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

Last Updated on: 23rd January 2023, 05:14 am

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

In this article, we will explore the process of house flipping, including the steps involved, the costs and potential profits, and the role of the individuals or professionals involved in the transaction.

To start, let’s lay out the basic process of flipping houses in real estate, and then we’ll move forward to answering more questions.

5 Basic Steps to do real estate house flipping

1. Finding a property to purchase: To find a property to purchase try using the MLS (Multiple Listing Service). It’s where all the newly listed properties are available for sale, currently for sale, or have sold in the past in a specific area. Note that access to MLS is only limited to licensed real estate agents. In short, you’d need to work with them.
   
   There are, of course, other platforms and ways to find a property, so please read on through the end to find them.
2. Determine The Purchase Price: When buying a house to fix and flip, it’s important to look at the numbers. The general rule is to buy a property at 70% of the ARV (After Repair Value), meaning 70% of the total value of the property after a renovation is done. Then you minus the repair cost to that 70%.
   Let’s say you’re looking at a property that you believe has an ARV (After Repair Value) of $300,000. According to the 70% rule, you should aim to purchase the property at 70% of its ARV, which would be $210,000.
   Let’s say the repairs and renovation costs for the property are estimated at $50,000. To calculate the purchase price, you would subtract the repair costs from 70% of the ARV.
   So: $210,000 (70% of ARV) – $50,000 (repair costs) = $160,000
   This would be the price at which you should aim to purchase the property in order to make a profit.
3. Renovate The House: Renovating the property increases the value of the property, which means possibly more profit. Also, it makes it more appealing to potential buyers. This process includes fixing structural issues, painting, installing new flooring, updating the kitchen and bathrooms, and more.
4. Finding A Buyer: This can be done by listing the property on the MLS with the help of a real estate agent, driving around your neighborhood, paid advertising to reach potential buyers, and more.
5. Negotiate The Selling Price: Once the property has been renovated and appraised by your appraiser, it’s time to negotiate the selling price with the buyer (if you have one). This negotiation will involve discussing closing costs, the final selling price, and the closing date agreement.

Going into more detail, once you’ve completed the renovation on your flipped house, here are a few options for selling it:

1. Hire a real estate agent: A real estate agent will help you list your house on the local multiple listing service (MLS). This is a database to which licensed real estate agents have access. They use it to look for properties that are for sale.
2. List it on a property listing website: Listing your house on online platforms such as Zillow and Realtor.com will help you reach a wider audience. There are other more platforms you can list a property on but these two are the most used.
3. Social Media Posting: You can post a property you want to sell on either your personal or business page social account.
4. Social Media Paid Advertising: This can be a good way to easily do prospecting and target the right buyer, but only if you have the budget to do so.

 

Are you in need of an all-in-one tool to do real estate marketing?

 

Moving on to another important point, let’s talk about who will be involved during the transaction, what their role and what fees and payments are associated with it.

Parties involved in real estate house flipping transaction

When flipping a house, there are several parties or individuals that are involved in the process, including:

1. Investor (house flippers): This person is in charge of finding and fixing up the property and overseeing the entire house-flipping process.
2. Real Estate Agent: This professional will be responsible for finding buyers and managing the sale of the property. They can provide market analysis and pricing advice for the flipper.
3. Escrow and Title Companies: These companies handle the transfer of ownership and payment of fees related to the transaction. They handle paperwork, conduct title searches, and make sure all legal requirements are met.
4. Appraisers: These experts determine the value of the property before it’s sold and provide a report on the property’s condition.
5. Home Inspectors: They examine the property to detect any issues or problems that could affect its value. Money
6. Money Lenders: Lenders such as banks, private money lenders, and hard money lenders, provide the funding to purchase and renovate the property.
7. Contractor: Provide an estimate of the cost of a construction, remodeling, or renovation project based on the square footage of the space.

What is the job of the contractor in the rehabilitation of the house?

The contractor will take into account the cost of materials and labor required for rehab, as well as any other costs associated with it, such as permits and inspections. They will then provide the investor (house flipper) with a detailed breakdown of these costs, including the cost of materials, labor, and any other expenses. This allows them to see exactly where their money is going and make informed decisions about the project.

Who goes out to buy the materials for rehabilitation?

The contractor is typically responsible for purchasing the materials needed for construction, remodeling, or renovation. They often have established relationships with suppliers and vendors, which they use to acquire the necessary materials at a fair price. This means that they generally have experience in sourcing quality materials and know where to find good deals. Additionally, they have the ability to buy in bulk, which often leads to lower material costs.

How to get funding to buy a property to fix and flip?

 

In need of a Hard Money Lender?

 

 

How much is the rehab cost for flipping a house?

Rehab cost for house flipping is split into two parts, and they are:

• Contractor Cost: This cost is set by square footage. Let’s say an investor wants to rehab a total of 200-square-footage kitchen and bathroom of the house they just bought to flip it. A contractor will then give, for example, an estimate of $100 per square foot for the rehab. To determine the total cost, the contractor would multiply the 200 square footage of that property by $100 (the cost per square foot) for a total cost of $20,000.
• Material Cost: We can’t give an exact number of how the material cost will be to rehab a house as this information will depend on what kind of renovation is needed and which part of the house it is that needs renovating, not to mention the inflation and alike matters. However, the cost estimate of materials for a house renovation is typically provided by a contractor.

Please note that the “square footage” method of determining costs can be applied to any part of a property, including both the interior and exterior.

Which part of the house typically needs rehabbing?

Here are the common areas of a house that typically require renovation and remodeling:

• Kitchen
• Bathroom
• Basement
• Single room
• Driveways
• Roofs
• Attics
• Patio
• Backyard
• Front yard.

Please note that in order to get the best ROI when fixing up a property to flip, you don’t necessarily have to rehab every corner of the house, just those parts that need it, this way you’ll be sure to get the best possible return on your investment.

To dive deeper a little bit more, here are some of the materials that may be needed for rehabbing a house:

1. Drywall
2. Lumber
3. Insulation
4. Flooring (such as hardwood, tile, or carpet)
5. Paint
6. Cabinetry
7. Fixtures (such as faucets, light fixtures, and doorknobs)
8. Appliances (such as a stove, refrigerator, and dishwasher)

Going into more detail, let’s discuss…

Payments and fees involved in real estate house flipping

The payments associated with house flipping include:

1. The cost of the property: This is the purchase price of the property, which may include additional costs such as back taxes or liens.
2. The cost of rehab: This includes the cost of the labor and materials needed to repair and renovate the property. This can include things like new flooring, appliances, roofing, and other upgrades.
3. Closing costs: These are the expenses associated with finalizing the sale of the property, including title insurance, appraisal fees, and attorney’s fees.
4. Real estate agent commissions: If you choose to use a real estate agent to sell the property, you will need to pay a commission, which is typically 6% of the sale price. This commission is split 50-50 with the agent that’s representing the seller and the agent that’s representing the buyer (house flipper). If there’s only one agent involved during the sale transaction, then that agent gets the whole 6%.
5. Escrow fees:  Escrow is a company that acts as a neutral go-between during the process of buying a home. They hold onto the payment made to the seller and all the paperwork related to the sale until all the agreements have been fulfilled by both parties.
6. Title fees: Paid to the title company for the costs associated with transferring ownership of a property. These fees typically include a title search, which checks the property’s ownership history to make sure the title is clear and there are no liens or judgments against it. Additionally, there are also recording fees for officially recording the sale in public records and other expenses that may be including notary fees, courier costs, and administrative costs for preparing and filing paperwork.

To gain a more comprehensive understanding, let’s take a look at…

What type of properties do real estate rehabbers fix and flip?

1. Neglected properties: These are properties that weren’t been taken care of for a long period of time,  thus, needed to be renovated.
2. Properties in distressed condition: Properties that have issues or  problems that are difficult to sell and are considered to be distressed, such as:
   • Cracks in the foundation, walls, or floors
   • Uneven roof
   • Outdated fixtures, faded and stained carpets
   • Outdated cabinetry
   • Health and safety hazards like attic mold, asbestos, and lead paint
   • Outdated electrical, plumbing, or HVAC systems
   • Overgrown landscaping, broken windows, missing or damaged siding, and shingles.
3. Properties where the seller is in financial distress: These properties may be priced lower than market value because the owner needs to sell quickly and may be willing to accept a lower offer. Rehabbers resell it at a significantly higher price after making the necessary repairs and upgrades.
4. Properties that are undervalued or overlooked by the market: Examples are the old-fashioned houses and houses in areas that are going through a revitalization process.
5. Properties that are being sold at auction: These properties may be sold at a discounted price, and rehabbers can sometimes get a great deal on a property that needs some work.
6. Properties that are being sold as part of an estate sale:  Properties that have been owned by the same family for a long time may need some updates and repairs. These houses may not have been updated in a while and may be in need of renovation work to bring them up to today’s standards.
7. Properties that are being sold by banks or other lending institutions: Properties that have been foreclosed on or where the previous owner couldn’t pay the mortgage are often sold by banks or other lending institutions. These properties may be sold at a lower price to try and make back some of the money they lost.

But let’s not forget to answer…

How and where to find a house to flip?

There are several websites and platforms available where you can find houses to buy for your real estate flipping business, and they are as follows:

1. Real estate listing websites: Zillow, Redfin, and Realtor.com are some of the most popular listing websites that allow you to list and search for properties by location, price, and other criteria.
   • Zillow: One of the most or probably “the most”  popular real estate listing website to list and search for houses for sale.
   • Realtor.com: Another popular property listing website operated by the National Association of Realtors (NAR).
   • Redfin: Offers a free home valuation tool, which can be helpful in determining how much to offer on a property.
2. Foreclosure and auction listings: RealtyTrac and Foreclosure.com list properties are a few examples.
   • RealtyTrac.com:  Largest database of foreclosure and distressed properties
   • Foreclosure.com: Another popular listing website for foreclosed properties that are available for sale.
   • Auction.com: One of the best foreclosure and REO bank-owned properties.
3. MLS (Multiple Listing Service): Contact a local real estate agent, who has access to the MLS and can help you find properties that are not yet listed on the public marketplaces.
4. Partner with Wholesalers: Rehabbers can also purchase properties from real estate wholesalers who have acquired properties at a discounted price. Wholesale properties are usually sold at a steep discount, but they may be in need of repairs and renovations.

Curious about what real estate wholesaling is?
Read on here: What Is Real Estate Wholesaling & How Does it Works?

If you are a people person and have attended many local real estate events, joined local real estate investing groups, and are well connected with other rehabbers, real estate agents, and mortgage brokers, chances are these people can help find you properties to fix and flip

 

These are all the details we can provide for now in a simplified form. We’re going to update this post accordingly
Thanks for reading!
N.G.