Fix and flipping television shows do a decent job of portraying the process of a flip, but television shows can’t possibly show the entire process and what it takes to flip a home. I have fix and flipped close to 100 homes in the last ten years and I am working on nine fix and flips right now. It takes a lot of work, experience and time to learn to flip homes and make a profit. The profit is determined by many things besides the buy price, the repairs made and the selling price. Those sometimes forgotten costs are what determine if a flip will make money or lose money.
How do fix and flippers find and buy properties?
On most of the flipping shows, the flippers are buying properties at the foreclosure sale. Every state has a different foreclosure process with different rules and guidelines. At the foreclosure sale the bank sends in a minimum bid and if an investor wants to meet or beat that minimum bid they can buy the home for cash.
Buying at the foreclosure sale is very risky, because many times you cannot see the interior of a home or it may still be occupied by the previous owners or tenants. When you buy at the foreclosure sale you have to pay cash within hours of the sale or bring cash with you to the sale. The cash does not have to be a briefcase full of $100 bills, but it does need to be certified funds like a cashier’s check.
I used to buy 90 percent of my fix and flips at the foreclosure sale and a couple of times I got burned. In one instance I bought a house at the foreclosure sale and when we had it rekeyed we found a newer BMW in the garage. I knew something was wrong immediately and I contacted the previous owners who were in California (I am in Colorado). The previous owners claimed the banks foreclosed wrong and was suing the bank. They did not file the lawsuit until after the foreclosure sale and I had no way to know about the lawsuit until after I bought the home. I could not sell the home with an active lawsuit against it and it took over a year for a court to review the case. The court threw out the lawsuit after reviewing it, but I had to hire lawyers to speed up the process. I lost $10,000 on that flip because of the time it took to sell the property and my lawyer’s fees.
If you are wondering about the BMW, the previous owners came and got it. Another misconception about flipping is that the flippers get to keep whatever they find in a house. It is not legal to take whatever you find in a house after you buy it at the foreclosure sale. States have different laws, but in most instances if the value of the personal property left in the house is over $300 a personal property eviction must be done or the property must be stored for months to give the previous owners a chance to get it.
How do I find and buy fix and flips?
I stopped buying at the foreclosure sale because the competition has gotten so intense form other investors that prices are close to what they are on MLS (multiple listing service). I buy almost all of my properties from the MLS, which has its advantages.
- I can see the entire house before I buy.
- I can get a loan on the property; here is an article on how to finance a fix and flip.
- I can do an inspection on the house, although many times I waive this to make my offer more appealing.
- I have 15 to 30 days to close on a house instead of 2 hours.
- I am a real estate agent so I get paid a commission on most houses I buy through MLS saving me thousands on each deal.
Many people think it is impossible to get a great deal on the MLS in today’s market. My market is no different; our prices have gone up 20 to 30 percent in the last two years and our inventory is very low. I am not saying it is easy to find homes to flip; I check my MLS system five to ten times a day. There are many things I do to get great deals.
- I write offers on properties within hours of seeing a good deal
- I am very patient; it takes me months to see a good deal worth making an offer on
- I invest in small towns where there is not as much competition
- I buy houses that need a lot of repairs
What are the real costs of flipping a home?
On television, some shows do a decent job of listing the costs involved and others are horrible. My goal is to make at least $25,000 on each flip I complete and my average buy price is around $100,000. For me to make $25,000 on a flip that I buy for $100,000 I have to sell that house for close to $170,000. The reason I have to sell the flip for so much are the costs involved in flipping.
- Buying costs: when you buy a home you have to pay closing costs and those can expensive with a loan. I would estimate I pay $2,000 on a $100,000 purchase.
- Carrying costs: When you own a flip you have to pay utilities, take care of the lawn, hold insurance, pay HOA dues, pay interest on your loan and pay taxes. It takes me about six months to flip a house and those costs can easily add up to $5,000.
- Repairs: Repairs are almost always more than I expect because you miss things when you see a house and repairs come up that were hidden until you start tearing stuff out. On a typical flip I expect to spend $15,000 on repairs, but I always add $5,000 for unknowns.
- Selling costs: I am a Realtor so I save money by listing homes myself. Non agents would pay double the closing costs I would pay. With title insurance, closing fees, recording fees, buyer paid closing costs and real estate commissions I pay $10,000 or more in selling costs. A non agent would pay close to $15,000.
When you add those costs up the breakeven point to make money on your flip is $137,000. That leaves me with a $33,000 profit, which happens to be the average amount I made in 2013 on my fix and flips.
How do you repair a fix and flip?
When I repair my fix and flips I do not do any of the work myself. I hire contractors to do everything, because I have nine flips and there is no way I could do the work myself. If I had one flip I would still hire a contractor because of the time and money I save using a contractor. When I own a flip it costs me from $35 to $50 a day to own that property. If I tried to do the work myself it would take my months to finish a job that would take a professional weeks. That extra time would cost me thousands of dollars and all the money I thought I was saving by not hiring a contractor. On top of the job taking longer, it would not be done as well.
When I repair a flip here are the basics I always do
- Make sure major systems work; electrical, plumbing, heating, roofing, etc.
- Make sure it looks nice; new paint, new floor coverings, new appliances and new fixtures
I try not to make major changes in a floor plan or tear into walls unless necessary. When you make major changes, especially in older homes, you run into big problems. Simple remodels turn complete renovations when walls are taken down. Additions rarely ad enough value to a home to justify the cost either.
There is much more to flipping than what this article contains, but hopefully this lets you know the basic costs and what it takes to fix and flip a home. If you want to get into the flipping business, make sure you find great contractors, because that is by far my biggest headache.
About Mark Ferguson
Mark has been a licensed Realtor since 2001 and has flipped close to 100 homes in his career. Mark also runs a real estate team of ten, owns 11 rental properties and runs www.investfourmore.com, a blog dedicated to fix and flipping, rental properties and becoming a real estate agent.