3 New House Flipping Rules for 2013 and Beyond

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There’s no denying false appreciation brought out the brave, arrogant, and opportunistic speculators. It was the age of a Tulip market crisis, only about 400 years later.

Personally I’m glad to see the “easy money makers” leave; it let the crème rise to the top. But, time and a quite roar of rumors softens the memories of a harsh past. “Could real estate be back?” is echoing through counties across America, to the tune of an 11.6 year over year price increase according to the National Association of Realtors. And, inventory levels are back down to pre-apocalypse levels.

So, flipping is becoming sexy again. Truth is, it’s still been around this entire time, the game was just different. According to RealtyTrac, the average profit on a flip in 2012 was $37,375 (as defined as any house bought and sold for a profit in less than 6 months time). What’s normal in your market of course may be different, as this was from a national perspective.

Nonetheless, the majority of the damage has been cleared, and the media is shouting the bust is over. Nothing sells papers, magazines, and homes for that matter more than behavioral economics. Markets don’t happen to people, in my belief…people make markets. Getting off my economist soapbox though, the rules of the Flip Game have changed. Easy money, complete ignorance, and no remodeling/rehab doesn’t cut it anymore.

#1) Flip in an Area that Makes Sense

The fundamentals have to be in place for your opportunity to be prime, of course. If you live in an area where the foreclosure process can take the better part of a year, demand is low, and costs are high, the chances of you being successful at the business model become diminished. If your area isn’t moving and shaking, investing somewhere else in the country may make more sense.

Researching emerging markets and pockets of the country where price prices are rising, sales are steady, and demand is high can host the ideal spot to purchase, fix, and sell quickly for large profits. If you’re unsure of if your market is ripe or not, it’s better to pick a small area to research and start small. Talk to agents, other investors, and read online about the local economics there. It’s one thing to say “Arizona is a good market to buy” vs “Glendale, Arizona, has the specifics I need to have a successful buy and sell business model.” (don’t base any decisions off that statement, by the way. I am mostly in the East valley of Arizona and only used the city as an example).

Thing is, what makes the fundamentals alluring will also create more competition, so your marketing costs and time between deals may be higher.

Learn to calculate ALL the expenses on your next flip! Check out the new BiggerPockets Fix and Flip Analysis and Reporting Tool. Try it out for free today!

#2) Actually Have Money

I say this jokingly, only to shake my head at the fact “investors” were purchasing homes with absolutely no skin in the deal. But, I can’t blame buyers for being opportunistic when the products were being created by seemingly intelligent decision makers.

Regardless, no money down real estate is now going to mean, you’re finding deals and spending your efforts. It may take a money partner (or three) to fund the deal and share in the profits, but gone are the days where you’re purchasing a home with little more than a signature and a smile.

Hard money lenders are going to require at least 20% of the purchase price from you, plus potentially a personal guarantee, if not other collateral. Plus, you will have to fund rehab costs, interest payments on the loan, and other related expenses.

If you’re planning on purchasing homes to fix and sell quickly on traditional loans, it is going to make you much less competitive. Not to say it can’t be done, but if the Seller’s home is in foreclosure and other buyers are aware of the opportunity, cash will be king. If you don’t have any, find someone who does until you earn enough to start pitching in. Until then, you’re a professional bird dog or partner.

#3) Hone in on Your Rehab and Budgeting

With a shortage of inventory and rising prices, it may be hard to get a decent discount on a property unless it’s in pretty bad shape. This alone may be enough to scare off those new to the business.

Ceilings caving in, additions that may or may not be permitted, and a host of other non-cosmetic problems are not for the faint of heart, or the undereducated in construction. If you’re relying on your friendly Big Name Fix Up Store to hire contractors to fix all the problems, say hello to a hellacious mark-up on labor and costs. You don’t know what you don’t know, but hope is not a strategy now, folks. Knowledge and budgeting, are.

The least of what needs to be done could be:

  • Kitchen remodel with new appliances and similar upgrades as other homes in the area
  • Fresh paint
  • Low E windows and features
  • New high-end looking flooring
  • Making sure electrical, plumbing, heating, AC and roofing are repaired and up to code
  • Creating curb appeal
  • Professional photos & staging

Measure twice and cut once; research other retail homes in the area that have sold in the last few months and stick with improving the same they did. Don’t fall in love with what would look “SO good in here!” – this isn’t your home! Budget, budget, monitor, and budget. Soon you’ll learn to gauge the neighborhoods and area and find cost effective products and labor to bring your expenses down. But if you want to get and stay in the game, these elements are critical to your staying power.

There’s always opportunity in real estate for the risk takers and hard workers. One thing I love about this business is that there’s a 100 ways to slice it, and it’s ever changing. What makes it challenging though also makes it rewarding, monetarily and otherwise.

If you’re getting into the Buying & Selling game, the world is still your oyster. But, preconceived notions and stories from 2007 on how much profits so and so made back then need to be forgotten.

This year could be a game changer for you, so long as you adapt to the new rules of the game. Being the ambitious and keen reader I know you are, you’ll happily embrace the now and take control of your own destiny. Here’s to your success!

What other rules do you see now for flipping houses?

Photo Credit: Mariano Kamp

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About Author

Tracy (G+) is an Arizona Short Sale Realtor, Investor, Rehabber, and Foreclosure Expert. She also is an avid blogger, vlogger and consultant on all things Arizona Foreclosures.

12 Comments

  1. I noticed the real estate infomercials with a new array of gurus popping up in the media.

    Maybe Carlton Sheets will make a comeback? I will admit to seeing him on television, his course was $150 but when the operator said he has sold thousands of these courses I turned to Ebay where I scored it for $10!
    It was a good thing too, the first person I tried to use his stuff on was a real estate investor who told me I was wasting my time. Later he allowed me to pick his brain for hvac work swaps.

    • Yes, those opportunists are back too, Dennis. But, the fact is, you were attracted to it and it led you to what you needed (and you spent a fraction of the price!)

      • Neat circle completion on this comment and neat article in general, Tracy. (For more extensive praise, see my response to “Top 2 Reasons You Won’t Make It In Real Estate Investing” :)!

  2. Tracy:
    Great article. Flips are hard because you’re buying into the future and we’ve all seen how quickly the economy/regulations/banking procedures can change.

    Overestimate your costs for repair, your time for renovations, and especially your time to close once you have a “qualified” buyer. What we used to do in 45 days now takes 120.

    Thanks for your post.

  3. Nice post Tracy.

    My wife and I did our first flip in 2008 so we have no idea about the “good ole days” It has always been a battle, and we have always had to do it the right way without cutting corners. It has served us well as we now see the market starting to change and flipping becoming “sexy again” as you said, it has allowed us to be in a good position. Thanks again for the post.

    • What’s especially commendable about that is most would have quit, gone broke, or mis-spent their funds. You’ve beaten the odds and are making good decisions, all the while with your wife! What a wonderful example of tenacity and conviction. To your success!

  4. Chris Bounds on

    Good article Tracy. I wouldn’t say no money down deals are gone completely though. My hard money lender lends up to 100% of the purchase price as long as it 70% minus repairs or less. They fund the repairs as well (escrowed), but they do make sure you have cash or credit lines available as reserves. I’m not recommending this strategy, but it works if you are disciplined and you have reserves & multiple exit strategies should things not turn out you planned.

    Another rule for flipping? For me it is, do not sell it! Low inventory and higher demand makes it hard to replace my deal with another one (in my area at least), so I am happy to buy & hold – for now.

    • You’re right Chris, I thought about that when I was writing. However, the theme of the article was to structure “then vs now” so I chose to not highlight the HM 100% loans. But if you’re out there getting stellar deals like you, then yes, it usually is an option! :)

      About the “do not sell,”…I’m with ya! I’ve prepped my partners that not all deals are going to be flips. If we can refi out some equity and hold onto the property for a few years, we get the best of both worlds. Thanks for your insight!

  5. I enjoyed the article Tracy. I have been direct mail marketing for about 20 months now and am starting to see trends with respect to what group I am targeting. What I mean is a specific group I am marketing to will yield most of the leads and thus most of the deals in certain areas. The result is, as you mentioned, qauging the neighborhood happens naturally. The benefit is that is is easier to fine tune the deal and not have to have so much room in the deal for errors. This really helps as inventory tightens up and margins are squeezed.

    • What’s different about what you’re doing vs most is your specificity, which is going to provide data that you’d be hard pressed to be able to even purchase. If I’m not mistaken I think Karen Rittenhouse has talked about how they got started with lead gen, and much of it was mailing over a couple years time to the same area until they were “known”. It’s made them very successful in their area.

      Good for you for staying the course; hopefully it will breed the success you deserve! Cheers -

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