I’m a contractor looking to get into flipping houses
Contractor · Louisville, KY · Member since 2018 · 8 posts · 4 votes
I’m a contractor looking to get into flipping houses
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Realtor · WV · Member since 2018 · 454 posts · 310 votes
8yI think this is a great idea. I am a real estate agent now, but spent most of my life as a general contractor and still do work on my own properties. I have learned from working with lots of investors is that typically their weak point is on the contracting side. This means that you have a huge advantage with your contracting skills!
The one mistake that most contractors make (including myself) is that we think like a contractor when purchasing a property instead of thinking like an investor. We tend to look at the repairs and know that we can fix it ourselves so we overpay for the property because the repairs are at a low cost. In reality we end up doing the repairs for free, or making no profit on the flip depending on how you look at it. Always run your numbers like you are paying another contractor to do the work, if you do it yourself then its more money made but you still have the option of having someone else do it. This will help you scale your business as you grow.
I recommend reading the eMyth. Its a business book that helps you break down business functions and really helped me.
Good Luck! Aaron
12 Replies
- Realtor · Miami, FL · Member since 2018 · 53 posts · 23 votes8y@Harley Fowler What area are you in?
- Contractor · Louisville, KY · Member since 2018 · 8 posts · 4 votes8y
Louisville ky
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes8y
Then do it . Just remember you make the money when you buy , not when you sell . Buy right
- Portsmouth, VA · Member since 2015 · 330 posts · 191 votes8y
A friend of mine is a general contractor and his wife is an accountant for a large firm. They buy houses in good neighborhoods that other investors won't touch because of the work required to rehab the house. Since he has a crew he can rehab the house no matter the condition and still make a profit. His criteria is a profit margin of $20,000. He isn't afraid to rent out the house if needed and continue to sell it at his price. This year alone he has done 3 houses with $20,000 profit. He usually goes after the foreclosures at auction and has the cash to bid.
- Realtor · WV · Member since 2018 · 454 posts · 310 votes8y
I think this is a great idea. I am a real estate agent now, but spent most of my life as a general contractor and still do work on my own properties. I have learned from working with lots of investors is that typically their weak point is on the contracting side. This means that you have a huge advantage with your contracting skills!
The one mistake that most contractors make (including myself) is that we think like a contractor when purchasing a property instead of thinking like an investor. We tend to look at the repairs and know that we can fix it ourselves so we overpay for the property because the repairs are at a low cost. In reality we end up doing the repairs for free, or making no profit on the flip depending on how you look at it. Always run your numbers like you are paying another contractor to do the work, if you do it yourself then its more money made but you still have the option of having someone else do it. This will help you scale your business as you grow.
I recommend reading the eMyth. Its a business book that helps you break down business functions and really helped me.
Good Luck! Aaron
- Contractor · Louisville, KY · Member since 2018 · 8 posts · 4 votes8y@Yasuha J. Dorce Louisville ky
- 8yJordan MoorheadBusiness MemberReal Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
@Harley Fowler I invest in Louisville and like it quite a lot! My father's an agent there and the KREIA gets raving reviews. Probably best to start networking and check that out
The Moorhead Team5140 Reviews - Rental Property Investor · Louisville, KY · Member since 2015 · 221 posts · 106 votes7y
set three actionable goals and get it done!
- Property Manager · Louisville, KY · Member since 2013 · 309 posts · 115 votes7y
A year from now you'll wish you had started investing 10 years earlier. I have to agree with Mathew that you make your money when you buy. And Walter's warning to price property like an investor (and not a contractor) is valuable. I've also seen contractor's buy a property and then get too busy to start on it or they try to work on it between jobs. The problem with that model is that the carrying costs can significantly eat into your profits.
Jordan mentioned KREIA and I concur but you should also come out to one of my meetups if you get a chance. They are much smaller but the networking is great.
- Real Estate Investor & Consultant · Los Angeles, CA · Member since 2016 · 620 posts · 386 votes7y
@Harley Fowler my partner is a GC and we have a great partnership.
Even though he was able to do some flips on his own before we partnered, and he can do all of the finance stuff himself, after we partnered, and I took over all of the finance, working w/ lenders and investors, getting insurance, creating timelines and budgets, marketing, branding, etc, we have been able to grow much faster than he could have on his own.
If you have someone in your network that you trust, who is good at the business side, then start a joint venture w/ him/her on a deal, see how it goes, and if it works, maybe you've found a good partner to grow w/.
Onward!
sjw
- 7yThomas FranklinPro MemberReal Estate Investor · Miami, FL · Member since 2010 · 939 posts · 739 votes
@Harley Fowler Since you are interested in fix and flips, I propose the following action plan. The first step would find an Investor Friendly Realtor assuming you do not have access, to the MLS. I would suggest that you interview several Realtors and ask them the following questions, to ascertain if they are truly Investor Friendly, or if they are throwing you a sales pitch.
1. How many investors do you currently work with and how many investors have you worked with, in the past?
2. How many transactions have you closed, with investors?
3. Do you currently own any Investment Properties? If so, what type do you own?
4. Are you a member of any REIAs?
The next step would be to work with the Realtor and determine the hot markets, in your County, with the greatest number of sales over the last 90 to 120 days. Personally, I would prefer 90 days because markets are always changing. This list would contain the zip code and corresponding name of the municipality. In addition, a breakdown of the number of SFRs, Townhouses, and Condos, with corresponding ADOM (Average Days On Market), and Median Sales Price, for each municipality. This will be your Farming Area. From this data, you can utilize a website bestplaces.net that will give you a breakdown of the percentage of homes that sold, in various price ranges, for a given zip code. You can identify the two highest retail price ranges, in greatest demand, per zip code where you can list the rehabbed property.
You can use the Realtor to help you find deals and also use Wholesalers. If you acquire a property, from a Wholesaler, once the property is rehabbed and ready for the Retail Market, allow the Realtor that provided you the zip codes, to list the property for sale. This creates a WIN-WIN Situation and gives the Realtor incentive, to work harder on your behalf.
Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.
I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.
ARV - Desired Profit - Closing Costs to Buy - Repairs - 10% of Repairs - Holdings Costs - Concessions - Realtor Fees - Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).
ARV: After repaired value or what you think it will sell for once repaired.
Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable.
Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.
Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.
Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, property insurance premiums, property taxes, loan payments, HOA Fees, etc.).
Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.
Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.
Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.
This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.
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