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How to buy houses to flip

Updated on August 4, 2015

Introduction

The first job of anyone who flips houses is to find the correct house to flip. If you don't buy houses at the right prices, you will never make any money flipping houses. There are four separate parts to successfully buying a house to renovate.

  • You need to totally understand the city area you are flipping houses in

  • You need to find a house to renovate

  • you should calculate the total cost of repairs (adding 10 percent for contingencies).

  • You need to check the prices of comparable houses

  • You should set a price to buy the house.

Only after you have done all of this prep work, are you ready to make an offer on the house. You then need to adhere to this buying price. The second thing is that you need to make all cash offers. Now we will look at each point in detail.

Understanding your house flipping area

The first problem to be solved in buying homes is to understand the metro area that you will be renovating homes in. I will use a couple of examples to prove the point.

The first is Phoenix Arizona. There are areas of phoenix that I wouldn't even want to drive a car through. However there are other areas of Phoenix and its suburbs that are very good for rehabbing. You as a rehabber have to know the difference, and only buy properties in the good parts. No matter how good the deal seems, if it is in the wrong area you need to leave it alone. If you don't your business will be the loser in the long term.

The second example is San Diego county. I am sure that most people don't understand this, but there are over one million feral cats in San Diego county. When people don't have the money to take decent care of their cat, they take it a few miles from their home and turn it loose. These cats in turn breed with other cats and we end up with an enormous feral cat population.

If they are turned loose in good neighborhoods the people usually call animal control and they are rounded up and dealt with. In poorer neighborhoods the people try to tolerate it more, and we have a rapidly expanding feral cat population. You need to know the areas in San Diego county where it is not safe to do rehabbing, and those you need to leave alone. You can make good decent money by doing your home flipping in the good areas and wait until the city does something about the bad areas before you go in.

In Chicago in the late 1970s there was a big movement to convert a lot of rental apartments into condos. The rental price on apartments went up over $100.00 per month in one year. This was caused because the city worked with developers on the condo conversions. This caused a rental scarcity and jacked rental prices up. It also caused a lot of people who couldn't afford the rent to move to other areas. I am sure this lowered crime in the area, at least on a temporary basis.

The city probably improved their tax collections, because of all the taxes collected on all the condos, which I am sure gained in market value, and so they brought in more property tax money. If you are looking to flip homes in a questionable area, wait until the city does something to improve the neighborhood. The major thing is to know which are good neighborhoods, and which are bad.


finding the right house to flip

Finding the house to renovate

Once you understand the city areas you want to buy in, the next task is to look for good home buys in those areas. In another article we considered a couple of ways to buy homes at very reasonable prices. In this article we will look at a third way of buying homes if you live in certain areas. If you are looking to buy homes in the Phoenix, Las Vegas, parts of California, the six county Chicago area, Certain parts of Florida, Georgia and North Carolina then I have a new way you should consider in buying homes.

There is a website www.azbidders.com that does a very good job of presenting foreclosure homes in these areas. It is a pay for service website that does a very good job of showing you the foreclosures and REO's in these areas. They also do research, title and drive by reports on homes that are coming up for auction. They supply comparables you you understand the potential price you can get when the house is renovated and goes up for sale. They will go to the auction and bid for the home or homes that you choose, up to your preset monetary limit. They also offer a realty brokerage in all the previously mentioned areas to sell your homes if needed. All of the work before buying the home can be done from your computer at home.

The worst problem associated with bidding at auctions is what I call auction fever. You decide you really want the house and overpay for it. With Azbidders they send a representative to the auction with your max bid. The person will try and get the home as cheaply as possible without paying more than your max price. This eliminates auction fever from your buying of homes.

The website is well worth checking out if you are really serious about flipping homes in an area that they cover. They are very professional in all the services that they offer. The only service that they don't offer which I would like to see is bridge financing for qualified flippers. If you read the biographies on the top people at the company they are well qualified to offer the service. It is well worth the time to check the website out. Another website that is very important to all house flippers is www.realtytrac.com on which you can find all the foreclosure information from around the country. We will now look at figuring the cost of repairs to your flip.

Figuring the cost of repairs

When you initially visit the house in question, you should come up with a list of needed renovations to properly upgrade the house considering the neighborhood in question, Then you need to get together with a contractor for any repairs you have questions on. When you come up with a figure for the cost of repairs you should then add 10 percent to this figure for problems you can't see. Only then will you have a realistic cost for repairs. Next we need to look at other costs which you should add to the costs of repairs.

Figuring your other costs

There are several costs that are included in this category. These include realtors fees on the sale of the house, closing costs on the sale of the house, and interest carrying costs. The first one to look at is the realtors selling cost.

When you consider that most realtors fees are around five to six percent of the selling price, it is easy to see that this is a major cost of your doing business. If you are planning to sell the house for $150,000.00 dollars then the realtors fees alone would be between $7,500.00 and $9,000.00 dollars. Many times this cost alone would be greater than the cost of repairs. Therefore you would be remiss not to add it into the costs of doing business.

If you are the real estate agent that sells the house to your corporation, and then handles the listing after the rehab you would cut yourself in for some of these realtor fees. If you made $2,000.00 from the sale of the house to your corporation, and another $2,500.00 selling the house after it is rehabbed, you would make $4,500.00 from the turnover of one home. If your corporation could rehab and sell eight homes a year this would mean around $32,000.00 dollars from your house flipping business without taking any profit from the corporation. Being a real estate agent and having a house flipping business is a natural, if it is done right.


Figuring the buying price

The most important thing to remember when you are getting ready to buy a house to flip is that the profit is made when you buy the house. If you buy at the right price your profit is fairly well assured. You need to understand what the selling price will be before you buy the house. To do this you need to have prices on other recent comparable sales of homes in the neighborhood. This will show you about what your selling price should be. From this you subtract the realtor fees, the other closing costs, the rehabbing costs, and your profit. This will give you your buying price. If you can't come close to this price, then don't buy the house.

Summary

The most important part of making a profit in house flipping is knowing what to pay for a house. If you can get the house for the right price you are almost guaranteed to make a good profit. In order to understand what the right price is you need to thoroughly inspect the house for any problems. The four main things you are looking for are water damage, asbestos, termite damage, and mold. Any of these can cost thousands of extra dollars, and can ruin your house flipping budget.

These unknown problems are the main thing I have against buying houses without a good prior inspection. You are just asking for trouble. If you want to gamble you should go to a casino, not buy houses to flip. Buying houses to flip can be a good business, if you include a thorough inspection, so you know what your costs are.


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