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Six House Flipping Tips

by Brandon Turner on August 5, 2012 · 37 comments

  
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You might call it obsessive, but I listen to Pandora Radio for at least ten hours a day.

In case you are unaware of this amazing piece of technology, Pandora is an online radio program which plays only music that is similar to songs you already love. For example, if I only wanted to listen to songs like “Smells Like Teen Spirit,” I would enter that song in and would be presented with endless hours of music similar to the style, age, tempo, and genre found in that classic Nirvana song. The best part is – I can listen on my iPhone all day long, where ever I go (hence the “ten hours a day of Pandora”).

Pandora offers this completely for free – but is supported by short advertisements that play periodically (unless you upgrade to the premium service). This afternoon – wedged between some great songs, I heard an advertisement telling me that I could, “make an extra thirty, forty, or fifty thousand dollars every month without spending any of my own money FLIPPING HOUSES.”

Of course, the ad is for another “real estate guru” who can teach how to make millions from flipping houses. The advertisement seems so easy, so painless, and so attainable. All you need to do is attend the free mini-workshop, upgrade to the more intensive (and expensive) training session, and hire the guru as your own personal coach to get you there. Easy money without any work.

It’s for this very reason that the “flipping shows” became so popular on television over the last decade. People love to see and hear the “rags to riches” stories and believe that they, too, can achieve these results. Yes, some have actually made that kind of money flipping houses. However, the vast majority of flippers make little to no money on their projects.

Don’t get me wrong – flipping houses can be a successful way to earn a living and I, too, love the flipping shows. In fact, I entered the world of real estate investing after watching these shows and there is a good possibility that you did as well. However, TV is TV and the real world is, well, real.

If you are new to flipping, I wanted to share a few tips for flipping houses I’ve picked up over the past several years while investing in real estate. I hope the following suggestions will make their way into your psyche before you jump into the game unprepared, hoping to make millions flipping but end up just another sad story.

Here are 6 House Flipping Tips

1.) Flipping Houses is Only “Sorta” Investing.

The process of buying a cheap property, adding value, and reselling can be profitable and exciting; and yes, it does fit the Webster’s definition of an investment. However, at face value this form of earning money more closely resembles the buy-low-sell-high model of a clothing store than the wealth building strategies of a true real estate investor. However, flipping CAN be an investment if you use it as a tool to generate income to support a more robust investment strategy. In other words, flipping can help either pay the bills (like a job) or used as a source of cash infusion into your investment strategy. However, don’t assume you will simply “flip your way to retirement.”

2.) You Make Your Money When You Buy

If you pay too much for a property, no amount of spit and shine is going to give you any better financial outcome. A good friend and investor told me once, “If I don’t blush when I offer, I offered too much.” This might mean it will take you twenty, fifty, or even a hundred offers before getting one accepted. However, that work will pay off significantly in the long run.

3.) Don’t Simply “Buy Low”

Cheap homes are often times the only factor would-be house flippers look for. However, keep in mind that a cheap house may need significantly more repairs – and money – than one simply average. For example, if you found a home for $50,000.00 that needed $40,000.00 of work and another, similar, that could be had for $80,000.00 but only required $10,000.00 worth of repairs, which would be a better flip? If future value is the same, obviously the home that needed far less work (and time) would be a better option. Additionally, these homes in the marginal middle of the price range are often neglected by both retail buyers AND investors – giving you a better opportunity for a lower price.

4.) Be Conservative In Your Math

Perhaps the easiest and most common mistake among newbie home flippers is an unrealistic look at what a home actually costs to remodel. Trust me – I’ve made this mistake multiple times. I am always continually surprised at just how quickly costs can add up. It is important that you get a realistic idea of what the costs will be and add significant amounts of cushion to your figures. Also, don’t forget to include holding costs – such as taxes, insurance, mortgage payments, utilities, and any other charges that might occur. A good rule of thumb is to double your projected budget and double your projected timeline. If the deal still pencils out, proceed.

5.) Sell As The Best and Lowest

In the better market of yester-year, you could flip a house and be either the best looking OR the lowest price among other homes on the market and still find success. In today’s market, however, it is imperative that you are both the best AND the lowest among comparable homes. It doesn’t mean you need to put solid granite counters and a fancy hot tub in a low-end home. However, if comparable homes include those items – you better as well.

6.) You MUST Have a Plan B

Hopefully, by following the advice above you will find yourself with a home that sells quickly and nets you a significant profit that you can reinvest in further endeavors. However, it’s not enough to have a quick-sale as your only option. In today’s market, you need to be prepared for the chance that your home will not sell for what you need. Many house flippers lost everything when the market dropped and they were no longer able to sell their homes. You need to be prepared for this to happen

Final Thoughts

If you’ve been following my posts here on BiggerPockets or my own blog, you probably have heard me talk negatively about flipping on several occasions. It’s not that I don’t like flipping – in fact, I love doing it. However, far too many “investors” jump into flipping without an accurate understanding of the time, pressures, and costs associated with it. If you are looking to flip a house, I highly recommend that you first partner with someone who has done many. Learn everything you can first, follow the advice I’ve shared above, and proceed. You may not, like the commercial suggested, make millions of dollars – but you just might find a career more exciting than the job you are currently in and a good source of cash for future investment deals.

It’s Your Turn

For those who are reading this and have successfully completed house flips in the past, please comment below and let me know what the main piece of advice you would like to give to newbie house flippers? Also, please feel free to share this on your Facebook, LinkedIn, Twitter, or simply share it with your Grandma!

Image courtesy of Thomas Quine

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{ 37 comments… read them below or add one }

Dwayne August 5, 2012 at 3:16 pm

Good article Brandon. I’m always watching fix and flip shows. Sometimes they have a renovation team and sometimes they do the work. Either way, you have to have your numbers in order. I’m truly a novice, so new I haven’t made any moves yet. You make a good point…I don’t want to jump in and become a another sad story.

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Brandon Turner August 5, 2012 at 3:38 pm

Thanks Dwayne. Exactly – you have to have your numbers in order. At least you’ve come to a good place to learn more – Bigger Pockets is the best resource you can find for learning to invest in real estate. Good luck and let us know how you progress!

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Jessica August 5, 2012 at 6:17 pm

Hey Brandon,

Any thoughts on simply wholesaling as opposed to fix and flipping? I live in New York and invest throughout the tristate area. Would love some help.

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Brandon Turner August 6, 2012 at 10:00 am

Hey Jessica,

I think wholesaling is a terrific way to learn the business, gain experience, make contacts, and learn how to “buy right.” I definitely recommend it for anyone who wants to flip houses someday. It’s also a lot less risk (but less reward, I suppose).

If you are interested in becoming a wholesaler – there are tons of great articles on BiggerPockets about it. My main piece of advice is to find a flipper or investor in your area FIRST who can teach/train you in what they are looking for.

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Jessica August 6, 2012 at 10:12 am

Hey Brandon,

I’m definitely working hard to expand my network of investors, rehabbers and fellow wholesalers. However, I’ve found it a bit difficult to connect with other wholesalers (more competition I suppose). I thank you for taking the time to respond to my post. Good investing!

Jessica

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Brandon Turner August 7, 2012 at 7:52 am

Yeah, I suppose wholesalers can be pretty territorial and competitive! Hang in there!

Michael Borger August 6, 2012 at 4:18 am

Very good article, Brandon. I agree — having realistic expectations is vitally important. Along the same lines, no one gets rich quick overnight doing this. As sexy as flipping houses can be, you’re still building a business from scratch and that takes time. Branding, building relationships and getting the systems down is nothing you want to rush through. A real business develops properly at its own pace.

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Brandon Turner August 6, 2012 at 10:02 am

Michael – I love what you said ” Getting the systems down.” That’s key – and why I always advise people to work with other’s first (so you can “steal” ideas from their systems). I started without doing that and wasted a lot of time and money trying to figure it all out with trial and error. Ick.

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ofimed August 6, 2012 at 4:57 am

Good article.

I always have a plan B, a plan C, a plan D… that’s very important.

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Brandon Turner August 6, 2012 at 10:04 am

I also come up with multiple exit strategies. I never want to say I lost a house or the hard money lender took it back. For example, I once had a house I tried to sell but it was taking a while. The loan was expiring and the lender didn’t want to renew. So I called up a partner, paid the loan off with their cash, and subsequently sold it a month later to a buyer. A lot of people in that situation have simply walked away from the deal and accepted defeat. Thanks for the comment!

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Paul Crowson August 6, 2012 at 6:20 am

Thanks Brandon for reminding me why i must stay partnered with really successful people, it has saved my butt several times already….my rehab construction partner is a real life saver and he is worth more than I could afford, but our partnering has really worked out better than being solo, for lots of different reasons. Thanks again!

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Brandon Turner August 6, 2012 at 10:06 am

No problem Paul! Once you have that experience, don’t be afraid to step outside that expensive arrangement and find your own contractors. However, if it works – great!

Another benefit of partnerships is the ability to motivate each other. This is worth a lot as well. Thanks for the comment!

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Mike August 6, 2012 at 6:23 am

Brandon, solid advice. Buying right is the key as you say. Like many house flippers, I use the 70% Rule based on ARV. If I look at a house to flip, I take 70% of the projected After Repair Value as my starting point. So for a $200,000 ARV $140,000 is 70%. But if my contractor says it needs $40,000 in repairs I buy for $100,000 – no more. That way the 70% Rule saves me from market downturns. We did a house with those exact numbers and made just over $15,000 profit thanks to the 70% Rule.

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Brandon Turner August 6, 2012 at 10:07 am

Dang Mike! Congrats on the recent success! Using 70% ARV is an excellent tool when running those numbers. It’s easy to remember and use – and can save a lot of headache later and like you said, protect us from the market downturns.

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Mike August 6, 2012 at 10:45 am

Hey Brandon, they dont all turn out that way but when they do it is pretty sweet. Thanks for the compliment. 70% really keeps you disclinplined and forces you to buy right. Its just one cog in the machinery, but an important one to remember and stick to.

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Chris December 11, 2012 at 10:19 am

Great work, Mike. It’s always good to see others succeeding with their flips. Just a question though. You bought the place for $100k, and put in $40k of repairs. What price did you end up selling it for and what were your holding costs/other costs? Just curious, because I love seeing how the numbers work in different deals!

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Lynn Andris August 6, 2012 at 1:38 pm

Concise and to the point. These are my observations as well. To me the most critical point you made is the best product lowest price model. This is a new world for those seeking to flip. Being conservative with your numbers and planning to offer the property at just below market price will insure a quick sale.

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Brandon Turner August 7, 2012 at 7:51 am

Thanks Lynn! Best Pice/Lowest Model = success (hopefully!) Like you said, this is a whole new world for those seeking to flip! Thanks for the comment!

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Adam Johnson August 7, 2012 at 1:47 pm

All very good points, many of which I have learned the hard (and more expensive) way. As I gain experience, I have learned that flipping/wholesaling and many other “investments” merely create a “job”. Once the deal is done/sold, you have to go and find the next one to keep the income coming. I have switched my focus to buy/hold/lease, though I will look at flips from time to time. I already have a full-time business, already real estate related. I look at it as a means which allows me flexibility to shift focus to my own properties when they need attention, but it is my day job. For the most part, my properties don’t take a lot of my time, thought they are certainly not completely hands off.

The fun part is watching the balance sheet get stronger, while I work less! That is what I consider an investment. With a job, the balance sheet only gets stronger when I work more!

Again, all great thoughts. I appreciate you sharing.

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Brandon Turner August 7, 2012 at 5:24 pm

Hey Adam,
I feel the exact same way. I tend to spend a lot of time creating jobs for myself. Not the ideal situation. On the other hand, I love real estate as a j.o.b. much more than anything else I’ve done, but I just need to be careful to keep them separate in my mind.

Thanks for chiming in!

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Karen Rittenhouse August 9, 2012 at 4:10 pm

Great advice – if you haven’t done many, do them with someone who’s experienced.

Cost overruns can wipe out a new investor in their very first deal.

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Brandon Turner August 10, 2012 at 12:41 pm

Thanks Karen! I know cost overruns have made life difficult for me on more than one occasion!

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Randy February 15, 2013 at 1:46 pm

I work in construction so that helps with house flipping on the side. getting started, I believe 2 of the most important things to rememeber is location & size of house. Location – you will be stopping by a lot more than you think, keep the flip close to home or work. Size – keep the 1st flip under a 1,000 S.F. this will allow you to learn on the 1ST one with out too much at risk.

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Ben Leybovich February 18, 2013 at 4:40 pm

I love it!

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Brandon Turner February 18, 2013 at 4:56 pm

Thanks Ben! Do you flip at all?

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Ben Leybovich February 18, 2013 at 5:03 pm

You mean houses? :) Yes, if the spread is so big that I can’t pass it up. But in genral, I don’t like to work that hard :)

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Jeff Hahn March 1, 2013 at 4:02 pm

My wife and I flip in Ventura County CA where prices are pretty high and now that there is no inventory prices are rising again. We have done 9 homes so far. We have not lost on any so far. Unfortunately the state of CA and Mr. Obama keep adding taxes. We have to pay our income rate of now 39.6 Fed and 9.3 state…I have a day job….plus this extra percentage Mr. Obama wants on short term investments. It takes incentive out and we then buy less at Home Depot and hire less people. Go figure. We downsized a large home we lived in into a smaller home so we could use the equity to flip with cash on the courthouse steps. The first 6 were Short Sales and now with no inventory the auction is the only way I see to get any kind of deal. Love all of your comments and experienced advice. Good stuff. 70% rule is good because the cost of fixing ads up quickly especially hiring everything done like we are. It took time to find all the quality and fair priced vendors but we have a team now. Lots of pain finding them. Buying low is the key or you won’t make money.

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Chamoa jackson March 29, 2013 at 8:45 am

im very interested in flipping.im 21 years old and I have to start from the bottom.Whats a good start for me. Im located in dallas texas???

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Brandon Turner March 29, 2013 at 9:17 am

Hey Chamoa,

I started flipping my first house when I was 21. The best advice I have is to really be conservative in your numbers, and wait for the best deal – don’t get excited and pay too much! Be sure to listen to the 10th episode of the BiggerPockets Podcast where we interview J Scott about flipping. You’ll learn a ton!

You can also pick up two of J’s books that will teach you everything you need to know about flipping here.

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JT June 20, 2013 at 10:23 pm

I was hoping for more of a strategy or formula to improve value of a home. All the points made in the article I noticed myself while watching one episode of property wars. I found the article to be rudimentary common sense of a business model.

From what I observed from “flipping” shows that granite kitchen countertops, copper plumbing, remodeled bathrooms, energy efficient windows, & high end cabinet doors all increase value of a home but that cant be all. What else is there?

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Brandon Turner June 20, 2013 at 10:58 pm

Hey JT, thanks for the comment. I hope you understand this post was intended as a “basic tips” post (as the title suggests) not an end-all-be-all rehab book. For that, you’ll want to check out The Book on Flipping Houses and The Book on Estimating Rehab Costs.

That said, every area is different and you cannot rely on the information from reality television shows to base your knowledge on. In the purest form – there is no such thing as increasing the value of a property – you can only bring it back up to the level it belongs in. To do that – you simple need to determine what the competition is offering. If they all have Granite – then yes, you would want granite to bring the value to their level.

Hope that helps!

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Leon June 26, 2013 at 7:37 pm

I’m a renter in the process of purchasing a house at a low price. The house is 70% completed construction, reason for low selling price. Is it a good idea to finish construction, then immediately put the house on the market, but move in to avoid carrying cost until the house sell. Second questions, should I use the equity to purchase another house. This is new to me so I am very nervous, but I’m going for it. Really could use some good advice!

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Adam Johnson June 27, 2013 at 3:57 am

Not knowing all of the specifics of your situation makes it a bit more difficult to give specific thoughts. However, if you are already considering living there, you may want to explore the idea of living there for a bit and listing it for sale later. This is something to discuss with your accountant as well. I don’t remember if it is 2 out of the last 5 years or 3 out of the last 5 years, but if it is your primary residence for that period of time, then the capital gains is exempt up to a certain amount. That could mean you don’t lose any of your profit to pay Uncle Sam!

This assumes your cost basis is less than what you sell it for (aka you are making a profit on the sale). It also assumes that it would work for your personal situation to live at this property for that long. If it works for you, you can do this as many times as you want (but you can only do one at time with this exemption).

I wish I had known as much about all of the benefits of real estate investing when I started out in my adult life. At least I am learning now before it’s too late.

I have not personally used this strategy. I have a friend that buys a house such as yours, moves in, fixes it while living there, lives there for the required period of time, then lists it for sale. She has been doing this for quite a while and normally doesn’t sell the house she is living in until she finds her next suitable house. One criteria for her is to keep her kids in the same school district. Her sales are not taxable capital gains because she has lived there as her primary residence for the required time. If her capital gains rate is more favorable than her ordinary income rate, then she could also hold it for 1 year and 1 day and then sell it and the profit would be taxed as capital gains instead of as ordinary income. Owning for 1 year and 1 day also opens up the option of a 1031 exchange to DEFER the capital gains tax.

None of my ideas limit you from doing another project(s) while you live there. I only offered them because you mentioned living there while selling, so I thought I would give you a new angle to consider. Talk with your accountant so you can make money for YOU instead of for Uncle Sam!

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alexis July 3, 2013 at 11:44 pm

Just recently, I came across a video about flipping houses. This seems like a good investment regardless of geography. So far, non from my place have considered this strategy. I am very interested in going into this kind’a investment but most data available in the net is US based. By the sound of the discussions above, you guys kind’a already know what you are doing. For me, it will take a lot a research – that I will do before I take the plunge! Regards from Davao City Philippines.

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Josh October 14, 2013 at 11:47 am

There have been many times where we have bought a house and done our normal projections for remodeling, and have been completely wrong. Whether it be spending an extra few thousand on a roof, or having a sewer line damaged that wasn’t perceived before, it is nearly impossible to account for everything. Especially in older homes. I think out of all the expenses that have caught me off guard, it would be electrical in older homes that always seems to be the most. To put canned lighting and redo a lot of the electrical throughout a 1200 sq ft house build in the the 40s in Los Angeles cost us $8,000. We have been doing this for 5 years, and this was probably our oldest home. We also just moved in to doing estates with larger lots. To redo the landscaping completely for 20,000sqft. lot homes cost us about $10,000. These expenses definitely add up. Good thing this was during an up-economy and the costs paid off rather than a decline economy.

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House Work June 3, 2014 at 2:07 pm

Great post! Been reading a lot about working on houses like this. Thanks for the info here!

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Warren June 22, 2014 at 5:56 pm

Brandon,

Wish I had more insight for anyone and everyone that has even less experience than I do. I really just wanted to stop in and say Thank You for all that you do.

As for Flipping, I believe it can be a great business. Takes work, but I was not looking to retire tomorrow. It will be a means to get the passive buy and hold income. I also believe that a spin off wholesale company will come about for me once I have my marketing campaigns up and running.

Essentially REI is several avenues and they are all in a seedling stage for me. Some nurturing and they will become very viable and lucrative.

Again, thank you.

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