HOW DO YOU FLIP A HOUSE?
But the real question is should you flip a house?
The answer will depend on your risk tolerance level. If you can tolerate a possible loss versus profit, then the answer is yes. If you can not tolerate this type of risk, then the obvious answer is no. But always remember, the greater your risk, the greater the rewards and/or your loss.
Flipping a house is not like you see on television.
On television, they find a dilapidated house and totally repair and transform it in around 21 days, usually for a dollar amount that is not realistic.
Can this be done? Yes, the repairs can be done if you have an entire crew consisting of electricians, drywall people, painters, landscapers, plumbers, roofers, a/c contractor, general contractor, concrete contractor, flooring contractor, etc. at your disposal. If you have this type of crew, some flips will be repaired and ready for the market sooner than others. However, it has been my experience that delays will happen even if you have this type of crew due to unforeseen issues.
Realistically, the majority of us do not have a full team of specialist available to us to expedite the flipping of a house. What does this mean? It means possibly longer turn around time and much higher cost.
Remember-television shows are there for the ratings. So a happy outcome (rags to riches story) is what sells. I am not saying you can't make any money flipping a house. You just need to proceed with caution and know what you are doing and getting yourself into.
I have been doing flips (for the last 10 years) in the Sacramento area before they were made so popular by television. The fastest turn around (fixed and ready to market) was a little under 4 weeks; the longest took over four months due to contractor firing and other construction issues (these are the unanticipated issues that can occur). Currently, as I am writing this page, I am into a flip that is approaching the 4 month point. Again, contractor problems, city inspector correction calls, repair delays, molding manufacturer delays, etc. All the while, I continue to make payments (this will happen unless you have a bank account that can pay for the property outright) which will bring up the cost.
So where do you start if you want to do this? First, KNOW YOUR REAL ESTATE MARKET! Make sure you know the high and low dollar range in your particular area you plan to work in (your Sacramento or other realtor can help you with this). Next, estimate your total cost.
During your property investigations, get competitive bids from all your trades people (at least 3 from each trade). I would recommend you always get at least 3 bids even if you have been working with some company for awhile. It has been my experience that smaller companies seem to charge a lot more after the first 2 or 3 times they have worked with you on flips. I think they think you are getting rich doing flips, so why not me. Additionally, budget an amount for miscellaneous expenses (they will come up). This is important. How much to budget for will depend on many factors. Depending on the extent of repairs and your skill level and availability of time, unless you do not have a full time job, you may need to budget for a/c heating, wall repairs, cabinets, flooring, dry-rot/termite repairs, roofing, drainage, framing, window repairs/replacement, painting, in & out clean up, concrete, foundation work, etc. Always check with your city planning department to see what is allowed or disallowed. And NEVER do any work without a permit.
On television, you will see a home with foundation repairs, new cabinets, roof, plumbing, tile work, wood floors, landscaping, cleanup, painting and more while staying under a $40 thousand budget. NOT IN CALIFORNIA! The 1st three items can run you over $30 thousand. This is why you need to know your market. What they don't show you on television is the associated cost with buying and selling of the house. Unless you have the entire amount in cash, you will paying someone interest on a loan. This amount must be accounted for and you must budget at least enough to cover the estimated amount of time for repair and time on the market (I usually budget 6 months). This could even go as long as eight months depending on the real estate market in your area. There are also closing cost when buying, and even more, when selling a home. When selling real estate in California you will have to pay up to 6% commission, 3.33% franchise tax, and up to 2% in closing cost for an approximate total of about 11.33% of your sale price. Then after you receive your proceeds, depending on your tax bracket, you are going to pay capital gains tax. I always over budget this tax amount at 35% of gross. This may seem high but it is a financial safety factor.
What does this all mean? Plan carefully when you buy and plan to flip a house in the Sacramento region.
For example, lets' say you purchase a fixer upper @ $250K in a $400K neighborhood. If you are lucky enough to win this home over other bidders (remember do not get caught up in a bidding frenzy; set your buy limit and back off at that point; another opportunity will come around soon enough) then you might have a chance to make a little money.
Let's make some assumptions:
Now if everything goes as planned and budgeted you should have a chance to make a little money.
Now let's say 2 months fix-up time, 60 days on the market with a full price offer at $400K and a 45 day escrow (nearly 6 months). This buy still looks good.
$400K x 11.33% = $45,320 (commission, Franchise tax, and possible closing cost) leaves a gross profit of $354,680.
Subtract out your fix-up cost, payments, closing cost when buying of $59,437.50 = $295,242.50 minus your $250,000 purchase price gives you a gross profit of $45, 242.50 x 35% capital gains (over estimated) leaves a net profit of $29,407.62. Now this was a good flip.
Now what originally appeared to be a huge amount of money (over 100K profit) turned out to be a lot less but still very profitable.
I believe if you can do a flip and net 10K or more, than it is worth doing. Remember, it may be a lot of work and headaches to attain this profit. I have done some flips in the Sacramento region where I have walked away with nearly nothing and others that have been very good financially. You have to plan for the worst case scenario. This is a very risky venture and you must know what you are doing. And you should use professionals to assist you from an investor/realtor such as myself to landscapers and everything in between. I would recommend working with an experienced realtor to help you find your fixer upper and let them guide you through the process. This is the best place to start your "flip" in the Sacramento area.
Never let the television shows sway you into thinking that you can make 100 to 250K per flip. This kind of money can be made but it is rare and if a house can generate this type of income, I can guarantee you that there is going to be 40 other bidders/offers in on this purchase that will bring up the final sale price, thereby reducing your total profit. And never forget to budget for miscellaneous because miscellaneous costs will come up. As long as I have been doing flips in the Sacramento area, there is always something that comes up, costs more, or I forgot to budget for it. Never buy a home out of your price range. This will get you into financial troubles real fast. Never rush into a buy unless you are absolutely certain this is a good buy (Your investor/realtor can assist you here). Always do your property investigations (due diligence). Most fixers are sold "as is". So make sure you know what you are getting. Call for a pest inspection, home inspection, roof inspection, etc. I personally use my instinct as well (be careful here because this comes with experience and knowledge of your real estate market). But property due diligence is the best!
Now when it comes to the actual fix up times, the reason it takes longer than many television shows is because I do not have an entire crew available to me. So you take bids, you hire and then you coordinate the repairs. The electrical and plumbing must go in before the drywall, the walls have to go up before the painter, tile and flooring go in last, etc. While one is working, the other trade may be waiting to go in.
There is a sequence of events that must take place and proper scheduling of the work is the key to avoid delays. But, unfortunately, delays still occur. For example, the electrician is a week out so the a/c contractor cannot "fire up" the condenser. But before the a/c contractors turns on their condenser, you will need to have the electrical inspected. Once the electrical is inspected, and if there aren't any corrections needed, you move on to the next task. Generally you cannot close walls until the electrical and plumbing have been signed off by the city inspector. It's funny; I have never seen anyone inspecting the flips on TV. At this time the painter, tile and flooring people are on hold. Outside, landscapers are waiting for the roofer, window people and painters to finish. And on and on! Even with the best coordinated efforts, you still may go 4 to 8 weeks and sometimes even longer before the house goes on the market. And unlike the TV shows, most houses do not sell for full price on the 1st day of an open house.
The bottom line is to proceed with caution and KNOWLEDGE. Your Realtor, if they have been an investor, can give you the knowledge to succeed in this business. Never forget that you can lose in certain transactions so be prepared for this so you do not get caught off guard. Make sure you do not under-estimate your expenses. This can occur with the most experienced investor. So the best thing to do is over estimate by a certain amount or percentage. As you proceed through your project you'll be able to adjust your figures.
My best advice is not to let the TV shows encourage you to enter into a business that will not reap the rewards that are shown weekly.
This type of business is not for everyone. I love doing it. But it is stressful.
If at this point you feel you want to get into the business and may need some advice, guidance, help, or just have a general real estate question, you can email me at CalNorthRealty@msn.com.
Good luck with your house flipping.
UPDATE: As the end of another month approaches, our current "flip" has now been on the market for 5 months. Was our market analysis wrong? Was the market price set too high? Is the house in the wrong area? The answer to these and other questions is NO!
As everyone knows, the housing market is in a slump. This is one of the hazards of house flipping. So what does this mean? It means it will definitely cut into to profits. If we end up in a loss, we must look at this as a tax advantage. This is also tying up funds for other opportunities that have surfaced.
As we wait anxiously for a buyer, we are in the early stages of advertising the house for rent. In this manner we can minimize our expenditures on payments while we wait for the market to turn. This is all part of the business. Awhile back this same house would have sold within a few days and probably with a offer over the asking price.
The great thing about this flip is that this house is located in one of Sacramento's finest neighborhoods. This is an area that is always in demand, even if the demand is currently less than normal.
This flip should not be a discouragement to anyone. This should be an enlightenment as to some of the situations that happen in the real world.
The bottom line here is, always be prepared for the unexpected and have your plan A, B, C, and D ready to put into action.
I will periodically update this page as we progress through this flip.