Flipping Houses

6 Criteria For Finding Profitable Houses to Flip

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I love it when an agent or broker sends me a new potential flip opportunity. My face lights up, I feel the tingle of adrenaline coursing through me, and images of wealthy grandeur float through my mind. What am I gonna do with all that profit?! Usually the email has a number of exclamation points that signify the immediacy with which I need to act.

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The seller has to get rid of the house but needs an all-cash offer today!!!!” My anticipation heightens – I take another sip of my coffee to increase the frenzy of excitement!

I get down to the part of the email where the address is listed, quickly create a new tab in my browser where I can search for this wondrous deal on Redfin, and plug it in to get the quick lay of the land. Usually I have to double take and check again as to what the price of the home is. No way is the seller looking for over market value on this house! I thought they were distressed?! Did this agent do any due diligence or just simply fire it off to me looking for a quick buck? Maybe I'm missing something…

The reality is that most of the homes I look at aren't worth flipping. Still, I go through the same process every time when I see an agent's email. The excitement is half of the fun, but it needs to be tempered because most of the deals I see aren't worth my time. It is particularly difficult to pass on marginal deals in a real estate market that is doing well, but it is important to realize that markets are cyclical and that this time is no different than the past.

Through a lot of trial (and many errors) I have developed six criteria that can take the buzz out of any over-hyped flip opportunity and yet still allow the good ones through. I don’t think my criteria are the only ones worth having; far from it. The point is that it is important to have some basis, process, or chill time to allow the fervor of a potential flip to cool before you make an economic investment decision. Here are mine.

6 Criteria For Finding Profitable Houses to Flip

1. Comfortable Basement Sales Price

The natural thing to do when underwriting a flip is to look at the top comps. “Ohh, that one over there sold for $800,000, and the subject property is only five hundred square feet smaller so surely it will sell for… $795,000!” Trust me, I do this all the time, and I know that a little comp-sterbation can be fun. The problem is that you should want to be prepared for the worst case scenario. Is there a comp right next door to the $800,000 house that just sold for $550,000 and upon further review is actually pretty similar to the subject?

Related: Flipping Houses: The Ultimate Step by Step Guide

Yes, I know, your flip is going to be soooo much nicer than the one that sold for $550,000! “It isn’t even comparable,” you may tell me! Or maybe it is. Regardless, the $550,000 comp shows you what the comfortable basement sales price for your flip is. I’m not saying it is going to sell for $550,000, but if things go wrong you should feel confident that your house would sell for at least that much.

This is not necessarily a deal killer, particularly if you buy the subject house for $300,000 or something. However, you should structure your deal or need to get a resale of anything over $550,000 to make it work. Yes, there may be upside, but at worst you know the deal will make you money at the $550,000 number.

2. “Pop” Potential

Now that you have your comfortable basement number all set, let’s see if there is potential for big upside. (Note: there is a reason the comfortable basement sales price comes before this.)

That $800,000 comp is definitely a good one for your subject property. Even better would be to have a couple other ones in the $700,000 range. In talking with some of the more savvy real estate agents, they have clued me into how some of the high outlying sales prices have come about. Oftentimes it is in an area with a dearth of inventory, the home is listed well below market, and a buyer comes in and just overbids everyone else by hundreds of thousands of dollars. Yes, that is a comp, but it is also a unique buyer. This happens a lot in Silicon Valley where I do flips, and it makes underwriting hard.

This means that it is important to look at the story for the “Pop” potential flips. Was it listed at $775,000, went pending in two weeks, and then sold for $800,000? This is a meaningfully better comp in my opinion than a home listed initially for $600,000. Again, having a couple of homes sales in the $700,000 range would make your deal look really sweet, and possibly help raise your “comfortable basement sales price.”

3. Near Median Price Range for City or Area

Are you going to build the nicest, biggest home this neighborhood has ever seen?! If so, you stand a higher chance of losing money, at least in my opinion. How many people can afford the absolute nicest and most expensive home in the area? A few. What happens if they aren’t in the market for a new house, or simply don’t want to overspend? Your flip can sit.

I feel like a broken recorder, but this is not a huge issue when the market is going up like it is now. However, when things cool down, it could be problematic. The solution is to target properties that would resale for close to the median price range for a city or area. How many buyers are in that pool? A majority. It’s a probability play. The point is to aim for a market segment that has a large pool of buyers. If your house truly is the nicest, then maybe you make a little bump in a bidding war.

4. Clear Value Add Story

One of the first things I ask an agent when they send me a possible flip is, “What’s the story with the house?” The honest truth is that what I’m really looking for is a sign of distress. “The house was inherited, but no one lived there for a few years and there is a lot of damage to the roof. They are just trying to sell it quickly because they need the cash.” This would be a good story because it shows how you can add value to the situation, and why the home is selling for a discount.

Most important is that I like to see how I can add value to the property in order to make my money on the flip. It could be the ability to close quickly with cash, an intensive renovation, or an add-on/rebuild scenario. All of those options have barriers to entry that I’m able to cross and explains why I’m getting a good deal.

I’m wary of buying a house where it just seems like I’m stealing it for a good price. Don’t get me wrong; I’m certainly fine purchasing a home for a great price, but I’d like to be able to rationalize why I’m getting a good deal. With the proliferation of real estate technology, most people should have an idea of what their home is worth (maybe even an inflated idea). I feel more comfortable buying a home if I can explain to myself why I’m going to be able to profit.

5. Normal Layout

This is by far one of the most overlooked aspects of a home for potential flippers. Layout matters. I deal with a lot of homes that were built in the 1950’s and have some weird additions. The proverbial “lipstick on a pig” approach can end up being a loser. Even more disconcerting is that Winchester Mansion lookalikes don’t have an easy fix. A home with a leaky roof is bad, but at least there is a reasonable price to fix it. A home with a terrible layout is irreparable, unless of course you just knock down the whole home.

Related: Flipping Houses: 101 Awesome Quick Tips for Success

I understand the term “normal layout” is subjective and a bit ambiguous. The test I use when walking a house is to try and see if I can map out the floor plan in my mind. I can do so relatively easily, then I feel like the layout is fine. The other trick to use — for all of you gentlemen out there — is to bring along a female because they have a way better sense of these things than most men.

6. Nice Surrounding Houses

This is real estate 101, but it is so often forgotten about. Are you buying the best home on the block or the worst? The other homes nearby don’t need to be brand new rebuilds, but it makes a huge difference if they have a little pride of ownership. More importantly, you want to stay away from houses that are terrible looking or which have problem owners.

Walk around the neighborhood at several different times of day, and speak to people who are outside. It can be a little awkward, but be honest and tell them what you are up to. Most people are more than happy to share a little dirt on their neighborhoods.

What do you look for when you flip houses? What is your process? What are your criteria?

Share your tips and stories below!

Conor has experienced every aspect of the foreclosure and rental business for single-family homes. He was VP of Acquisitions at Silver Bay Realty Trust, and has flipped over 100 homes. Conor starte...
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    Matt Aspen Engineer from Pleasanton, California
    Replied over 5 years ago
    Conor, thanks for this great post. I like when I hear of investors in the Bay Area (i’m in the East Bay) and see “realistic” prices; vs. Brandon’s $100k properties 🙂 I remain inspired by various posts (like yours) and hope to ‘start’ soon – am busy gaining knowledge. Best, –MA
    Conor Flaherty Real Estate Investor from Tiburon, California
    Replied over 5 years ago
    Thanks, Matt! Yes, not many $100k purchases going down in the Bay Area haha. Good luck getting started!
    Frankie Woods Investor from Albuquerque, NM
    Replied over 5 years ago
    Great article Conor! These tips can be used in all aspects of RE purchase strategies. Your goal may be flipping, but following these tips should allow for several exit strategies. Keep it up!
    Larry Russell
    Replied over 5 years ago
    Great article. I love your systematic approach to accessing your established criteria. I’m currently redocumenting my process and will most likely incorporate some of what I read here. Thanks for sharing.
    Replied over 5 years ago
    This kind of goes along with your question of “Why am I getting a good deal?”, but one of the easiest things to fix is pet odor. I find so many good flip houses just by using my nose. Almost no owner occupant will make an offer on a house that smells like urine. (Go figure!) That means I am only competing with investors for those deals. Since I already plan on replacing the flooring in houses that I flip, usually the only extra cost is sealing the floor. However, the discount is tremendous. People often won’t even walk through the house if it smells really bad. My daughter just purchased her first home: a $30,000 house in a $90,000 neighborhood. I think the realtor thought our whole family was crazy when we walked in the living room, smelled it, and said “This is the one!”
    Julian Robinson from Jacksonville, FL
    Replied over 5 years ago
    Great article Connor. I am still a newbie to REI, but a question I have is regarding to the point made about staying away from horrible looking homes. I am close to a lower-end of town and though the neighborhoods are not the best, many houses are selling and being put up off sale. The inventory is slightly higher than the demand, but the demand is there none the less. If there was a deal on a home but that home was less desirable than expected, would you let the deal fold and pass even though you were able to negotiate the seller into a profitable deal?
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 5 years ago
    Hey Julian. I think what Connor was trying to say is to stay away from neighborhoods where ALL the houses look terrible. You want the house you are buying to be not-that-awesome looking – you have to add value somewhere. But if every house in the neighborhood looks bad, find another neighborhood, because your buyers will do that, too. Connor’s advice to aim toward the middle is great advice. It is more difficult to sell the best, most expensive house in the neighborhood, mainly due to comps.
    Julian Robinson from Jacksonville, FL
    Replied over 5 years ago
    Thank you Mindy for helping clarify and provide information for me. Can you apply this due diligence when evaluating lots in the middle of neighborhoods where there is houses with the same site size; say if you were wanting to purchase that lot and build a house on that lot that has a lot of land value?
    Assaf Furman Wholesaler from Campbell, California
    Replied over 5 years ago
    Great article for flippers and wholesalers alike. It’s always good to know how flippers evaluate their potential properties so that I could estimate the opportunities accordingly
    Brian Rossiter Engineer from Rifle, CO
    Replied over 5 years ago
    “Comp-sterbation.” Oh, my! Put the kids to bed.
    Brian Alexander from Richardson, Texas
    Replied over 5 years ago
    Thanks for this article Conor. I’m a fellow Bay Area resident who’s just getting started in the RE investing thing. Great advice to start with for someone who is just getting started with figuring out how to do this. It’s nice to hear there are flipping options in the Bay Area despite the hot market we’re in right now.
    Joshua S
    Replied over 5 years ago
    I couldn’t agree more with needing a normal layout. Unless you are buying homes sight unseen, all flippers must be weary that layout matters. The worst feeling is putting a home on the market that you spent a ton of money on, only to watch it sit because Buyers can’t possibly figure out how to envision themselves in the property.
    Yoni R
    Replied over 5 years ago
    Hi Joshua, could you please explain more about the layout issue? Thank you, Yoni.
    Anne James Homeowner from Rio Linda, California
    Replied over 5 years ago
    Thanks for the article. Without the assistance of a real estate agent, how do you suggest identifying neighborhoods which meet the “median price for city or area” criteria?
    Mitch H. Investor from Denver, CO
    Replied over 5 years ago
    As someone who is looking into doing a live-in fixer-upper/flip (among other things) this article provides a good mental framework to have when visiting properties.
    George Smith Investor from Latham, New York
    Replied over 5 years ago
    Thanks for the insight. Regarding layout, it’s amazing how many properties you walk and wonder how at anytime during the build that they thought it was a good idea when it makes no sense whatsoever.
    Robert Connor
    Replied over 5 years ago
    WE like your blog and gave social love to your post. Home flipping seems to be roaring back!
    Andrew Cordle from Alpharetta, Georgia
    Replied over 5 years ago
    Awesome post! Those are all great tips!
    Eric Egeland Specialist from Long Grove, IL
    Replied about 5 years ago
    Thanks for the post…good read
    Brad Srutowski Real Estate Investor from Corona, California
    Replied about 5 years ago
    Great post! Thank you for bringing the basics back into focus. I am struggling to get a good start on my investing. Have been marketing via direct mail to probates with only a few bites thus far and none that worked out but still having high hopes. I hope to get something in the works soon as weather its an REO, probate or just a well priced distress. Would love an opportunity to JV with an experienced investor in the So Cal, Inland Empire area. I will have some skin in the game with the right deal.