How to Flip a House (and How Much Money You Can Make)

By Margaret Heidenry

Stephan Zabel/iStock

Ah, the house-flipping dream. Buy a run-down home, fix it up, put it on the market—and profit, big-time! Flipping may have hit its peak in the bubble years leading up to the 2007 housing market crash, but this is one dream that definitely hasn’t died. However, just because you’ve watched a lot of HGTV doesn’t mean that you know how to flip a house.

Earlier this year, RealtyTrac reported that homes flipped in the first quarter of 2016 had yielded the highest average gross flipping profit—the difference between the purchase price and the flipped price, not counting renovation expenses—in 10 years. The magic number: $58,250.

But just how much money you make will hinge on taking the right approach—so be sure to check out these pointers on how to flip a house. For real.

How to find a worthy house to flip

“Stick with the age-old adage of buying the cheapest home in the nicest neighborhood,” says Eric Workman, senior vice president of marketing at Chicago-based Renovo Financial, a private lender specializing in the house-flipping space. But don’t pick just any old shack—look for a home with  “good bones,” Workman says. Translation: one that’s structurally sound, has a decent roof, newer windows, and an HVAC system that’s less than 10 years old, as well as modern electrical and plumbing.

Next, a flip should need only cosmetic changes such as new cabinets, countertops, flooring, and paint.

“These renovations can usually be done without the delays of permits, plus the upgrade costs will be relatively fixed, helping to eliminate unforeseen expenses,” says Workman. And always look for homes in neighborhoods close to public transportation or in good school districts as they tend to sell quickly.

How much should you pay for a house you’ll flip?

Your goal should be to make a 10% to 20% return on your investment. So how do you crunch the numbers? For starters, find out what your fixer-upper will sell for once you’re done with it by looking at the sales price for similarly sized homes in the same neighborhood that are move-in ready, says broker Bobby Curtis at Living Room Realty in Portland, OR.

Let’s say, for instance, that homes in tip-top shape in the area sell for $300,000. To get a ballpark figure for a run-down house, cut that price by three-quarters (75% of $300,000 = $225,000). Then subtract the cost of repairs (if repairs cost $30,000, that would be $225,000 – $30,000 = $195,000). That’s about the most you should pay for your flipped house without cutting too much into your profits.

As for financing a flip, it isn’t that different from buying a regular home. You’ll either pay cash or take out a mortgage—just consider going for a 10- or 15-year mortgage, which will offer a lower rate. After all, odds are you won’t own this home for long anyway.

How fast should you flip?

Don’t kill yourself (or more accurately, flip yourself into an early grave) to rush the flip. But also note, you don’t want this house sitting around for long. Curtis recommends looking for a place that will take four to six weeks to renovate. A short deadline ensures you’ll buy and sell the house in that same housing market. Plus, owning a house for less than two months keeps costs like interest and taxes at a minimum.

This means that finding contractors who do quality work quickly is key to your success. For that reason, it’s crucial that you do your due diligence before you hire one: Make sure to meet with at least a few contractors, get their license number, references, and an estimate of what they think renovations will costs. Keep an eye out for red flags—e.g., contractors who ask for money upfront or in cash aren’t playing by the usual rules, and might be trying to take your money and run.

That said, you should accept the fact that the cost of repairs will almost always run over. As such, “you absolutely, positively must overbudget” so you have a financial cushion for those inevitable cost overruns, says Joseph Chiera of The Realty Cousins of Poughkeepsie, NY. Design backups will also help with budget shortcomings.

“If you’re planning to use high-end hardwood flooring priced at $5 per square foot, have a nice backup at $2 per square foot.” Here’s a list of renovations and how much they pay off at resale.

 

Learning the Lingo: Dollhouse, Bird Dog, and Other Flipping Slang Deciphered

 

So you’re handy with power tools and have a pile of cash burning a hole in your mattress. Flipping real estate may be just the ticket to grow that pile into an Everest of dough!

However, before you start attending auctions or scouring foreclosure sites for deals, you should know that flipping has its own colorful, and, to beginners, puzzling slang. Our Learning the Lingo series can help you look like you’re in the know.

Read on to understand the difference between a dollhouse and a haircut and beyond.

Distressed property

Yeah, this one you already know, but it’s the starting block for most flips. Distressed properties have fallen on hard times and are usually in the process of foreclosure. Since the original owner hasn’t paid the mortgage for some time—maybe a long time—the bank or lender has taken over. It generally has one goal: sell the place and sell it fast. That’s why distressed properties are priced far below market value. Hello, bargain basement!

30-60-90 pre-NOD list

This is the primo list of leads generated by property data companies on homes where owners are 30, 60, or 90 days late in paying their mortgage.

 

What’s important here is that the property is in pre-foreclosure andnotice of default, or NOD, has not been filed; therefore, the property is not public knowledge yet. If you want to beat other rehabbers to the property, these lists give you a sneak peek at which homeowners might want to throw in the towel so you can pounce. They give you a competitive advantage in the marketplace. They also usually cost money, often priced per lead.

After-repair value (ARV)

This is the price people will pay for the property after you fix it up. It’s your profit margin! It’s what you’re working for, and it’s the key metric in your investment strategy. You need to do a realistic calculation of what the home could be worth based on the amount of work you plan to do and the comparable homes in the area. So if you find something that looks like junk but has great bones and is located in a desirable neighborhood, the after-repair value, or ARV, might just sound phenomenal and you should probably plunk down an offer.

Dollhouse

It’s a minor fixer-upper. Barbie herself would be proud to live there because it needs only cosmetic attention—some new paint and maybe a few lighting fixtures. There’s an absence of the deeper problems (foundation, plumbing, electrical) that would require lots of elbow grease and hard cash in order to get the place up to snuff on the market.

Haircut

You like the no-fuss sound of a dollhouse? This property is even more sales-ready. Just take out the trash and mow the lawn before planting that “for sale” sign, and you’re good to go!

Bird dog

In the same way wirehaired pointers flush out pheasants, these professionals hunt down distressed properties whose owners might be desperate to sell. If they smell blood, bird dogs (also called “deal scouts” or “real estate jobbers”) then sell these leads to frequent or professional flippers to swoop in and close the deal.

OPM

Flippers often use other people’s money, or OPM, to curb their own financial risks. Unless you’re fully confident in your flipping skills and flush with cash, OPM can make the difference between an intriguing side venture and a do-or-die investment.

Hard-money lenders

Hard-money lenders give loans to flippers in a fraction of the time it takes to get a traditional mortgage. They are not banks, but rather private businesses or individuals. And yes, they’re expensive, with interest rates well in the teens. But at an auction, when flippers need cash quickly, a hard loan can serve as a bridge until they can secure longer-term financing—or just flip the house and pay their lender back.

Wholesaler

This is a property flipper on human growth hormones. This professional buys a distressed property and then immediately turns around and sells it as is to another flipper. Sometimes these guys work so fast they don’t actually close on the initial sales contract; they just agree to buy the property, but before closing, find a buyer and simply assign the contract of sale to this next guy in line. It’s great because wholesalers pay nothing but rake in a profit. That said, you’d better know what you’re doing and how to spot properties with real potential.

Weekend warrior

This is a more relaxed flipper, someone who approaches it as a hobby or a part-time second income. Usually these flippers invest their sweat equity (see below) on, well, you guessed it, the weekend.

Sweat equity

This is the energy and effort flippers put into buying a property, fixing it up, and selling it. With any luck, it does not involve tears, blood, or hospital visits due to a malfunctioning nail gun. A bit of actual sweat is OK.

Crying the sale

This is the ridiculously rapid-fire patter of an auctioneer at a foreclosure auction. It takes these guys years of practice. The National Auctioneers Association hosts an annualInternational Auctioneer Championship in which contestants are scored, among other things, on clarity, voice control, speed, rhythm, and voice expression.

Bene

Bene is an abbreviation for “beneficiary.” When a distressed property doesn’t sell at a foreclosure auction, it goes automatically to the bene—the bank or lender, which will typically then just put it up for sale as a foreclosed property and hope for the best.