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Let’s get straight to the house flipping point…

 House flipping rule # 1 - Buy the smallest or ugliest house in the neighborhood. 

Being a house flipper means that you don’t mind the dirty work; or paying someone else to do it.  The main reason for this rule is based on future appraisal value.  The smallest house on the block has the biggest potential to be raised.  Once the rehab work is completed, it will appraise higher based on the new improvements, and the value of other houses on the block.  Conversely the largest house on the block is already carrying the weight of the market value.  Adding square footage for instance will not bring the same Return On Investment (ROI) as it would for smallest house.

House flipping rule # 2 - Find a good contractor.

This is not as easy as one would think.  There are a lot of bad contractors out there.   Some just want to steal your money, some have no idea what they are doing,  some do crappy work just to get paid,  some charge twice what the job should cost.  Let’s face it, most contractors fall somewhere in the gray area of these categories.  The key is to try and find the guy that is at least honest and very skilled.  The best way to do this is through references.  Don’t just rely on the word of someone else.  Go see the work in person.  You can find additional information on finding contractors in my article, House Flipper - Be your own private investigator.

 House flipping rule # 3 - Add 10 to 20 percent to your estimated repair costs.

 This is what troubles most new and “old” house flippers.  They cant exactly estimate the costs for repairs.  You see it all the time on TLC’s Flip That House.  The investor estimated 30K for repair costs but when they opened the walls, they found mold, rot, electrical problems, termite damage, and the list goes on…  Before you buy always bring in a home inspector.  Continue this until you become skilled enough at inspecting them yourself.  Rehabber’s don’t need an inspector because the house usually requires new everything.  In this case you simply need to know what the cost will be to put in all new electrical, plumbing, framing, HVAC, etc.   Several building cost estimators can be found on the web.  Building-cost.net is a free easy to use calculator that’s typically used for new construction.  It also can be used for extensive repair work i.e. rehabs and flips.  It’s actually easier to estimate repair costs on a rehab than it is on an “average” house flip.  Once you totaled your repair costs, add a 10 - 20% error margin.  You can also follow along with my current rehab project here.

House flipping rule # 4 - Buy your materials at wholesale prices.

As much as I love Loews and Home Depot, these are probably not the best places for bulk materials.  Unless of course you are buying through Home Depot’s new bid room.   Find your local lumber yard, hardware stores, electrical supplies warehouses, tool rental stores, hardwood flooring warehouse, tile wholesaler, etc.  Open accounts at the places that require them.  Most of these places allow anyone who is buying in bulk to shop there.  Some may require a contractor’s license in order to open a line of credit.  Once you establish an ongoing relationship, the discounts will begin to add up.  You can find them right in your phone book or you can stop and ask someone at the next construction site that you drive by.  I do a lot of “driveby’s” ,  but not the kind that you see on the news.  I like to call these “drive bUy’s”.  This kind of drive buy is when you see some guys working on a house and you stop to get information.  It’s also a great way to find contractors too! 

There is a sliver lining behind the doom and gloom of the housing market.  The cost to build and remodel a home is coming down.  According to “Money” magazine the prices for building materials have fallen in the past 18 months.  Lumber is 18% cheaper, drywall a whopping 40% less, windows and door frames 12% lower and roofing materials 11% down.  

House flipping rule # 5 - Find a good Real Estate Agent.

This part of your flip is arguably just as important as any other phase.  A good real estate agent can make a huge difference in your realized gain or profit.  Find one that knows the area, has many years of experience, and will give do it for a 4 percent commission or less.  Most agents realize that you are in the business for a profit and will be willing to take a smaller commission in return for your continued business.  Yes this applies to the good agents as well, so don’t settle for less.  If your agent will not work with less commission, then find another one who will.   As an investor you don’t want to be tied into long term contracts either.  You want freedom to use other agents in case the current one doesn’t work out.  In a normal market, 3 to 6 months would be long enough.  However, in the current market, do not expect to sell in this time frame which brings me to rule number 6. 

House flipping rule # 6 - Estimate your carrying costs and other expenses.

 Carrying costs for house flips can be substantial.  In the current market, assume a year or more and build that into your profit formula from the very beginning.   Also include settlement costs, down payments, transfer taxes, mortgage charges, property insurance, inspection fees, and real estate agent commission.  Don’t let this scare you away from your dream of becoming a house flipper.  

The old adage is that you make money when you BUY.  One good thing about the current market is that you can buy very, very low.  Ok. Ok… so maybe I should add a seventh rule.  I attempted to get this done in 6 from the beginning you know…

 House flipping rule # 7 - BUY LOW, BUY LOW, BUY LOW…   

How do you do this you ask?  It’s a numbers game.   When you see the right property for sale, make an offer around 30% lower than the asking price.  Remember, you are an investor.  Don’t get too caught up in the property.  Get caught up in the numbers!  This means don’t overpay because the location is perfect, or the house is exactly what you wanted.  If the numbers don’t work, move on the next one.

Find property wholesalers in your area.  These are folks that find properties cheap and sell them to investors, normally for a fee.  You can also do the work of finding the good deals yourself.  This involves, cold calls, fliers, letters, scouting, negotiating, short sales, lease options, subject to’s, and most of all TIME.  As a fix and flip or buy and hold investor, you may be better served allowing others to find them.   This way you can focus your time managing projects.