House Flipping: What Is It And How Does It Work?

How Does House Flipping Work?

To simplify, real estate house flipping works by purchasing a property, renovating it, and then selling it for a profit.

5 Basic Steps to Flip a House

1. Finding a property to purchase: Try using the MLS (Multiple Listing Service), where all newly listed properties are available. Note that MLS access is limited to licensed real estate agents, so you’ll need to work with one.
2. Determine the purchase price: The general rule is to buy a property at 70% of the ARV (After Repair Value), then subtract the repair cost. For example, if the ARV is $300,000, 70% is $210,000. If repairs cost $50,000, your target purchase price is $160,000.
3. Renovate the house: Renovating increases the property’s value and makes it more appealing to buyers. This includes fixing structural issues, painting, new flooring, updating kitchens and bathrooms, and more.
4. Finding a buyer: List the property on the MLS with the help of an agent, use online listing platforms, or run paid advertising.
5. Negotiate the selling price: Once the property is renovated and appraised, negotiate the final selling price, closing costs, and closing date with the buyer.

Parties Involved in a House Flip

1. Investor (house flipper): Finds and fixes up the property and oversees the entire process.
2. Real estate agent: Finds buyers and manages the sale.
3. Escrow and title companies: Handle the transfer of ownership and payment of fees.
4. Appraisers: Determine the property’s value before it’s sold.
5. Home inspectors: Examine the property for issues that could affect value.
6. Money lenders: Banks, private money lenders, and hard money lenders provide funding.
7. Contractors: Provide cost estimates and perform the renovation work.

How Much Does It Cost to Rehab a House?

Rehab costs are split into two parts:

• Contractor cost: Set by square footage. For example, rehabbing 200 square feet of kitchen and bathroom at $100 per square foot would cost $20,000.
• Material cost: Depends on the type of renovation needed. Common materials include drywall, lumber, insulation, flooring, paint, cabinetry, fixtures, and appliances.

Payments and Fees in House Flipping

1. Property cost: The purchase price, which may include back taxes or liens.
2. Rehab cost: Labor and materials for renovation.
3. Closing costs: Title insurance, appraisal fees, and attorney’s fees.
4. Agent commissions: Typically 6% of the sale price, split between buyer’s and seller’s agents.
5. Escrow fees: Paid to the neutral third party handling the transaction.
6. Title fees: For the title search and recording the sale.

Where to Find Properties to Flip

1. Listing websites: Zillow, Realtor.com, Redfin
2. Foreclosure and auction sites: RealtyTrac, Foreclosure.com, Auction.com
3. MLS: Through a licensed agent
4. Partner with wholesalers: Purchase properties they’ve acquired at a discount

If you’re networking at local real estate events and connected with other flippers, agents, and mortgage brokers, these people can help find you properties to fix and flip. Understanding your monthly expenses and keeping a good bookkeeper on your team is essential for tracking profitability on every flip.