On a recent business flight out of Atlanta, I was offered the opportunity to give up my seat in exchange for a slightly later flight … in first class. I accepted because it meant my seat would keep a young family together on their way to Disney World … though first class wasn’t a bad perk either.
What I didn’t know is that I would be sitting next to someone who is a respected authority on flipping houses. This woman is a nationally known expert and has appeared on numerous television shows for the past several years. I asked her if she was who I thought she was and lo and behold, she was! After explaining that I had a personal finance blog and inquiring if I might ask her a few questions about flipping houses, she agreed … so long as I didn’t use her name. “It would just make things complicated if I were to give interviews without running it by my agent and attorney.” I agreed to her conditions – so don’t ask who she was!
I was in for a surprise.
She had more information than I was ready to absorb.
Me: What’s your number one best tip for flipping a house?
Expert: Be there. Be on site. Absentee management doesn’t work and it never has despite how the shows are edited. Sure it would be nice to put something on auto-pilot and show up only to land the plane (no pun intended), but to flip a house successfully, YOU must be on the job site every single day to monitor the work being done … and push it to get done. Otherwise, you’re getting ripped off. Bank on it.
Me: I know the economic environment has had a deep impact on the real estate industry. What can house flippers learn from it?
Expert: To successfully flip a home, you have to know what features buyers are looking for. You may like zebra stripped carpet but only a tiny fraction of all buyers will share your tastes. Talk to a real estate agent about what you are planning to do to the property. Determine what the property will sell for after your repairs and improvements are completed. Also, don’t be afraid to make low offers. A “no” this morning doesn’t mean “no” this afternoon. Don’t let fear stop you.
Me: Since I run a personal finance blog, do you have any advice on the financial end of things?
Expert: Haha! Are you kidding? Everything to do with a flip is financial!
Just always remember that time is money … to make the money you want to make you have to buy it, fixit and flip it fast. Use both your time and money wisely and you’ll be successful. Too many amateur flippers have no idea how long it takes to complete most home repairs and they lose track of how many weeks or months they’ve been tied up on a project.
Budget the most on your kitchens and bathrooms. Those are where you should put the bulk of your money, probably 40 to 60 percent. And don’t forget about landscaping – plan to spend about 10 percent of your budget on landscaping and curb appeal. This area is always the last to get finished and that’s a HUGE mistake. Curb appeal draws people into the home and you don’t want to turn people off before they get out of their car because you cheaper out on the front yard. I’ve seen many houses with great landscaping sell while others with similar interior specs just sit on the market for weeks or months. It’s amazing what sod can do for the front of a home. Don’t neglect landscaping!
Put your budget on paper. I personally prefer using old fashioned pencil and paper rather than a computer because there’s just something about writing it down that makes it real. Compare your actual costs to your budgeted costs so you can see where the differences occur … and there WILL be differences. The key is to have a budget meeting with yourself every couple of days so if you go over budget in one area, you’ll know you have have to make adjustments somewhere else. Just know that when you go over early, those adjustments are much more difficult to make later on … and landscaping always seems to take the hit.
Understand all the costs involved in the transaction. These costs could include interest, repairs, upgrades, closing costs, home inspections, holding costs and sales commissions for the realtors. Most of the time on the show, we don’t show all these costs and it’s a bone of contention between me and the producers. When a couple buys a home for $575,000, puts $42,000 in it and plans to sell it in 6 weeks for $699,000 we rarely mention the realtor’s commissions, mortgage closing costs, or inspections.
Don’t invest everything you have. Always, always, always have extra money in reserve. If you plan to use every penny that you have, you will be in trouble. And have your funding in place before you look for a deal. Remember that you’re in business and no business would ever start without having some cash on hand and knowing where to get more.
And always remember that you make your money only if you buy it right in the first place. If the seller won’t sell at the price you need to make your desired profit, walk away. Trust me, you’ll be walking away from a lot of deals but that’s okay. It’s better to miss a few good deals than to make one bad one, especially early in your flipping career.
Me: I’ve noticed on the shows that almost NO ONE stays on track with their time line. What gives?
Expert: People we feature on these shows don’t know what they’re doing. It really is that simple. We pick a lot of them because of that fact – it makes for better television to see someone blow it. People can relate to that. Fewer people can actually relate to success. To succeed as a flipper, you’ll have to have a timeline with some allowances for no-show contractors and unexpected delays with everything from building inspectors to weather but it’s up to YOU to keep everything on schedule.
Sometimes the problems are unavoidable - a problem may appear just hours before the transfer of ownership. You will almost always run at least a little over budget and have to find some more cash or you may hold the flip a little longer than expected.
The BIG mistake is being too aggressive on the front end and expecting to do a $100,000 renovation in 5 days. You aren’t working for Extreme Makeover Home Edition.
Me: I’ve also noticed that a lot of the flippers on the show seem emotionally attached to the property.
Expert: You’re right, they do get emotionally attached but that’s because most of them are amateurs, like I mentioned earlier. The only homes they’ve bought in the past were for their personal use and each one of their former purchases of a home was for highly personal reasons. But make no mistake: flipping houses is a business and if you want to stay in business, you have to let go of the emotional attachment to that house and make money. Unless you’re planning to rent the place, selling it is the only way to make anything from it.
Me: What about hiring contractors? Any tips here?
Expert: Investing in real estate is a team sport regardless of how it’s portrayed on television and like other team sports, the stronger your team, the better your chances for success. Your team should be made up of reliable, and reputable contractors, local building officials, a real estate agent, and a staging company. Since you obviously can’t be on site 100% of the time, your contractor and his or her subs will be a crucial element to your making money. And please don’t try to sell your flip yourself – you’ll only delay the sale. That doesn’t mean you can’t negotiate a great deal with an agent though!
One thing to always remember: check your contractor’s references and check a LOT of them. Even bad contractors have a few good references but rarely more than three. I recommend checking at least five references and if you can check more, do it. Also, call the licensing board in your state to check the contractor’s license. Make sure he or she doesn’t have too many complaints on file.
Me: You include building code officials as a part of your team?
Expert: Yes. You have to get their approval so it’s best to view them as team members rather than enemies. They have a job to do and it’s your job to make sure you and your contractor perform the work to specifications in the local building codes. Code officials have saved me several times. Don’t neglect them.
Me: What’s the biggest surprise people encounter when flipping for the first time?
Expert: Paperwork. The amount of paperwork associated with flipping a house blows most people’s mind. Of course the most important paperwork you’ll deal with is permits. That’s why you need to consider building officials as team members. It takes a LOT of time to get all the permits so make sure you apply for them before ANY work begins. The lack of the proper permits WILL cause work stoppages and this costs you money. Keep up with all contracts you sign and any receipts for materials or services. You’ll need these to know if you actually made anything. You also need to obtain insurance coverage not only on the property but the workers as well in the event they don’t have worker’s compensation insurance. Worker’s comp really should be a requirement you place on the contractor though.
Me: Well, our flight is about to end. I certainly appreciate you taking a few minutes to speak with me.
Expert: You’re welcome! I enjoyed our talk and I hope you have some information to share on your blog. Just remember: with any business venture, flippers, business people, and entrepreneurs should always expect the unexpected. You’ll always encounter something you simply did not anticipate. That’s why you need to make sure you’ve done your homework and checked it twice! Anticipate problems and respond to them (as opposed to reacting to them). There WILL be the inevitable bumps in the road when flipping a house. Just count on it. Things WILL go wrong. It is how you react to those things that count when flipping a house … especially your first one.
Ron, you can make a lot of money flipping houses … a lot of money. But it really isn’t something you can do well in your spare time. It’s hard to dabble in house flipping so if you’re going to do it, go all in.
Some great information, huh? I really appreciate her approachability and willingness to share information with some guy on a plane! It was a fun talk and she had everyone around us straining to hear what was going on.
What do you think? Ready to flip that house?
This article was included in the latest edition of the Carnival of Personal Finance hosted at Money Cactus.