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Want to Flip a House? Here’s How to Actually Make a Profit
Your insomnia has done it again — it’s led you to the couch, where you’re flipping through home-renovation shows and nodding, “I can do this.”
You start to do the math in your head. “These nobodies bought a house for $125,000, did a couple of projects, and sold it for $350,000?” You think, “I’m so there!”
Wait a second! Flipping houses, or buying a home for the purpose of renovating and placing it back on the market, is hard work. You’re likely to get your share of splinters and scrapes while you turn your lackluster shack into a glistening home. But if you do your research, you could be on your way to a worthy investment property.
We asked a few experts how to do it right, and here’s what they told us.
1. Before You Flip a House, Do Your Homework
Read up on your desired neighborhood, take note of the home values in that area, and attend as many open houses as you can. NeighborhoodScout can help you get the skinny on a region. You can also scope out a local listserv for behind-the-scenes knowledge; talking to people who live in the area or small businesses that are based there are often the best ways to discover one. If you come up short, try searching Yahoo Groups, where many local listserves are hosted.
But the homework doesn’t stop there — you should also know a thing or two about home construction, advises Bree Al-Rashid, a real estate agent with national real estate brokerage Redfin. “The people making a lot of money [from flipping houses] are professionals,” Al-Rashid says. “Changing the structure of a house, whether it's cosmetic or a basic structure, can have a lot of consequences. It takes some experience and a good eye, and a background in the basics.”
Looking for your first flip? Al-Rashid says to look for older homes that can be improved with simple cosmetic changes like painting, or sectional remodels of the bath or kitchen. “It's fun, it's localized, and it can have a huge impact on the way a buyer sees the house,” she says. Don’t forget the landscaping — a green thumb can really perk up a property’s curb appeal.
But before you take a sledgehammer to those cabinets, make sure you’re playing by the rules. “As the buyer, you should know some of the code requirements of your town and you should have some of the permit requirements,” Bunni Longwell, a Keller-Williams realtor in Florida, notes. Not adhering to local requirements — or not being aware of them at all — can significantly delay your project.
2. Ask Construction and Real Estate Experts for Help
You’ll want to consult experts during every stage of your flip. “Work with someone who has a lot of construction experience, and find a really competent agent who can help keep your profit margin as wide as possible,” Al-Rashid advises. If personal recommendations come up short, joining Angie’s List can help you find respected craftsmen. While it might cost you to outsource some jobs to a contractor, you’ll almost guarantee a greater return when the job is done right — the first time.
A home inspection is always recommended, and in some places, it’s required. Before you bid, hire a home inspector to do a full inspection or at least a walkthrough to pinpoint major problems that may not be cosmetically apparent. “Better before than when you have already spent a lot of money and are trying to sell,” warns Mike Marlow of Veteran Home Inspectors.
Along with the experts, you might also ask your friends for assistance. “Novice home flippers need to be willing to devote a significant amount of ‘sweat equity’,” says Bennie Waller, a professor of Finance and Real Estate at Longwood University. “You must be willing to roll up your sleeves and get dirty. If the average person attempts to contract out all of the services, profit margins will dissipate very quickly.”
Waller and his wife have improved several properties they now rent for profit. “We only contract for those expenses that we cannot handle, like replacing a heat pump. However, for these big-ticket items, shop around and develop a relationship with contractors that you can trust,” Waller says.
3. Don’t Rush Your Flip
“People will watch shows on TV and think they can make 20 grand in a few weeks by doing a few simple remodels and then selling it again right away,” Al-Rashid says. In reality, on-time, under-budget renovations are rare. Be patient while renovating to ensure a product you’re proud of, and be prepared to wait a bit when your flip first enters the market.
“I try to eliminate any reason a buyer could use to negotiate,” Waller says. As you work through your renovation, take a regular break to examine your investment through a potential buyer’s eyes. Keep the end goal in mind and you’ll be on your way to a successful flip.
How Much Can You Make by Flipping a House?
Here’s the big question: How much can you actually make if you follow all of this advice?
Each scenario is different, of course, and depends on many of the factors mentioned above, including whether you’re able to minimize your expenses. But the return on a “mom and pop” remodel is typically between $15,000 to $150,000, Florida realtor Longwell says.
When you’re figuring out your budget, Longwell recommends setting aside 10% more money than you think you’ll need. By planning for the worst-case scenario, you’ll maximize your eventual return.
Lisa Rowan is a writer and editor in Washington, D.C. She could watch home buying and renovation shows all day — and night!