Ok. So you have figured out that you really want to start flipping houses. That was easy to decide.
The hard part is usually figuring out where to start. There are so many different ways to flip houses that it can get confusing and overwhelming. Just off the the top of my head, you could:
- Fix and flip retail (rehabbing)
- Do lease options
- Fix and sell with owner financing
- Fix, rent and sell
- Work short sales
Don’t Be a Jack of All House Flipping Trades and Master of Nothing
Choosing one or just a couple of these strategies and focusing on them is what I recommend. You should become an expert in those chosen techniques and the only way I know to become an expert is to actually be doing. You must actually take action and make mistakes. Don’t be fooled. It’s nearly impossible to learn everything before taking action and avoiding making any mistakes.
So many people get caught up in trying to learn everything about everything that they never actually do anything. This includes buying all the courses out there because it makes them feel like they are getting even more prepared. If that is all you are doing, you are probably more likely just getting more and more confused because you are having difficulty remember and figuring what to use and when.
Getting out of our comfort zone and actually taking action is scary for everyone and the only way to conquer that fear is to face it. Studying will not remove that fear. Doing can and will. It’s easier when you just start taking small steps and venturing out. This will allow you to quickly realize what is important for you to know at that particular stage of your learning. I guarantee when you learn this way, you will retain much more and conquer your fears as you go.
We can all do ourselves a favor and just choose to focus on what we enjoy and what feel right to us. This all depends on our individual circumstances.
Let’s look at some common situations and determine which method is best for each (at least in my opinion).
Determining Which Method of House Flipping is Right For Your Situation
Based on your current situation, here are some ideas for which method of flipping houses is likely to work best for you. This is not to say that you couldn’t work some of the other angles successfully, it’s just that you are likely to be starting with more risk and difficulty.
Very Little Money to Start and/or Need Money Fast
First, if you are in a situation where you need some cash very quickly and desperately, you might want to focus on taking care of that with a traditional job or some other way first. You don’t want to be so much under pressure that you make some very expensive mistakes because you HAD to do a deal. I guarantee your emotions will get in the way of what should be purely logical decisions. And decisions about real estate can be very, very costly.
If you are starting with very little money, you may feel that you don’t really have any options. After all, it takes a lot of money to buy a house, doesn’t it?
The thing is, you don’t actually have to buy any houses to ‘flip’ them. You could start out birddogging and wholesaling. Both of which cost very little to no money.
- Birddogging is where you find serious cash buyer investors that you sell leads to. Some will pay you a small amount for each lead (there needs to be some motivation for the seller to sell their house and investors don’t usually pay for leads that involve properties listed by Realtors) and some will pay a referral fee if and when they close on the deal. With birddogging, you don’t have to ever even see the house or negotiate anything except your payment from the investor you are dealing with.
- Wholesaling is where you take it a step further and work the lead yourself. You actually make offers to buy the houses and buy them cheap enough that you can assign your contract to another investor. This investor buyer will be the one responsible for actually closing on the house. You don’t even have to go to the closing. The title company can mail you a check for your assignment fee or even wire it into your bank account.
Obviously, there is more risk with wholesaling because you are having to negotiate to buy houses and then find a buyer to actually close on them. There are ways to limit this risk, but that is not the focus of this article.
I highly recommend people just starting to focus on wholesaling. It’s a great way to learn the ropes and make some good money quickly. You don’t need to know the ins and outs of rehabbing, which can be very risky if you don’t know what you are doing. Wholesaling is also a great way to meet the serious investors in your area. Any of which could become a mentor for you that can help you learn rehabbing.
Some people don’t like to recommend wholesaling for getting started because they feel that finding the deals is the hard part. Not getting enough leads is one of the main reasons people fail in this business.
For marketing to find these deals, I recommend reading how to beat the competition and get better deals.
Money Saved Up, But Not Enough to Buy a House
Maybe you have some cash saved up and would like to use it to get started. Let’s also assume that it’s not enough to buy a fixer upper in your area. What can you do?
You could birddog and wholesale as was just mentioned. You could use your money for marketing to motivated sellers. This will allow you to generate a lot of leads and is the life blood of whatever method of house flipping you decide to do.
You could get into rehabbing (buying, fixing and selling) by borrowing from private or hard money lenders. These are lenders that are willing to lend on investment properties for a high rate of return on their investment. Just be sure to shop around and find the ones with the best rates. Always remember that everything is negotiable as well.
If you want to ease into rehabbing, you can try prehabbing first. Prehabbing is where you buy a house and only do demo and clean up work to the property to get a better price from an investor buyer. Some people will repair the things that scare away the majority of buyers (even if they are investors). These are things like repairing fire-damaged areas, leveling foundations, and rewiring or re-plumbing the house. In my opinion though, if you are going to be doing all that, you might as well just rehab the whole house.
Just doing demo and clean up of the inside and outside is all that I recommend if you are going to prehab. Don’t get carried away and don’t spend a whole lot. The majority of your time should be spent on finding the buyer for the house as holding costs and deeply cut into or destroy any chance of making a profit.
Enough Cash to Buy One or Several Houses for Investment
With enough cash to buy several properties, you have more possibilities. This isn’t such a good thing for a lot of people though. The temptation is to jump right in and buy up properties. The focus might be on getting the houses rather than whether they are the best deals.
I would much rather start from a point where I had to be very careful about what I bought. That being said, you can afford to spend more on marketing and trying to find deals that are profitable.
Rehabbing when you have a lot of funds to do it can also set you up to make mistakes. These mistakes are usually in the form of over-improving the property. The temptation is to keep adding things to your scope of work as you progress with the rehab. That bathroom looked fine before you painted and put new flooring in. Now, all of a sudden it looks too outdated. Better just gut it and start over. Nah, don’t do that if it’s not in your budget!
The long term investment strategies become more available to you if you have the money to buy the houses. That money will be tied up for a long time though, so that needs to be considered. If you going into the landlord business, you need to be prepared for certain realities that can eat up your cash reserves.
There is a tendency to just talk about rents and cash flow and the positive aspects without talking about what happens when you add humans. Humans can be bad. Some humans have a habit of not paying rent, not following the terms of their lease, forcing you to evict them, setting up meth labs, destroying homes, remuddling homes, treating you like you are less than human.. well, you get the idea.
When the laws are slanted towards the tenants and you have to spend a fortune getting them out of your house, only to find out that they destroyed it, you will need to have nerves of steel AND cash reserves. You will need to be able to weather the storm.
Not that you couldn’t borrow the money for longer term investments. It’s just that if you don’t have much money to begin with you won’t be able to make it through the tough times and grow as fast as you could if you stuck with either flipping at first or using a combination of flipping and long term investment.
A Lot of Pretty Houses with Little Equity Available
If you’re in an area with a lot of pretty houses that people are needing to sell but have very little equity, you might want to consider the lease option route. This is where you are buying the house and leasing the house to a tenant with an option to buy.
I’ve never been a fan of these deals based solely on the fact that you are buying houses at close to market value. Too much risk for me, when that’s the case. It always seemed like it would be more work that it was worth and is why I’ve never done them. I’ve always just wanted to keep things simple. What is that saying, “keep it simple, stupid.” Just my opinion of course.
A Lot of People Facing Foreclosure with Little Equity
If you’re in an area where there are a lot of people behind on mortgage payments that have little equity, you could focus on short sales. Short sales are when you make an offer on a house that is not enough to cover the amount owed on the house. The lender is asked to accept less than the balance of the loan.
Short sales can take months and a lot of work. But, they can also be very profitable. If you decide to go the short sale route, be sure to disclose everything to the seller about what you are doing and the possible outcomes (one of which being that the lender can wait until the last week or day before the foreclosure auction date to inform the seller that they will not accept the short sale) as that can affect their decision on how best to handle their problem. You will also need to inform them of the possible tax consequences and the chances of having a judgement against them for the amount the loan was discounted.
A Lot of Landlords Looking for Turnkey Rentals
It seems that there are a lot of people buying houses, fixing them up, renting them out and then selling them to landlords. This is called turnkey because the landlord buyer doesn’t have to deal with all of the leg work. They just want cash-flow and are willing to pay more to avoid having to deal with the hassles.
I’ve not done this and so cannot elaborate on it much. Just another option for you to consider.
Whatever You Do…
Whatever method of house flipping you decide to do, please beware the temptation to focus on volume rather than profits. All that really matters is how much you are making and how much work and risk is involved. A lot of people fall into the trap of wanting to do X amount of deals no matter what. I’ve had these goals as well but have never bought a house I shouldn’t have trying to meet them….
Ok. Maybe once.
Photo:WonderlaneWhich Type of House Flipping Do You Want To Start With? by Danny Johnson