The Absolute Best Way To Reduce Your Risk When Flipping Houses

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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. 🙂

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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.

Photo:Glutnix

About Author

Danny Johnson (G+) is a real estate investor in San Antonio, TX. Visit his blog: Flipping Junkie - A House Flipping Blog to follow along with him as he shows, in detail, the marketing he is doing, the leads being generated, the lead and deal analysis, the rehabs and really, just about everything. He also provides real estate investor websites at LeadPropeller.com.

24 Comments

  1. Danny:
    Another important point I’d like to add to your post is:
    DON’T PAY MORE THAN THE MAXIMUM YOU DETERMINED YOU WOULD OFFER.
    (we all have formulas for determining that)

    Too many investors get emotional in the negotiations and let their offers creep up. When you go to sell, you’ll be VERY sorry that you did. DETERMINE YOUR PURCHASE PRICE AND STICK TO IT.

    No need to go above your maximum offer amount. As you pointed out, if you’re marketing well to generate enough good leads, walk away when the asking price gets too high. There’s always another deal available to go after.

    Thanks for your article!

  2. If you can buy it cheap enough you can make some money.

    If you fail to buy it cheap enough, you can create a real problem for that deal and your reputation.

    Nice job Danny, simple.

    A low priced contract has room for many mistakes! :}

  3. In terms of making low ball offers, now that the market is making a strong comeback sellers have gotten much more confidence when they consider these offers. Depending on your market, the goal might not be to make an embarrassingly low offer that could be outright rejected (and be offensive to the seller) – instead, you may want to find that middle ground where the seller entertains the idea of your price and is willing to counter.

    • Yes, this depends on the situation. If the seller is talking to other investors you might want to consider not making your offer much lower than your max. But, I still advise to always offer below your max so that you have a little room to negotiate.

      If other people are willing to pay more than my max, let them. I’ll find another deal.

      Thanks.

  4. Lee’s comment is right on the money…Yes, we all want to buy at low-ball rates but these guidelines may not apply to your market. So. Cal, especially, is currently so competitive and prices are being driven by too many offers for too few inventory..

  5. I couldn’t DISAGREE with this article more on several points.

    1. “Buy” the house for as cheap as you possibly can. The Least Risk is NOT to “Buy” it at all but to “Control” it for the least amount as possible. Anyone can control a property for as little as $10.

    2. One of the biggest falases in Real Estate is that you make your money when you buy. Nothing could be further from the truth. If you “buy”, which you don’t have to do to reap ALL the profits, You DO NOT make a dime until you sell, period. Sure if you Control or Buy right, your Potential for Profit is greater, but you do not make any money unitl you sell.

    3. Marketing to “Motivated Sellers” is the best way to beat your competition? REALLY? Everybody is marketing to Motivated Sellers. The most competition is with so-called Motivated Sellers. Just call one and find out how many others have called them before you. Motivation comes in many forms. Why not learn how to Create Your Motivated Seller. IOW, You have to hurt’em before you can help’em.

    There are a few other points I could disagree with but my fingers are getting tired. I’ll post this and the rest of my points in facebook so my post won’t be removed or deleted.

  6. Hello, Scott.

    Thanks for your input. Let me see if I can talk a little about your objections. We can agree to disagree also.

    1. I absolutely agree with you on this one. My article was intended more for the intention of fix and flipping. I also preach that controlling deals (by way of assigning contracts) is much less risky.

    2. The simple idea here is that it is best to build in your profit by buying cheaper. Obviously, you don’t literally “make money” when you buy. 🙂 (unless you are getting loan overages, but that is not really profit)

    3. Yes, there is a lot of competition with certain forms of motivated seller marketing. But, I completely disagree with them all having more competition than REOs. Maybe if you could be more specific about which forms of marketing. You mentioned how many people have “called the motivated sellers”. All of the motivated seller marketing I do gets them to call me.

    Obviously, pre-foreclosures have a ton and, yes, they will have received a lot of contact from your competition. But, I’ve not experienced a lot of competition for other forms of marketing to motivated sellers.

    Thanks again for sharing your opinion.

  7. 1. Agreed, but you can Control Real Estate and not have to Assign a Contact. You can control the property and enjoy all the benefits of ownership without ever owning it, including upfront cash, cash flow, equtiy, note reduction, appreciation, etc..

    2. Many investor mistakenly believe that if the property appraises for $200k and they buy for $150k that they have made $50k. That of course is only if they sell for Full Price with no commissions or closing costs. It can be very deflating when you get to the closing and your check isn’t for $50k but for much less.

    3. Regardless of how they are contacted or contact you, every investor is seeking “motivated” sellers, right? I do not advertise or place signs, I make direct phone calls to sellers who are advertising their homes for sale or from a referral I get from licensed agents who can’t get a listing or close a deal because the seller owes too much and either can’t or doesn’t want to sell and come out of pocket. Or, they don’t or can’t Walk Away, File BK, Deed in Lue, Loan Mod or go through Foreclosure because they want or need to keep their credit intact.

  8. Great article and good conversation going on.

    One thing that I always find amazing recently when people talk about how to offer are those that talk about how competition is stronger and you have to offer more to get “deals”.
    Guess what, if you are buying properties for more than your MAO you are buying pieces of property but not deals.

    It boggles my mind that just because others are willing to overpay for a property why that means I should overpay.
    I guess some people just want to stay busy.
    Personally I’d rather be bored for a few months than put all the work into a rehab just to hope to make a few bucks if appreciation keeps coming.

    • I could not have said that better, Shaun.

      Great comment and I hope everyone reads it a couple of times. I too see people doing this. It also happens when people say they ‘have’ to do x deal per month. I’d rather shoot for profit numbers than deal count.

      Danny

      • Hey Danny,

        I am totally with you! I don’t see much point in churning out places just to say you hit some numbers of projects (Purposefully not using the term “deals”).

        You are right on that you want to set an income goal and a profit you want to make on a deal. If you back out the number of deals from that I can see that but I don’t think most people do that.
        If you say “I want to make $1MM in profit this year and I want to make $30K per deal” Then you can back out that you need to do about 34 deals which is basically 3 per month.

        That is a lofty goal but I know if I had that I would want to fall short on the deal count if it meant getting close to that number but being way short of the million dollars still.

  9. hey Danny, your article is incredible the bigger the range between the purchase price and the expected resale figure, the higher the chances of making some realistic profit……what do you think of flipping homes at the ‘pre-foreclosure’ stage?

    • hey, David.

      I don’t have a problem with it. A deal is a deal at the right numbers, regardless of the situation. I don’t target them though because of the level of competition and the emotional aspect of the people needing to sell.

  10. I’m not sure Scott understood this article was targeted to actual flippers vs wholesalers but the same principle applies…just get it under contract for as little as possible and wherever you decide to take it you’ll be fine. I mean it personally doesn’t make sense to me to work with a private owner to get them to trust you enough to tie their property up and you have a contract you cant mark up and/or sell because the underlying contract is too high.

    Good article…when the fur is flying at auctions and multiple offer properties it’s tempting to talk yourself into paying more but it always helps to have the reminder to take your finger off the trigger and remember that sometimes the best deals are the ones you never get.

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