The Properly Guide to House Flipping
Shows like “Flip or Flop” make it seem like “flippable” properties are always coming on the market and super easy to grab at a profitable price. Just find a cheap house in a nice area and renovate, right?
Reality, unfortunately, isn’t a TV show. Flips can go wrong really fast and end up returning a lot less than you expected, or even costing you money.
We want to show you the basics of flipping a home the right way to make a significant return. The truth is that flipping a home is a tough process that takes time and knowledge. Done well, however, it can be an extremely profitable investment.
Sourcing the flip
Find a house on the right lot. Not all lots are equal. Just because a lot is cheap compared to the surrounding neighborhood doesn’t necessarily make it a good option for a flip. Lots that are too small to allow for improvements and additions, like a backyard or garage, that buyers expect from the area won’t be profitable, no matter how nice the final renovation is.
Look for houses that are smaller than what buyers are currently looking for in the area, but sit on lots that allow for an addition. That’s what the pros do. Adding an extra bedroom, bathroom, or larger kitchen can significantly drive up profit margins at closing if the additions meet buyers’ expectations.
Get a contractor and an inspector out to the property before making an offer (or at least while you’re in your due diligence period). These experts will help identify potential problems with the renovation (e.g. walls that can’t be torn down, features that aren’t up to code) and provide a high level cost estimate for the project.
Figure out how much profit you’ll make ahead of time. To make a flip worthwhile, you have to buy the property for substantially under market value. How cheap does the home have to be? Here’s how the math works out:
Let’s say you purchase a property for $400,000, which is $100,000 less than you expect to sell it for, and then put $50,000 into the renovation. Sounds like an easy $50,000, right?
Wrong. Assume the whole renovation process takes about 6 months (which is how long the average flip takes right now), and you sell the property at full ask, or $500,000, the day it comes on the market (which means you underpriced the home). After commissions (which assuming you use Properly, will only be $20,000), your total profit will be $30,000.
But wait – since you only held onto the property for 6 months, you’ll have to pay short-term capital gains taxes on the sale. The rate varies based on your ordinary income, but it wouldn’t be unusual to pay 36.8% tax on the transaction, meaning that Uncle Sam just turned your $30,000 of profit into $18,960.
Ignoring any other transaction or holding costs right now, which can be significant, your return on investment is only 4.2%, or about 8.7% on an annualized basis. Putting that same $450,000 in an index fund will return 7% annually, on average, with a lot less work or risk. So was the flip worth it?
Plan before you buy a house to flip
A little planning goes a long way. If you’re thinking about a flip, get a free home valuation using the Properly Online Valuation Tool on the property ahead of time. Not only will we tell you what we think you can sell it for once the renovation is complete (with over 97% accuracy), but we’ll also tell you what types of finishes you should install to get the most bang for your buck in the neighborhood.
Professional flippers look for ROIs of at least 25%, meaning they would have to purchase the home from the example above for around $275,000 for the flip to make financial sense. Two flipped properties we’ve sold, 281 Ormond Street and 681 Cherokee Ave, both in Grant Park, each netted their owners over $100,000 in profit, after expenses.
How do these professional house flippers get such great deals?
Make an all-cash offer for the home in as-is condition. If you’ve never had an all cash offer on your home, this is what it feels like (Giphy)
Professional flippers almost always make all-cash offers for their properties for two reasons:
- Homeowners are more likely to sell at a lower price if they know their home won’t have to undergo an appraisal and inspection.
- Banks aren’t likely to issue a mortgage for properties that are in disrepair.
For the homeowner, this means that they can sell their asset quickly without the hassle of putting it on the market. As a flipper, you can usually close more quickly than a buyer with a financed transaction, meaning that you can renovate faster and reduce the amount of time your money is tied up.
How to flip a house: renovating the right way
A lot of the hard work for a profitable flip is done during the sourcing process, before the property is even purchased. Once you’ve done your due diligence and found an opportunity, the renovation and redesign begins.
The renovation may be the most fun part of the flip for most investors, but it’s also the part that’s most likely to drive up costs unnecessarily and reduce the final ROI. How can you make sure you’re renovating for return, instead of for fun?
Start with the boring stuff
Make sure the electrical and plumbing systems are in good working order and up to code. It’s easy to overlook when your mind is focused on countertops and hardwood floors. The experienced flippers we’ve worked with know that mechanical issues are the quickest way to lose money on a home. As David, the flipper of 787 Rosedale Ave in Grant Park pointed out:
Making sure all mechanical systems are in order is vital. Buyers, especially first time buyers, can get scared off by things that pop up in the inspection report.David – Pro House Flipper & Properly Customer
An inspector should have identified most mechanical issues before you purchased the home. Other issues may arise as you start breaking down walls, so build a contingency fund into the purchase price to ensure you can afford new air ducts or crossbeams if they’re needed.
Design for the neighborhood, not for Architectural Digest
It’s no coincidence that neighborhoods tend to have a uniform look. The features that make a subdivision attractive to buyers (e.g. location, school district) also tend to attract buyers that have very similar amenities and styles. For example, a neighborhood in a great school district will probably attract families, which means 1 bedroom homes aren’t going to be popular.
The first suburb in the US, Levittown, was successful in part because it understood this uniformity of need.
“You can have a home in any style you want, as long as it’s a ranch” (Source)
Stick with the neighborhood style. If you’re renovating in a neighborhood that has a lot of Victorian houses with brick fireplaces and wooden staircases, now is not the time to try your hand at building modern masterpiece. Likewise, if most homes in the neighborhood have 3 bedrooms, 2 baths, and 1,800 square feet, don’t spend the money on an addition that will convert the property to a 5 bedroom, 5 bath mansion, even if the lot is large enough. You won’t get your money back when you go to sell it.
Don’t “over-finish.” One of the quickest ways a project can get out of control is by over-finishing the interior of the home compared to the surrounding properties. If homes in the area typically have granite countertops and pre-fab cabinets, don’t waste money on marble and custom woodwork. A quick scan of nearby sales (using the Properly online home valuation tool, of course) will tell you what finishes the buyers in the area are expecting.
The same goes for paint colors. Stick with relatively neutral colors that buyers are looking for – gray is “in” right now – that complement the size of the rooms. Just by being freshly renovated, the house should stand out from others on the market, so don’t go overboard with paint colors that could turn off buyers.
That doesn’t mean your flip can’t stand out a little. A few unique characteristics, like vintage mirrors or cool cabinet hardware, can go a long way to making your home the top pick for buyers in the neighborhood.
A good use of a unique mirror to make a room stand out like Properly Customer & House Flipper on Cherokee Avenue, Atlanta learned.
How to flip a house: selling for a profit
So far you’ve sourced a property with a high ROI potential and renovated the home to fit in with the neighborhood. Now that the hard work is done, how can you maximize your flip’s profit once it’s ready to be listed?
Finalize the list price based on changes in the local market
As we mentioned, you should have set a target sale price for the flip even before purchasing the home. A lot can change in six months though, so once you’re putting the finishing touches on the renovation, go ahead and get an update on the comps you used for that initial price and see if any new comparable listings have come on the market. Of course, if you get one of our real-time digital valuations, you’ll get those updates automatically . Otherwise, head over to your favorite listing site and do the grunt work.
What makes a good comp for a flip? The ideal comp is another recently sold home nearby that has the same bedroom/bathroom count and finishes as your property. Since it’s rare to find such gems, Properly tends to look first for listings that are a similar size to your property and then adjust the list price based on the differences in updates. It’s two parts science, one part art.
Don’t spend money on staging (unless you think the layout will be a problem). While many investors opt to stage a newly renovated home, there’s little evidence that the money spent on staging – which can be thousands of dollars a month – brings in a higher offer. One study done at the College of William & Mary showed that a buyer’s willingness to pay didn’t change whether the home was staged or not. Likewise, the evidence for whether staging sells home faster is inconclusive.
Our experience is that buyers are pretty savvy, and they don’t need furniture in a room to understand how the space can be used. In many cases, the opposite is true – buyers prefer a blank canvas because they can more easily imagine how the home will look with their family and furniture.
There is one exception to this rule: If your property has an unusual layout, or if the purpose of all the rooms isn’t immediately clear from their size or location in the home. Since you did the flip yourself, hopefully this won’t be an issue, but if your property’s living room in the shape of a triangle and connected to a large laundry room and a small master bedroom, you may want to put in some furniture so buyers can visualize the best way to use the space.
Do use professional photography. You just spent a lot of money making this property look beautiful, so make sure your photos showcase all the work you put in. The average buyer spends 20 seconds looking at the first 4 photos of a listing before deciding whether to schedule a showing, so professional photographs are worth the time and money. That’s why Properly includes them with every single one of our listings.
Remember the ROI math we did earlier. One of the highest impact factors in the equation was the total time your money was tied up in the investment. The quicker you get to closing, the better your annualized ROI will be, and the sooner you can use your profits to invest in another flip.
Practically, that means closely tracking the showing activity on your home and adjusting the price if you’re not getting offers in a reasonable amount of time. We’ve written before that price should be adjusted in 14 day increments, because, from our data, almost all offers come within two weeks of listing or a price reduction.
Time is not on your side. If the house sits on the market for three months after renovating for six months it means that means that by closing, your money will have been tied up for almost a year. Reducing the price by $10,000 early on can cut months of wasted time and dramatically increase your ROI.
Thinking about flipping a home or just finishing the renovations and trying to figure out a pricing strategy? Start with a free digital valuation on the property. We’ll give you an unbiased list price recommendation based on local comps, entirely online. You can even check out your comps’ listing photos online and get instant updates when their prices change or they go under contract.