Getting Started *analysis paralysis*
New to Real Estate · Houston, TX · Member since 2020 · 20 posts · 8 votes
Getting Started *analysis paralysis*
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Member since 2025 · 194 posts · 140 votes
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- 1yBryce JamisonPro MemberRental Property Investor · Mebane, NC · Member since 2015 · 493 posts · 439 votes
- Member since 2025 · 194 posts · 140 votes1y
- New to Real Estate · Houston, TX · Member since 2020 · 20 posts · 8 votes1y
- 1yGary NelsonBusiness MemberReal Estate Agent · Branson, MO · Member since 2016 · 141 posts · 93 votes
Gary Nelson Real Estate, EXP Realty, LLC554 Reviews - New to Real Estate · Houston, TX · Member since 2020 · 20 posts · 8 votes1y
- 1yEric FernwoodBusiness MemberRealtor · Las Vegas, NV · Member since 2014 · 995 posts · 1k+ votes
Hello @William Hunt,
House flipping can be a profitable business, but you need expertise and the right market conditions—otherwise, you risk significant losses. I regularly see partially remodeled properties for sale, clear evidence of another "quick profit" flip gone wrong. So you have some idea about what's involved, below I'll share my process for successful flipping (I did a lot of flipping when market conditions were right).
Work Backwards to Make Money
The key to profitable house flipping is purchasing at the right price—pay too much and you're doomed from the start. To determine your maximum offer price, start with the property's likely sale price and work backwards. Let me demonstrate this process with an example property.
Suppose you find a promising property for flipping. Your research indicates you could sell it for $200,000 within 60 days after making it market-ready. After evaluating the necessary renovations, your trusted contractor estimates the work will cost $40,000 and require two months to complete.
Once you know the renovation timeline, you can estimate the total time from purchase through sale.
Hold Time
Calculate the total hold time by combining all time periods. Get estimated selling and closing times from your Realtor. Always add extra buffer time—projects typically take longer than expected.
Total Costs
Determine all rates and costs upfront—no guessing. Then, systematically work through each expense.
- Purchase Closing Cost - Since the purchase price is unknown, I estimated 3% of the anticipated sale price ($200,000 × 3% = $6,000). While this estimate is conservative, it ensures we have sufficient funds allocated for closing costs.
- Renovation Cost - The contractor estimated $40,000, so I added a 20% contingency buffer ($40,000 × 120% = $48,000). Since renovations rarely go exactly as planned, this padding is essential.
- Taxes - 6 Months x 1% x $200,000 / 12 months/Year = $1,000
- Insurance - $850/Year / 12 Months/Year x 6 Months = $425
- Profit - Profit is also an expense. I will assume a profit goal of 10%. So, 10% x $200,000 = $20,000
- Pad - Always include a contingency pad beyond the renovation buffer. The size of this pad depends on the likelihood of unexpected costs. For simple renovations involving carpet, paint, appliances, and light fixtures, a smaller pad suffices. For complex work involving electrical, plumbing, HVAC, roofing, or structural changes, you'll need a larger pad. In this example, I used $5,000.
- Sales Closing Cost - Sales Closing Cost - $200,000 x 8% = $16,000
- Utilities - $200/Month x 6 Months = $1,200
- Debt service - Debt service depends on the purchase price, which we do not know at this time. However, you can guess based on what costs you do know. If you add up all the above costs, the total is $97,625 ($6,000 + $48,000 + $1,000 + $425 + $20,000 + $5,000 + $16,000 + $1,200). Based on the total cost, you know that you will have to purchase the property for less than $100,000 ($200,000 - $99,741 ≈ $100,000). If the current interest rate is 7% and you can finance the property with a 30-year term mortgage with 25% down, principal and interest will be about $665/Month. So, 6 Months x $665/Month = $3,990.
Next, create a table with all the estimated costs.
Flipping Considerations
Below are important considerations for profitable flipping.
Market Condition
You cannot successfully flip properties in just any market. If the market is not in the right state, your odds of making money are significantly lower. Below are three market states and what they mean for flipping.
- Seller's Market - Inventories are low, and there is intense competition for properties. In this market, the difference between properties in poor condition and those in market-ready condition will be minimal, making it difficult to buy properties at the right price.
- Buyer's Market - There is excess inventory, and properties take a long time to sell. You will likely need to improve the property to meet above-average market conditions in such a market to sell it in a reasonable amount of time. It is challenging to estimate how long it will take to sell in a buyer's market and what the selling price will be. Additionally, you may need to discount the property to sell it. All of this creates considerable uncertainty.
- Balanced Market - In a balanced market, the number of buyers roughly matches the number of sellers. Typically, you can find properties in poor condition selling for significantly less than properties in market-ready condition. You can estimate the sales price and time to sell reasonably accurately. A balanced market is the best market for flipping.
Financing or Cash
In the above example, I assumed you could get a conforming loan. That may not be the case if the property is not in livable condition. If the property is not financeable, your options are cash or a hard money loan. The last time I worked with a hard money lender, the terms were:
- Interest rate: prime plus 5%
- Closing cost: 5%
- Term: 12 months
- Amortization: Interest only based on a 20-year loan
Below is a comparison of costs between a conforming loan and a hard money loan, assuming a $100,000 loan at a 7% interest rate.
As you can see, a hard money loan significantly increases your costs.
Sale Price
A costly mistake new flippers make is to start with the property's purchase price, add all the costs, and decide that will be the sales price. You do not control the sales price; the market controls the sales price. You need to be dispassionate and use a conservative estimate of how much the property will sell for and how long it will take to sell, including the time to close. Be conservative, because everything else depends on the sale price.
Contractor Reliability and Availability
Thoroughly investigate the contractor and talk to recent clients. The big concern is whether they stay on schedule and budget. Also, use progress payments with well-defined milestones. If you pay most of the funds upfront, you will have little leverage to keep them on track. Your best source of such services is your investment team. They will no doubt have worked with a contractor for a significant period. Also, you are a small source of income for the contractor. But your investment team may be a long-term source of substantial income. The investment team is where your leverage will come from.
Onsite Management
If we don't go on-site at least every other day, things start going wrong. Workers do not show up, substandard quality, wrong materials used, overruns start piling up. If you lack the time and skills to manage a significant renovation project, your costs can double, and the time required to complete it can also increase significantly. On-site management is critical.
Market-Ready
Market-ready means the property is in a condition that attracts the segment of buyers who typically purchase such properties, and they are willing to pay the full market price. Too often, flippers remodel the property to match their personal taste, rather than the buyer's. Your tastes do not matter.
You also need to weigh every item renovated against the minimum property condition you need to sell at market value. For example, if all recent sales have vinyl floors in the kitchen, you should install vinyl floors. Installing tile may decrease the time to sell slightly and increase the sales price slightly, but it is unlikely that you will recover the incremental cost. Additionally, you should utilize colors and other items that are popular with your target buyers. Know what you're doing before you start, or you will lose a lot of money.
Purchase Price
Between 2009 and 2012, I worked with many clients on house flips. We typically only get one offer accepted per month at our target price. This was frustrating for clients—some wanted to ignore the cost estimates and raise their offers to get a property under contract. However, paying more than your total estimated costs is a guaranteed path to losses. If you can't secure a property at the price you need, move on to another property.
In Conclusion
Flipping houses can be highly profitable when you have expertise and favorable market conditions. However, without proper knowledge or timing, substantial losses are likely. Remember that house flipping demands significant time investment—daily site visits are crucial to prevent serious problems. Before committing, carefully evaluate each step of the process. If you have any doubts, it's best to walk away.
FERNWOOD Team, KW VIP Realty520 Reviews - New to Real Estate · Houston, TX · Member since 2020 · 20 posts · 8 votes1y
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