In the Beginning
Finding a house to flip boils down to a few steps. Mastery of those steps is key to success. “But making money, or at the least not losing money, could be trickier for someone new to the process.
To start the process of real estate investment and financial independence, consider these steps:
1. Find a local group of like-minded individuals through Meetup, Facebook, or networking events. Join Bigger Pockets, an online community for real estate investors that provides blogs, podcasts, videos, boot camps, and webinars.
1. Create a “buy box” – a list of criteria tailored to your financial ability and goals. A buy box will define your client and help you focus on a particular area and asset class. Asset classes are properties ranging from A to D and are identifiable by age, affordability, and amenities such as parks, shopping, public transportation, and livability. Most nascent house flippers focus on a Class B or C property. Class A is a more expensive market to enter and Class D is a higher-risk market.
2. Assemble a team that specifically works with real estate investors or are investors themselves: a real estate agent, CPA, attorney, contractor, and lender.
3. Use direct marketing, driving for dollars, an investor-friendly agent, real estate auctions, and public records to identify potential properties.
4. When you locate a property that fits your criteria, walk through it with a contractor (or inspector) to determine the scope of work (SOW) needed to bring it up to the neighborhood’s standards.
5. When making an offer always apply the 70% rule which states that an investor pays no more than 70% of a property’s after-repair value (AVR) minus the renovation cost. Always add a contingency cost of about 20% for the inevitable. Fully understanding the neighborhood and knowing the most recent comparables will help you determine what repairs would be needed and the sales price.
Controlling the Chaos
The above steps are pretty boiler-plate. Sticking with these steps should get you closer to your financial goals. But here are a few rookie mistakes where everything can go south, fast. Below are a few tips taken from a recent discussion on Bigger Pockets, by Jonathan Greene, on best practices to control what you can in what could become a complete chaos.
1. Paying a contractor in full before they start the job. For small jobs, half up front, for larger jobs use quarterly draws tied to a performance schedule or SOW.
2. Doing DIY on plumbing, electrical, or structural. If you aren’t a licensed contractor, plumber, or electrician, you should leave these to the professionals.
3. Not getting permits for something because you probably won’t get caught. This will eventually catch up with you and could result in disastrous consequences.
4. Not doing progress checks as often as possible (or sending someone you trust to do it). You have to have eyes on your project every day, or weekly at the very least, to stay up-to-date. If you are out-of-state, your contractor is not your eyes. You need a local unbiased friend. If you are new to flipping, work closer to home until you have more experience.
5. Underestimating repair costs and overestimating ARV. This is where it all goes wrong. It’s about how you are getting your information and who you trust. For a first flip, you should have a basic knowledge of what is needed. Have a network of other investors to lean on, not just contractors.
6. Do your due diligence. Double-check what a seller tells you regarding the history or potential of the property.
