There are many types of ways to make money in real estate. Being a real estate agent, wholesaler, property manager, landlord, and even a fix-and-flipper. With all these different ways of making money in real estate, people tend to want to get involved. Especially doing a fix and flip. Everyone thinks it is so easy and a fast way to make money. But it’s not as easy as it looks. Sometimes you find yourself way over your head in the wrong investment. That’s why we are going to talk about fix and flips and everything you need to know.
How to Find Fix and Flip Properties
In today’s market, it is getting harder to find great deals with tons of profit on the back end. Right after the housing market crash in 2008, not many people were investing in real estate. Recently, values have seen all-time highs. Making more and more people want to invest in real estate.
If you are looking to buy a fix-and-flip property, there are a couple of ways you can go about it. You can contact an off-market company that contracts properties directly with the homeowner. But the best, most efficient way is to contact a local real estate agent who has an understanding of the fix and flip process. That would be your best option, considering you will need an agent to resell the property after it is rehabbed.
A real estate agent will have access to thousands of properties through Bright MLS. It is a site only agents have access to for properties that are available for sale. Depending on the agent you are dealing with, they might also have access to off-market properties. Finding the right agent who has experience and has helped investors in the past complete a fix and flip is where you want to start.
Steps of Purchasing a Fix and Flip
We are going to explain the full process from start to finish in going about purchasing a fix and flip property. That way, you could have a better understanding and maybe look to purchase your next fix and flip.
- Purchase price: The most important part and first step of this process is the purchase price. The obvious reason is that if you pay too much to start, there will be no profit on the back end. If you have a subject property, you will need to know the ARV (after-repair value). Which is what the home is worth after all the repairs have been made. Then get a general idea of the construction cost. This will vary based on the amount of work the home needs and the price of finishes you plan to put into the home to increase value. ARV x .75 or .70 (bank % number you receive if you refinance) – Construction cost = Purchase price.
- Speak with a lender: You are going to want to use a loan when buying and paying for the construction costs. Each lender or mortgage company will have a higher cost on your first flip with them. But most lenders will cover 80% of the purchase and 100% of your construction cost. The more money you have, the higher the rehab you can do. But it is better to start with lower value rehabs in the beginning since it’s less risk.
Additional Steps for Purchasing a Fix-and-Flip House
- The right contractor: This part is just as important as the lender and the agent. You can always shop for the best price, just like the lender. But you are going to want someone who has experience and does not waste time. Also, someone who is familiar with pulling permits and moving along the process.
- Sold: Sometimes the market might go through changes while you are renovating the home. Since that process can take up to four months or more. You want to be constantly looking for an increase or decrease in value. As well as other competitions, just hitting the market.
How to Obtain a Fix and Flip Loan
Like we had briefly mentioned earlier, it is crucial to find the right lender. There are a couple of ways of obtaining a loan for fix-and-flips. You can either go to your bank and take out a large loan. Which can be beneficial because your bank can usually offer a lower monthly payment and rate. But their process could require many more hurdles. There are plenty of private money lenders you can find online. They are willing to provide you with funds for fix and flips.
Typically, at the beginning of working with them, they may require 20% of the purchase price down to buy the property. But they will finance all of the construction costs. Paying your contractor as they go along the process. The more deals you do with these private lenders, the better the terms will get. Eventually, to the point where they finance the whole operation. Leveraging other people’s money through loans will allow you the freedom to eventually do multiple projects at once and scale.
Process of Construction on Fix-and-Flip houses
Once the property is purchased, you can then begin the renovation. This will most likely be the most stressful part of this process.
- Your contractor should have a clean-out crew. They will begin the demolishing process. Where all the old is torn out and the walls are taken down. If you don’t have a contractor, there are plenty of clean-out crews that can tear out a whole house for around $5,000 to $10,000. During this process, permits should be pulled for electrical and plumbing.
- Framing and any structural repairs should be made after the property is cleaned out. Depending on whether you need a new roof or joists replaced. You should be right around $5,000 for this process. If you need a new roof, we are talking about much more, depending on the size.
Next Steps for Fix and Flip Construction
- Rough plumbing and electrical work should be started. This is where you will see most of that money being spent. Your average home’s electrical if installing an electric panel and running all new wire should range anywhere from $15,000 to $25,000. Plumbing will begin putting in new water lines, sewer lines if needed, and gas lines. That should cost you around $20,000 or more, depending on the extent of work you get done.
- Floors and drywall will be the next project. Depending on the floors you do throughout the house, it could cost you another $15,000. You can go with cheaper options, such as carpet in certain areas, to bring down the cost. Drywall probably costs around $5,000. Then a few thousand for painting.
- The finishes will be the final stage. You will have your cabinets, vanities, toilets, showers, and sinks. If you are looking for a high-end rehab, you are going to want to spend good money here. The higher-end products you put into your home, the more money you can ask for. Builder-grade products will be cheaper, but could also make it more difficult to sell on the way out. You could be looking at $15,000 on the low end, but much higher if you go with more expensive products.
Fix and Flips can be Risky but also Rewarding
Plenty of times, I have heard or seen people lose money on this process. But if you follow my guidelines or even someone else who has done and helped people do this before. You should have no issues making money. At the same time, even with all the right resources and tools. Fix and flips can be very risky. You need to pay attention to the area you plan to rehab a home.
Ensure you are comfortable with the market and that you know it well. You always want an area where houses are selling in at least 60 days or less. Especially when you are paying interest on these loans. That interest could start to eat at your profit if it does not sell promptly. Plenty of people make money doing this every day. That is why if you hire a real estate agent who can help you, then you will never have an issue making money.