’ll actually purchase that home. Once you go under contract, you need to complete the necessary due diligence before closing. This due diligence includes home inspections, confirming that your final contractor bids support your deal budget, and finalizing the hard money loan closing. This stage concludes once you’ve closed on the purchase and own the property.
- Supervise the rehab: This is the stage that most new investors are familiar with, as HGTV house flipping shows focus on the rehab work. During this supervision, you’ll monitor your GC’s progress through your scope of work. Unless you’re a licensed contractor, you won’t be swinging hammers here – you’ll make sure your GC and the associated subcontractors stay on task and schedule. Additionally, monitoring this progress will allow you to continue submitting loan draw requests to your hard money lender, a key task in any rehab. This stage concludes once the rehab is completed and you’ve received a certificate of occupancy from the local housing authority.
- Market and sell the finished property: Once you’ve received your certificate of occupancy, your renovated home will now qualify for traditional financing. As a result, you can begin marketing your home to traditional homebuyers (generally people looking to purchase a primary residence). Once you sell the property, a portion of the proceeds will go to paying off your hard money loan and any other debt, and a portion will go to paying taxes. Your remaining funds equal the profit you netted on the deal.
In the rest of this article, I’m going to focus primarily on the “find a deal” stage, as this is where you’ll pour the bulk of your time and effort into any flip deal. With that said, here are the first seven steps to start flipping houses.
Step 1: Find a Hard Money Lender
When I began flipping houses, I wasted a ton of time and money looking for properties. But, every time I found what I thought was a great deal, all the hard money lenders I talked to said they weren’t interested in it for one reason or another (e.g. location, loan size, home characteristics, etc.).
After a few rejections by lenders, I had an epiphany. Instead of finding a property then seeking lender approval, I reversed the process. I found a hard money lender, asked what sort of properties they were seeking, and I went out and found a property that fit those criteria. Then, when I brought that deal before the lender, they approved my hard money loan.
Without financing, the deal doesn’t work. Rather than look for properties, the first thing you need to do as a house flipper is confirm your hard money lender. Due to the fact that these lenders are asset-based, that is, they loan based solely on the property’s characteristics, they’ll have specific requirements for every home they finance. When you understand these requirements, you’ll guarantee that every deal you bring to your hard money lender will be approved for financing.
Step 2: Create a Blueprint
Once you’ve confirmed your hard money lender, you need to build a blueprint. Basically, this means reverse engineering your next successful deal. You need to build a plan to get from the present to successful completion of that next deal. For example, you say “I want to flip a house and make $25,000 in profit,” and you work backwards from that goal to build each step towards deal success.
At Do Hard Money, we have software that we use to complete this reverse engineering: our Next Property Roadmap. This tool helps you build the actionable steps to take you from your current goal through a successful deal. We’ll help you structure those key tasks you need to take, from phone calls to leads to seller appointments to accepted offers and ultimately successful deals.
Our software gives you a key blueprint to execute successful real estate deals. And, if you’d like a free copy of this Next Property Roadmap software, text your email address to 435-294-0433.
Step 3: Get the Necessary Investing Software
House flippers don’t need hundreds of thousands of dollars to start investing. But, they do need some money. In my experience, you’ll need between $3,000 to $5,000 to purchase the following software necessary to start successfully flipping houses.
- Zip code research software: This is the software that will help tell you “where to fish.” More precisely, you can use this software to look at both all of the potential deals in an area and, just as importantly, how many cash sales have occurred in the past. This information will focus your search areas.
- Driving software: Once you’ve identified target zip codes, you need some software to help tell you where to drive and seek properties within those areas. These driving apps (which I’ll discuss in more detail below), help you plot the most efficient routes through an area to see as many homes as possible. And, a good program will also let you add notes and access information about all of those properties.
- Skip trace software: This software, traditionally used by PIs, will help you track down contact information (cell phone, landline, and e-mail) for property owners.
- Calling software: With the above contact information, calling software will help automate reaching out to potential sellers. Most homeowners you contact will reject your offers, so the more offers you make, the better. Software can help you scale up this process.
But, it’s important to note that these won’t be costs in every deal. Once you’ve purchased this software, you can use it in every one of your future deals. Our Find-Fund-Flip System includes all this software as well as training videos, downloads, and access to funding!
Step 4: Identify Target Zip Codes and Drive
My Strategy for Where to Invest
With your software established, you can actually start driving around looking for properties that are in disrepair (i.e. ones that a traditional lender wouldn’t finance). On a national average, you’ll pass about 20 properties/hour that meet these criteria. And, after years of figuring out the best ways to find deals, I’ve settled on a tried-and-true strategy for identifying the areas with the most deal potential to get this process going.
First, I need to decide how far I’m willing to drive. This will depend somewhat on the population density in your area. For instance, if you live in a rural area, you may need to drive much farther to see potential deals than someone who lives in a busy suburb. Personally, I recommend setting 30 minutes as an ideal drive with one hour as a maximum distance. On the outer edge of that range, you’re looking at a two-hour round trip to visit an investment property – long, but not impossible.
Next, I need a map. If you’re old school, a hard-copy one works. For the more technologically savvy, Google Maps works extremely well. On the map, I plot two points: my home and my office. On weekends, I search for deals from my home, while I search from my office during the week. From both of these points, I draw two circles: my 30-minute radius and the one-hour one (NOTE: Google Maps has a good tool to build a driving distance radius). The area within these circles becomes the geography where I’m willing to invest based on drive time.
I begin with the 30-minute radius, as I see the one-hour range as more of a back-up. Personally, I’d rather drive shorter distances than longer ones, so I focus my initial attention on the smaller circle. If I can’t find any deals there – which is unlikely – I can always expand my search.
Within this circle, you’ll likely cover a variety of counties, towns, and individual zip codes. For every county that my circle touches, I break it down into a list of individual zip codes. If a zip code falls within my driving radius, it becomes a “yes” zip code, that is, an area where I’m willing to invest.
What I Look for in Target Zip Codes
However, just because a zip code meets my geographic criteria doesn’t mean it meets my investing criteria. To establish my list of actual “target zip codes,” I need to dig into some deal-related details for each of these areas.
In particular, I look for the number of cash sales that occurred in each of my geographic “yes” zip codes over the preceding year. More precisely, I look for the number of cash sales within my purchase range. For instance, I may be willing to consider deals ranging from $75,000 to $500,000, so I’ll filter my search for cash sales that have happened within that range. Back to the fishing analogy: you want to fish where the most fish are. And, the number of cash transactions in an area serves as the best indicator of the number of deals that happened in that area.
When fix & flip or BRRR investors buy homes, they take one of two paths: use a hard money loan or pay with cash. In public records, hard money loan transactions appear the same way as any financed purchase. As a result, these transactions are tough to determine in an area. On the other hand, cash sales are reflected as cash sales. Accordingly, if a zip code has a large number of cash transactions over the past year, you know there are a lot of “fish” there, that is, a ton of deals.
So, while cash sales information doesn’t tell you about total deals in an area (as it ignores deals financed with hard money loans), these numbers provide the absolute best indicator for deal potential in a given zip code. Simply put, a lot of cash deals in an area means that investors are “pulling fish out” all the time.
Once I have a list of the number of cash sales for all of the zip codes in my geographic area, I run a basic Excel sort. With a couple clicks, I rank the “yes” zip codes by cash deals, from highest to lowest. With this sorting, I can clearly visualize the number of deals. For example, the top three zip codes may have had 20, 18, and 14 cash sales over the last year, while the bottom three may have had 2, 2, and 0. Clearly, the zip codes with the most cash sales represent the best “fishing holes.” As such, these become my target zip codes, that is, the places where I’ll look to invest.
After completing these steps, I’ve clearly identified the best places to invest in real estate for me personally. Each of my target zip codes now meets all of the following criteria:
- Close proximity to my home or office
- Plenty of deals available
- Deals within my price range
Driving for Dollars
But, finding the areas to invest in is only a partial solution. Next, I need to actually find deals in those areas.
Once I’ve narrowed down my target zip codes, I absolutely love a strategy I call “driving for dollars.” Simply put, you hop in your car, drive around some neighborhoods, and identify homes that look like potential deals. You may find a distressed property or one that looks abandoned. Regardless what type of property you’re seeking, driving around for a couple hours every week will help you find plenty of opportunities. And, we’re so confident in the potential of this technique that we’ve built a Driving for Dollars app to help!
This app helps achieve two major objectives: 1) find potential deals, and 2) connect with motivated sellers. With respect to the first, the app tracks your progress through a geographic area, helping make sure you don’t miss any streets – or potential deals! Second, the app seamlessly integrates with our Investor’s Edge database of over 160 million potential deals, which gives you the ability to connect with the owners of homes you identify while driving for dollars.
More precisely, with Investor’s Edge and the Driving for Dollars app, you can market instantly to homeowners via printed postcards with pre-filled addresses or automated voicemails. This system lets you efficiently bridge the gap between a potential deal and putting a property under contract.
Step 5: Call Potential Leads
After I’ve identified potential leads and the associated contact information, I may have close to 1,000 (or more!) phone numbers. As stated, skip trace software (accessible from Investor’s Edge) may provide you three or four numbers for every property. And to find deals, you’ll need to be disciplined about calling all of them.
If you call each number individually, it could take weeks to go through your entire list. Fortunately, automated calling software assists with this process, letting you optimize your time. Bottom line, finding motivated sellers is a numbers game. Most people will reject your offers, so the more you call, the more likely you will find someone interested in selling.
Step 6: Make and Go to Appointments
Eventually, you’ll get someone on the phone willing to sell. I recommend setting a face-to-face appointment within 24 hours of that first call. The goal for these meetings is to leave with a signed sales contract in hand.
But, to get to that point, you need to do a little more preparation. First, you’ll want to use Investor’s Edge or another software to get sales comps, as this will inform your offer. More specifically, from these comps and your rough deal budget, you’ll establish a max allowable offer before the appointment, a price you know you won’t exceed. Then, you go to the appointment, establish a relationship with the homeowner, and attempt to reach an agreement.
Step 7: Put the Property Under Contract
Once you and the homeowner agree on price and other sales terms, you’ll sign a sales contract. In real estate parlance, this is referred to as “going under contract.” At this point, you’ll have a set amount of time – the due diligence period – to confirm that you do, in fact, want to proceed with the deal.
While TV shows make it seem like house flipping success depends on swinging hammers, true investors understand that the bulk of your time and effort goes into finding a good deal. Due to this importance, I highly recommend not outsourcing this search process. As investors, you’re the one – not a real estate agent – who needs to go out and find some great house flipping deals.