Buying a house.
While this is probably not news to you, the most important thing to consider when buying a house is obviously the location. Location, location, location! Many people attempting to flip houses buy inexpensive houses in bad neighborhoods and hope to turn a good profit. There is a reason why the house is so cheap. Nobody wants to live there. Even if you do the best renovation job, you may not get your expected return. Do your homework. Take the time to find up-and-coming areas. Buy a good solid house with great bones (potential). It is better to have the worst house in the best neighborhood rather than the best house in the worst neighborhood. A good amount of patience will serve you well. Look at lots of houses before you make a decision, and if you don't know what you're looking at, always get the house inspected.
Before jumping straight into buying a house, let's run down a checklist.
1. Do you have the skills to pull off a flip?
2. Do you have the money to pull off a flip?
3. And most important do you have the time to pull off a flip?
Let's break these down one by one. Do you have the skills to pull off a flip? Are you trying to do the work yourself or are you trying to sub (sub-contract) out the work? What's the plan? There is an immense amount of information out on the web these days with videos and articles on how to do just about anything. So if you are planning to do all the work yourself, there are some resources out there. If you decide to sub out the work, are you going to hire a general contractor for the whole job, or are you doing piece by piece jobs with different companies? Make sure you consider this before jumping in. Hiring contractors can cost a lot of money. Make sure your budget is on point.
Now that we have figured that out, let's move on to the second one. Do you have the money? Figuring out the money on the flip is hard work especially if it is your first time. To start you need to determine how you are paying for the house. Are you paying cash or getting a conventional loan or borrowing money from the bank? Then you need to figure out how much it will cost to rehab the house. When you are considering the cost of the rehab, always remember to include the mortgage payments, taxes, utilities and any other cost associated with owning a house. Now that you have the answers to those questions, you should have an amount for the budget.
Let's go on to the last question. As previously mentioned, the most important question of all is do you have the time. Whether you are subcontracting out the work or are doing it yourself, flipping takes a lot of time and dedication. Give yourself plenty of time to get the house done right. I know you will want to rush and get it to market, which is obviously understandable, but having a professionally finished product will help sell your house faster. Potential buyers notice crappy workmanship so make sure all of your subcontractors do a good job. Do not pay them until you are 100% satisfied.
The next step is to go out and buy a house. Purchasing a flip house can be very complicated. Obviously you would like to buy the worst house in the best neighborhood and make a lot of money. To help you along the way, you can do some very simple math. The cost of the house plus the cost of the renovation plus the cost of taxes, utilities, etc., gives you a total projected cost. Subtract the cost of reselling of the property, and that gives you the potential amount of profit. In the flipping industry that equation is called Return On Investment or ROI.
When putting a budget together, I always like to try and estimate the resale of the house and then add a little more to the rehab budget for unforeseen problems. That way I have a little cushion to work with.
Once you have found the house that you want to flip, it is now time to place an offer. Placing an offer on a property can be very stressful, so I'm going to break this down into different parts.
1. The sellers asking price. You've done your homework on the neighborhood, you know how much you have to spend on the renovations and you know what the house could resell for once it's finished. This is where you have to lean on the experience of your realtor. Hopefully they are knowledgable about the market and will give you guidance on whether to make an offer below asking price, at asking or above asking. I know this doesn't seem very helpful, but each market is different. For instance I live in Boston where most properties go for over asking prices. Whereas in Oklahoma (where I do a lot of work), many houses go for below the asking price. It really all depends on the market. It's always hard to know what the offer should be. You don't want to offend the seller, but you also don't want to overpay. Again this comes back to the homework that you have done. You know what you can pay for the house, so just don't overpay or it will cut into your bottom line.
2. Your offer has been submitted. In a perfect world when you place an offer on a house, the seller accepts the offer. In many markets that is not the reality. Instead you place an offer and then you have to wait to hear back from the seller. Sometimes you have to make your offer more attractive than others. Paying cash is always good and normally puts you at the front of the line. If you are applying for a mortgage, you can increase how much cash you are putting down. If you are doing a conventional mortgage with 20% down, maybe you can offer not to have an inspection on the property. But be very careful not having an inspection. While it makes your offer more attractive to the seller knowing that you are not going to come back and try and get more money off, make sure you have checked out the house properly before you go down that path. There are generally four different responses that you receive from the seller: 1. Yes. Congratulations you got the house. 2. No. This is self-explanatory and means your offer was too low. 3. A counter offer to your initial offer. Generally this is a good thing because it means that your offer was close and hopefully you'll get the house. 4. The dreaded multiple offer situation. This means that multiple people are interested in the property. This drives up the price of the house and you will end up having to pay more. The seller will come back to you with a best and final bid. It means you have to offer the most you are willing to pay for the house and see how it goes. Of course like everything else, there are exceptions to the rules. For instance I was in a multiple offer situation on a property that I knew I could make a good return on. I was not the highest bidder and did not win the house. So I went back a day later and offered $10,000 more and ended up getting the house. Once again and I know I keep saying it, but I knew how much I could make on the house, so I had a little room to play with. Know your budget.
3. Your offer is accepted. Congratulations you've got your shiny new flip house. Now what? In your offer you would have decided how long you have until closing. Generally soon after your offer is accepted, you have to put down a deposit (the amount can be different depending on which state you're in). This is called the P & S or Purchase and Sale. This just means that you are willing to buy the house and have to put a deposit down. Next comes the inspection. This can also vary state by state. This is an opportunity for you to get the house inspected to find all the problems that you don't know about. Many people use this as an opportunity to renegotiate the offer and try to take money off the price. As a side note about home inspectors, they are not liable for anything that they do not discover. Basically what I'm trying to say is if you buy the house, have an inspection but if they do not find that hole in the roof or the plumbing doesn't work or countless other things, they are not liable for that. Be aware of that. Spend as much time as you can in the house and look at everything from the attic to the basement. Go in the crawlspace, turn on the taps, have an electrician look at the wiring to make sure you know exactly what you're buying.
4. The closing is the best part. You get to sign away your life and in return, you get a set of keys. Let the party begin.
Just a final note on this subject. It's good to be patient so don't rush into buying a property that's not right for you. Do your homework.