In case it wasn’t obvious, flipping houses can be risky business. We’re typically dealing with houses that cost tens and hundreds of thousand of dollars. The stakes are higher. The profits are also higher and that is why so many people are willing to take on the risk.
But we can reduce the risk and I’m going to show you the super secret way to do so. Ok, so it’s rather simple and well known, but it’s often forgotten.
If we can reduce our risk and at the same time increase our profits, who wouldn’t want to make sure they did this? I’m asking you. You are the only one reading this right now. 🙂
The 20 Best Books for Aspiring Real Estate Investors!
Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.
Flipping Houses Can Be Too Risky
We could probably come up with over 1,000 ways flipping houses can be risky. I’m not going to attempt that right now. Maybe for another post. For now, let’s look at some of the main ways.
- Overpay for a house
- Underestimate level and cost of repairs needed
- Underestimate holding time
- Overestimate resell value
- Overpay contractor before a sufficient level of work is completed
- Underestimate buying and selling costs (I’m sure most people do this – if not, you’re lying)
If you experience one or more of these misfortunes, the profit from your house flip could be in jeopardy. Not only that, your financial well being could be at risk. Would your wife or husband be ok with that?
Who Wants to Lose a Lot of Money?
So maybe there are some wackos out there that enjoy losing money. I’ve never met one.
We all deal with fear when it comes to doing something new or something involving risks. That’s a good thing. It’s healthy. Without this fear, we wouldn’t do our best to make sure our due diligence is thorough. We wouldn’t double check our ARV (After Repair Value or resell value). We wouldn’t be conservative with our repair estimates. We wouldn’t get second opinions. We wouldn’t do a lot of things that save our butts.
Be happy that you are fearful. Use what I’m about to tell you to minimize your risk and thus grant you some comfort in knowing that pulling the trigger won’t be the end of the world for you.
The Best Way to Limit Your Risk to Near Microscopic Levels
Drum roll please…
The best way to reduce your risk when flipping houses is to buy the house for as cheap as you possibly can.
Were you expecting some new technique that involves documents prepared by the top real estate attorneys in the nation or ways to guarantee those techniques where you buy the house for full-market value and sell in a way that only looks good on paper doesn’t blow up in your face?
Talk to any house flipper that has been successfully flipping for more than 3 years. I’m sure you will find out that they know the simple truth that you make your money when you buy.
You don’t make your money when you sell. It’s already built in from when you buy. Don’t ever count on appreciation and reconsider selling strategies that don’t cash you out immediately.
It’s not rocket science, because it doesn’t have to be. I don’t care what strategy of house flipping you plan on pursuing, or even if you are planning on collecting rentals, the cheaper you buy the better off you are.
Conclusion: Are You Embarrassed?
Are you embarrassed? What I mean is, are you embarrassed by the offers you are making on your investment properties?
If you are not embarrassed by your offers you’re offering too much.
I’m not sure if Ron LeGrand was the first to say that, but whoever it was really knew how to drive a very important point home. God bless you, Ron.
The typical formula for calculating how much you can safely pay for a house you intend to flip is:
ARV (After Repaired Value) * 70% minus the cost of repairs.
I normally shoot for 65% instead of 70%.
That calculates the most you could pay. You need to offer as much below that as you can without being so embarrassed that you could never possibly make the offer.
What have you got to lose? Oh yeah, a lot of money. Now it shouldn’t be so hard. That’s worth a little embarrassment.
Regardless of what I plan to do with a house once I’ve bought it, I know I will be ok, because I bought cheap enough to do pretty much whatever I want to with it. I don’t need to figure out all of those fancy rental return calculations. I know mine are through the roof.
The Big Key To Getting Houses Cheaper
The best way to get houses for cheaper is to be generating enough leads where you can land the great deals. If you don’t have enough leads coming in, your chances of getting houses for less with be drastically reduced. This is usually because you feel the pressure to make each lead a deal. You are afraid to lose a precious deal because you don’t have an abundance of leads.
Simple as that.
So if you are finding yourself trying to force deals, the best thing to do is work on getting more leads. My recommendation is to always focus on marketing to motivated sellers. This is one of the best ways to beat the competition and get better deals.
Once you have a good amount of leads coming in, it will be much easier to make those embarrassing offers and buy houses much cheaper so that you greatly reduce your risk.
Do you shoot for home run deals? I’d love to hear about any deals that you’ve done that generated great profits because you bought the house cheap enough to allow for such profits. Just leave a comment below about it. Thanks.