Ultimate Guide to Fix and Flipping Homes
A fix and flip is when an investor buys an undervalued or distressed property, makes improvements to the property then sells it for a profit.
The truth is some fix and flippers do better than others depending on numerous factors such as:
- What market they are in
- How much of a discount they can acquire the property for
- How well they can execute renovations
This comprehensive guide covers everything you need to execute a successful fix and flip.
ROI: What You Can Expect to Make
- The gross profit on a typical flip nationwide in the first quarter of 2020 was $62,300 with a 36.7% ROI (Source)
- ARV stands for “after repair value” and is the primary metric to maximize your ROI (Source)
Keys to Earning a Great ROI
The 70% Rule
A fix and flips’ ROI comes down to ARV which stands for after repair value. This is calculated with the following formula:
70% ARV MINUS estimated repair costs EQUALS initial purchase price.
This provides an investor with a 30% profit margin after renovations.
It also protects the investment in case of any unforeseen project costs or a sudden change in the real estate market.
Know Your Market
A savvy investor will understand local market trends.
Understanding local market data and your target buyers’ preferences can inform purchase, renovation and selling decisions and strongly correlates to a great ROI.
Finding an undervalued property is the crucial first step in helping you achieve a large profit on your fix and flip.
An integral part of this search is understanding what your target home buyer is looking for and how that aligns with the local market possibilities.
For example: Homes with 3 bedrooms, rather than 2, may sell for 30 to 40k more in your local market.
Having data like this will give you valuable information and confidence in your investment project success.
Selecting Great Value Renovations
Typically you want to make 3 kinds of renovations:
- High value/low cost renovations like a fresh coat of paint or making the entry way look better
- Absolutely necessary repairs
- Renovations that may not have the highest ROI, but will sell the property faster
Tip: Avoid renovations that might seem good on the surface but have a limited pool of buyers and select ones that either increase value or are known to sell a property more quickly.
Time on Market
Every day your property sits on the market, your profits are being cut into and may even prevent you from starting your next project.
So finding the optimal sales price is important to maximizing profit.
Consider staging your property.
Furnishing an uninhabited home allows potential buyers to see the space in a more livable way.
Staging a home can increase the sales price as well as decrease the amount of time the home spends on the market.
How to Find Undervalued Properties
There are numerous strategies to discover undervalued and distressed properties.
It’s best to zero in on a specific geographical area.
The use one or a combination of the following strategies to optimize for success.
Driving for Dollars
Driving or walking around a neighborhood is a great tactic for finding undervalued and distressed properties.
Typically you want to select homes that have not been maintained, are boarded up or are clearly vacant.
After identifying a few properties via exploring a neighborhood, it’s important to conduct further research such as figuring out who the owner is, when the property was last purchased and if the property is in foreclosure.
This information can reveal strong indicators of how serious a home owner is about selling their respective property and may give you an advantage when it comes to negotiating the price.
Searching the MLS
The majority of real estate transactions occur through the MLS.
While you may not find a surplus of discounted homes there, they do exist.
Undervalued homes listed on the MLS typically sell quickly, so it is best to scan the site on a daily basis and to have your financing in order to be able to close quickly when you find a great deal.
Bank-owned properties, otherwise known as real estate owned ****(REO), represent a notable portion of the housing market.
Larger banks have a designated section on their website dedicated to selling REOs.
These properties are generally sold “as is” and can have major structure flaws.
This makes it absolutely necessary to do your due diligence when buying this type of property.
These deals can take a few weeks to close because dealing with banks comes with lots of red tape.
Sometimes multiple people or departments must approve the sale price and often times the buyer will receive a counter offer which can make the process even longer.
Foreclosure Listing Services
All properties on HomePath are owned by Fannie Mae and are acquired through foreclosure.
Fannie Mae offers a renovation mortgage to home buyers which covers both the purchase and the property rehab.
Freddie Mac uses HomeSteps to sell the foreclosure properties they own.
HomeSteps “Good Neighbor Practices**,**” ensure their properties are clean, lawn is properly maintained and the home is secured.
Brokers & Wholesalers
Building strong relationships with both real estate brokers and wholesalers can give a real estate investor the inside track on good deals in a desired area.
Real Estate Brokers
Real estate brokers often have pocket listings not seen on the MLS.
If you have a strong connection with a savvy broker you might be the first person they call when there is a great deal to be had.
Wholesalers are experts at finding distressed properties with motivated sellers.
They call home owners with tax liens on their properties who oftentimes can’t afford to continue owning the property.
These wholesalers are actively looking for more buyers to add to their network and you can usually find them in Facebook Groups.
What to Look Out for When Renovating a Property
- Not all renovations are created equally
- Some renovations will be below 100% ROI, but help to sell the property quicker resulting in better overall ROI
- Understanding what the home buyer in a particular market is looking for is key to selecting great value renovations
- What you choose to renovate and what you choose to leave alone will have a giant impact on your ROI
Sell a Home Quicker with These 4 Renovations
There is nothing that turns off home buyers quicker than an outdated kitchen.
At the very least you should repaint the kitchen cabinets, replace fixtures and add some nice counter tops to make the kitchen pop.
Bathrooms are a great way to get big bang for your buck on renovations.
Whether it be taking dead space and adding a bathroom or renovating existing ones, it’s well known home buyers appreciate a comfortable bathroom.
A fresh coat of paint can make a home look new again and can be a DIY project, making it cost effective with a high ROI.
The exterior of a home is where the buyer will have their first impression.
Make sure it looks nice and consider making minor improvements like a fresh coat of paint, upgrading the entry way and improving the overall look and feel of the landscaping.
Common Renovation Mistakes to Avoid
- Choosing the wrong colors When painting or adding features it‘s best to choose a neutral color palette. Getting too fancy with colors might turn off some buyers.
- Overdoing the landscaping When landscaping it‘s best to keep it simple, avoid expensive luxury features like fountains, and focus on basic low maintenance low cost plants and a small retouch of the lawn.
- Avoid luxury features A potential buyer might not fall in love with the waterfall shower head you love. When possible work on the basics and avoid luxury features. Throw your preferences out the window and try to adapt your property to help is sell the best on the market.
- Making the house the nicest in the neighborhood Your job as an investor is to do the renovations that return the best value and sell the home quickly. Avoid trying to make your house the nicest in the neighborhood and focus on getting all the basics right. ****
How to Finance Your Fix and Flip
Don’t forget the old saying, Cash is King!
Cash offers are generally preferred by sellers, especially banks or traditional lenders who are looking to offload their distressed properties quickly.
Here are our top 3 options to have cash on hand before you find a deal.
Private Money Loan
These loans allow a borrower to use a currently owned property as collateral.
A private money loan is a short-term loan with a higher interest rate than a traditional lender, (usually% 8 to 12% depending on your region).
The advantage to a loan like this is they carry much shorter 6 to 60 month terms, and can also be funded in rapid fashion.
Whereas a traditional lender might take more than 30 days to fund a loan, a private money loan can be funded in as little as 5 to 7 days.
This is because these lenders mostly only consider the value of the collateral rather than the complete history of the borrower.
The shorter term and ability to get funds quickly make them popular in the fix and flip industry.
Just be weary, the private money loan industry has less regulation than other financial vectors, you might want to read up on some common hard money scams.
HELOC stands for Home Equity Line of Credit.
These are funded by more traditional lending institutions like a bank or credit union.
Generally you can borrow 75% to 90% of the equity in a property you already own.
They act much like a credit card in that you can take money in and out when you need it or repay it as you see fit with no pre-payment penalties.
They do have a variable interest rate, which makes them susceptible to rising interest rates.
However, the flexibility of getting cash when you need it, makes it a great option for the fix and flipper.
Owner financing is another popular way to finance the purchase of a home.
Property sellers are aware not everyone is able to qualify for a home loan and therefore they don’t mind carrying paper for the buyer.
Offering buyers seller financing will expand the potential buyer pool.
Buyers may find this method of financing advantageous because it allows them to get creative and they can sometimes negotiate a deal where they are paying an interest only loan with a balloon payment after 5 years.
This will give the buyer plenty of time to fix and flip the property.
Owner financing has decent interest rates, somewhere in between a hard money loan and a conventional mortgage.
Keep in mind that fix and flipping is a business like any other.
And like any kind of business you can lose money as well as make it.
Time, money, skills, knowledge and patience will be the biggest factors that will determine your success.
Be sure to specialize and become an expert in the neighborhood you hope to purchase a property in.
Your execution and the decisions you make along the way will be the determining factors of whether you are successful in this business.