Flip – Don’t Flop:
Everything You Need to Know About the Basics of House Flipping
Putting aside the myriad of marriage scandals and the latest “sexy” trend of documenting a “celebrity”
couple’s tumultuous relationship forays, the HGTV channel has brought to public attention some of the
more fundamental subjects regarding home ownership – from shows such as Fixer Upper, Home Town,
Flip or Flop and House Hunters has come an almost overnight obsession with home flipping, renovation,
interior design and more.
Perhaps one of the most misunderstood topics in this entire picture is flipping, with the blame for much
of that misunderstanding placed at the feet of show producers who choose to somewhat glamorize the
work that goes into this process. In this blog, we’re going to break through the pretentious glitz and
glam far too many serious novice house flippers have been blinded by when getting into this pastime or
business, for the purpose of making everything you need to know much clearer.
We understand how frustrating it can be for those just learning how the flipping business works,
especially when vague numbers or “rehab drama” is catapulted at them. If you’re just getting into
flipping, you need practical information about the most important parts of the process because it’s
really not as easy as many make it out to be.
In fact, The Malakai Sparks Group is so dedicated to this uber-popular topic that we have decided to
start a series of blogs about flipping, beginning with this primer on the basics. To make sure we’re on the
same page, let’s now get your feet wet by helping you understand the actual definition of “house
flipping.”
What Does it Mean to “Flip Houses”?
At its core, “house flipping” or “flipping houses” refers to the process of buying a house and then selling
it for a profit. Sounds simple enough, right? Well, like anything else worth exploring, it’s really not that
simple – normally, you’d spend some time and money (or someone else’s time and money) fixing things
up (or “rehabbing” the home). This isn’t always the case, but it usually is, from our experience; indeed,
this process of fixing up the home is how value is ultimately added.
But we’re getting ahead of ourselves here.
Let’s first cover what we like to call the “Four Pillars of House Flipping.” These four basic elements
comprise the process from beginning to end, and when putting together a house flipping strategy you’ll
be able to see each of these as separate “departments” in your efforts. By breaking your project down
based on these pillars, the learning process will become much less overwhelming and you’ll be able to
focus on one aspect at a time.
To be honest, each of these Four Pillars can take days or weeks – even months if we want to get
seriously detailed – to analyze on their own, but for now we will just provide you a quick overview so
you have a basic understanding of how it all works, and then dive into more detail in future posts.
The Four Pillars
Pillar 1: Buying
Learning how to locate, analyze and purchase houses is the single most important skill you can obtain
when it comes to flipping houses. In fact, if you become good enough at buying houses, it is indeed
possible to create a business based on this one skill alone (more on this later).
Essentially, the process of “buying” can be broken down into four areas, as well; you need to figure out
and decide:
Inventory – What kind of houses will you focus on buying?
Farm Area – Where (what location) will you focus your efforts when looking for these houses?
Deal Analysis – What will you offer when buying these houses?
Acquisitions or Buying Methods – Which methods will you utilize when locating and acquiring
these properties?
In the area of inventory, your best bet is to focus on a “standard” house with, say, three to four
bedrooms and probably anywhere from 1,200 to 2,000 square-feet with a general “entry-level” price
range. This is not a hard-and-fast rule and may change from area to area, but the point we’re trying to
make here is that you want to buy a house that will be easy for you to sell and an area you are familiar with. For instance, if you live in Orange County. You want to focus on real estate in Orange County. Narrow it down to cities you are familiar with. For example, if you grew up in Huntington Beach, focus on that area and seek out the best Huntington Beach real estate agent you can find to help guide you in the process.
With regard to “farm area,” this can be as small as a neighborhood or as large as several counties; it’s
where you want to focus your efforts on buying houses. For starters, what we can recommend is that
you pick one city (like homes in Huntington Beach) – or part of city if it’s a large area – or a zip code and adjust from there; the size of your farm area will depend on your level of experience as well as the buying strategies you choose to implement.
When it comes to deal analysis, what we can tell you is this: If buying is the first pillar of flipping, then
deal analysis is the cement from which that pillar is made. It is the process by which you determine the
amount you can pay for a property in order to cover all the required expenses involved in flipping while
still ensuring a profit. While this skill is something that should be thoroughly analyzed in its own blog, we
can offer a couple of basics here: The goal behind analyzing a deal is to first come up with the ARV (After
Repair Value), which is the price the house will sell for once you have done your rehab and
improvements to bring it up to “retail condition.” Once you know what you can sell the property for, you
can work backwards and subtract repair costs, closing costs, holding costs and desired profit in order to
arrive at your asking price.
Finally, when talking about buying and acquisition methods for flipping houses, these methods range
from working with real estate agents and buying houses listed on the “MLS” (Multiple Listing Service) to
buying at auctions and marketing for and working directly with private sellers.
Pillar 2: Financing
Financing is just a fancy term that describes how you come up with the capital (money) to pay for the
property you’re interested in flipping. We’re going to debunk two big myths that surround financing
right now – that you either have to do it through a bank, or that you must only use your own cash to buy
the property. In reality, this couldn’t be farther from the truth; bank financing is only one method in
which to obtain money for a property, and definitely not necessarily the first one we would recommend.
And, you are certainly not limited to using only your own money, either.
One popular way to finance a property when flipping is to use “private money.” A private money lender
is an entity that is seeking an alternative way to invest their money rather than via a risky stock market
or low-yield savings accounts and CDs. Since flipping houses can often provide individuals with an
annualized return of eight-to-12-percent on their capital, it’s a far cry better than the 0.05-percent
return that most banks provide.
Here are some other aspects of financing you need to know about:
Hard Money – The primary difference between hard money and private money is that hard
money is more “institutionalized” and you might need to qualify for the loan; however, the
benefit here over using a bank is that the qualification process is much less stringent.
Equity Split or Joint Venture (JV) – If you know someone who boasts capital and wants to be “in
on the action” but doesn’t have the time or knowhow to do the leg work and oversee the
project, they can put up the capital and you would be responsible for finding the house,
rehabbing it and then selling it. In this scenario, you would split the profit at the sale, with a split
usually being 50/50 (though you can work out something you both agree to).
Creative Financing – This is where you work with the property seller to come up with terms for
the purchase of the home; they can “carry the note,” meaning you sign a note (an agreement
which outlines the terms) to make payments directly to them for the property.
Pillar 3: Rehabbing
You’ve seen this word sprinkled throughout the previous parts of this blog already, so let’s take a look at
what it entails. “Rehabbing” is the process by which you fix and upgrade a house to bring it up to “retail
value,” so that you can ultimately sell it for a profit (assuming you purchased it correctly!). While many
novices to flipping believe they need to be handy or able to perform repairs themselves in order to flip
houses, the truth is you don’t need to know anything about fixing up a property to be a pro at flipping –
we know folks who, after flipping hundreds of homes, still have no idea how to lay tile, paint a wall or
handle interior design.
The key with rehabbing is finding, hiring and managing the people who can do all of these things for you.
In coming blogs, we will cover the specifics on how to hire and manage a good contractor, how to
estimate repairs and how to adjust your initial repair estimate and offer price – all of which will save you
a ton of time during the rehab process so you can focus on buying more houses.
One quick tip we want to mention here: On 90-percent of rehabs we’ve seen, a standard price list is
used when working with contractors – and this states exactly what you will pay per square-foot for
paint, flooring, etc., and breaks down any other expenses. Indeed, this saves a ton of time when
haggling and getting bids approved, and allows your contractors to focus on the work instead of bidding
and wondering when or if they’ll get the job.
Pillar 4: Selling
So once you have worked your backside to the bone buying, financing, purchasing and rehabbing the
property, it’s time for the moment of truth: To get this bad boy sold and to make a profit!
Though there are a plethora of ways to sell a house – which we can cover in more detail in another blog
– for now we’ll tell you that once you have gone through all the work of coming up with a great product, your best bet is to probably list the house on the open market with a quality realtor. Just know that if
you are new to this business, having a good agent like The Malakai Sparks Group to help you sell the
house is a huge benefit – not only can they help you get a great price, but they will guide you through
the paperwork and closing process as well.
Hopefully, this overall “big picture” view of flipping houses has given you a better idea of how all the
pieces fit together. Keep your eyes peeled for another blog in our series that showcases “the art of the
flip!”. If you have any questions feel free to stop by our HB or Costa Mesa location to speak to me in person.
