Secret to Flipping Houses

There is a hidden secret to flipping houses that only the most experienced real estate investors know anything about. You’re about to discover what most people will never know about flipping houses. I never read about this in a book. I never saw it on a house flipping tv show. This game changing lesson was revealed to me through the real world of real estate. It started out as a hunch after flipping houses myself and then it became more clear to me after coaching and mentoring investors from all over North America.

Unlike most investors, I have had the distinct advantage of being able to review thousands of investment deals over the past decade because of my position as a real estate coach and mentor. An unmistakeable pattern emerged after evaluating hundreds of real world flipping houses deals from all types of areas, in all types of markets from all types of investors. It went against what so many others teach and even what you watch on HGTV . It was never talked about at investor club meetings and almost no investors do it. For many creative real estate entrepreneurs, it can be the missing link.

 

What is the Secret to Flipping Houses?

 

Before I reveal this investing breakthrough to you, let’s take a walk through of the typical house flipping deal. (Note: The following is a real deal that just came across my desk yesterday)

  1. A property in need of significant work is for sale for $65,000 in a decent neighborhood of Chicago. An enterprising investor connects with his power team and his general contractor tells him there is no way it will cost more than $28,000 in order to bring it up to a level where he could sell it for top market price. His Realtor shows him numerous comps to support a conservative sales price of $150,000.
  2. The profit looks incredible and the investor can’t believe his good fortune. He conservatively estimates it will take 2 months to complete the work, even though his contractor swears it will be much faster than that. Then, he adds another 2 months to sell it. His best funding resource is a hard money loan at a cost of 5% interest fee plus 15% per year because it requires no credit checks or down payment and it will also fund the fix up costs.
  3. He negotiates the seller down to $60,000 and after closing costs, he is in the deal at $64,000. So far, he is the happiest guy around. He is even bragging to his friends and family how awesome he is. Buying a home that will sell for $150,000 for $64,000 without using his own cash or credit. He’s on top of the world.
  4. The repair work starts off great but soon, delays begin to creep in due to unforeseen difficulties. Some of the subcontractors fall behind and that throws off the schedule of upcoming subs which creates more delays. The investor overlooked a few details and that adds to the cost of the renovation. Week after week, month after month, the owner drives to the property to inspect progress and seems to always find more and more problems. It feels like a never ending saga. Rather than 2 months, it takes 4 months to complete the work. Rather than $28,000, it costs $34,000 altogether.
  5. The now-exhausted flipping houses tycoon puts it on the market for $150,000 and after 2 months, has no bites. His Realtor says he should drop the price and offer to pay for the buyer’s closing costs.
  6. After 3 months on the market, he finally gets an offer of $140,000. The offer is accepted but during the inspection, the new buyer finds several problems that must be fixed prior to closing. Another $2,000 in repair work later, the new buyer is happy and they go to closing.
  7. Mr. No-Longer-Happiest-Guy-Around looks at his final profits in absolute shock:$140,000 Sales Price
    - $64,000 Total Purchase Amount
    - $8,400 Realtor Commissions
    - $4.200 Buyer’s Closing Costs
    - $1,400 Seller Closing Costs
    - $36,000 Renovation Work ($28,000 estimate plus $6,000 unexpected plus $2,000 to appease the new buyer)
    - $15,000 (5% plus 8 months at 15% per year, or 15% of the $100,000 borrowed)
    ======================
    $11,000 Net Profit to the Investor

This is a true story. And it happens every day of the week, all across North America. I’ve seen it a hundred times (literally).

How did he only make $11,000 when he bought a $150,000 property for $60,000? What some people do is take a magnifying glass to each major expense in order to try to assess the problem as being rookie mistakes. Such as:

  1. Estimated value: Maybe you’re thinking, it wasn’t a $150,000 property, it was a $140,000 property! OK. You’re correct. In fact, most people over-estimate how much a property will sell for when they first buy it. Whatever you think it will sell for after pouring over comps, reduce it by 8% and you are usually more accurate.
  2. Cost of Funding: Maybe you think he paid too much to the hard money lender. Perhaps, but he didn’t have to use his own cash or credit and all of his renovation costs were paid for by the loan. His bigger issue with the money was that he paid it off after 8 months, rather than 4 months.
  3. Too Long to Fix Up and Bad Cost Estimating: His rehab work took double the estimated time and $8,000 more. That’s normal. Even the best contractors miss the mark on cost by about 25% and length of project by a few months. In other words, it always takes longer and costs more than you ever anticipate, even when you are a seasoned pro and have years of renovations under your belt.

 

This is the Secret to Flipping Houses

 

Rather than close on the property, fix it up and then resell it to a retail buyer, as in the above example, instead, simply flip the property to a contractor-investor-buyer. Wholesale the property to a full time contractor who buys, rehabs and resells 1 or 2 properties per year. They save a tremendous amount on renovation costs because they are there own contractor. Plus, when the project impacts their overall profitability, they are more efficient. This deal could easily have been sold to a contractor-investor-buyer for $70,000. Then, the investor would have walked away with $10,000 for less than one month’s work. Usually, people don’t see the light until they have gone through the above saga a few times. By reading this, hopefully you can learn this lesson and avoid the trap without having to go through it the hard way. The secret to flipping houses is to avoid buying fixing up and reselling the property, but instead to simply flip the property to a contractor-investor-buyer.

 

Comments

  1. Ilya kosenkov says:

    Phil Pustejovski’s blog is the best!!!

  2. 100% agree with this article. I have rehab and pre-have many properties, and by far the pre-hab is the best investment bar none. By merely emptying a home, basic repairs, and doing some basic landscaping I have made the most efficient profits. Once I have done this I can find investors who are willing to pay more money now that they can see what needs to be done. There are way too many houses to buy that are rundown and filthy that creates opportunities for investors. Good luck

  3. What a wonderful idea……I’ve seen so many fix and flips/buy and holds, etc. but hadn’t looked at contractors like that before. Thank You!

  4. Tracy Edwards says:

    This is an exceptional article. Many people do not realize the significance and the time taken to rehab a home and as mentioned, 99.9% of the time it runs over and cost even more than you ever anticipated as the article clearly illustrates. I will certainly add pre-habbing to my arsenal of real estate knowledge In order to keep my profits moving and my costs as low as possible. As always thank you for enlightening and usable information from those that are working in the trenches.

  5. Great topic. I love your enthusiastic way of teaching!

  6. Richard Woodford says:

    Thank you for the information and sacrifices you made to attain it.

  7. Chris Basker says:

    I am getting out of the military this month. I have no experience with flipping houses this way. I just know the physical work. I will have some money to start with but not enough to buy an entire house without a loan. What is the best way for to start?

    • Phil Pustejovsky says:

      Chris,
      Thank you for serving our country and protecting the freedoms so many take for granted.
      In order to begin in real estate investing when you have little to no money or credit, you want to take the Creative Investing Approach.
      Check out this article, Creative Real Estate vs. Traditional Investing
      Sincerely,
      Phil

    • Jeff Sampson says:

      Hard money is the easiest if your in the right area for the loans while hard money can be difficult to find when you find a good source stick with them. I am a professional contractor and finding money is tough

  8. Denise Violetta says:

    Another great article, Phil! You’ve hit the nail on the head on that subject for sure.

  9. Jonathan Arguello says:

    This article is Simplistic Genius! Thank you for the great tip. I was wondering: How would one get in touch with multiple “contractor-investor-buyer”?

    Thanks again,
    Jonathan A.

  10. Great article. Where can I find hard money lenders like the one in this story?

    • Phil Pustejovsky says:

      Great question. My team has painstakingly developed relationships with the top hard money lenders in this country over the past decade and for those in my apprentice program, when they have a deal that fits for hard Money, we introduce them to the appropriate hard money lender. There used to be nationwide hard money lenders in the real estate boom but they all went bust. The ones that survived were the local or regional folks. These days, Hard Money lenders are extremely picky on who they work with. Ultimately, the biggest issue they deal with is uneducated investors. They abhor ignorant investors because they don’t ever want to foreclose, they want to easily collect their interest and deal with good people who have their act together. Ironically, they rarely have an issue with “having enough deals.” Hard Money lenders know there are deals everywhere. The far more rare jewel is a wise and intelligent real estate investor to work with. Since many of our students are new in the real estate game, we bridge that knowledge gap for them and our students can borrow our relationships. Basically, our hard money contacts know that if my team and I have vetted the deal and will be available with any questions, they are far more comfortable. I hope this helps answer your question.

  11. Hi Phil, Excellent blog! I’m learning so much.

    I’m trying to get into the house flipping business and I want to figure out if it’s possible to go into business with my contractor friend who has redone my entire house. How would we split profits? He would like a percentage of what the house sells for but I don’t know how that would work. I would be putting all the money in (inheritance money) and he would be doing all the labor minus subcontracting to an electrician and plumber. He does pretty much everything himself with his workers.

    • Phil Pustejovsky says:

      If you are putting in the money, you control the deal completely. DON’T split profits or partner up in any way with a contractor. Instead, once you find the deal, get three bids from three different contractors. Don’t play favorites. Then, whichever one you hire, hold them accountable and assume that everything they say is a lie. Even if it is the truth, at least you’ll take the extra time to verify what they said before taking it at face value. Hiring contractors is NOT for the faint of heart. In most cases I have seen over the past decade, the contractor makes all the money in the deal because they are professionals at sucking all the profit out of the deal.
      On a more important note, most people shouldn’t ever get into the business of hiring contractors for real estate deals at all. Contractors take most newbies to school. ESPECIALLY if your money is coming from an inheritance. If you read this article, hopefully you gathered that buying, fixing up and reselling is usually not as profitable as finding and flipping to a contractor investor buyer.

  12. Hi Phil, The secret of flipping houses is very instructive and i thank you for sharing it with us.

    I am a newbie,how can i become one of your mentee’s

  13. BOB MANN says:

    hI Phil…I have a couple of questions…1..do you have to own the house in order to flip it, 2..can i put a pending contract on a house a flip it…and 3..can i sell a house and give the buyer a car when they but. thasnks

    • Phil Pustejovsky says:

      1. in most cases, you must at least have equitable interest, not necessarily be the owner of record, which would require you get the deal under contract.
      2. You can put a binding real estate contract on a property and then you may be able to flip it, provided you follow the laws for your state. See my article “Is Flipping Real Estate Illegal”
      3. A car would be considered personal property. Personal property is oftentimes included in the sale of a property. If the buyer is getting a loan, that car wouldn’t be added to the appraisal so you wouldn’t get credit for it but if the buyer is paying all cash, you can raise the price to include the car.
      MOST IMPORTANTLY…get an attorney and ask him these questions.

  14. Great info as always, but where/how do you find the contractor investor? Been tryin’ to find them!

  15. Annmarie says:

    Hmm it seems like your site ate my first comment (it was super long) so I guess I’ll just sum it up what I had written and say, I’m thoroughly enjoying your blog.

    I as well am an aspiring blog blogger but I’m still new to the whole thing. Do you have any tips and hints for first-time blog writers? I’d
    really appreciate it.

    • Phil Pustejovsky says:

      Only write about things you really, really, really know well. The problem with the internet is that anyone can post anything, and oftentimes what sounds accurate is completely wrong. So my suggestion is to write less but write about something you are certain.

  16. Phil – you really are a good teacher. These videos are so enjoyable I actually laugh out loud sometimes. I can tell you love this. Thanks.

  17. Hi Phil,

    Thank you for a very informative article!

    You said that at the end, even with all of the extra hardship, the investor still used none of his own money. So I was wondering if you could elaborate further on how the funding was stuctured for this particular deal (like the max term and max percentage of ARV allowed). It would be a great knowledge info for starting fix-and-flippers.

    Here are my questions:

    1. How did the investor obtain the extra time and funds needed for the rehab, buyer inspection contingency repairs, and extra 4 months (extra 2 mo. to rehab, 1 mo. to list, and 1 mo. to close) of carrying costs? In many cases HMLs only lend for 6 months with no extensions and will not give you anything above the original % of ARV agreed on.
    2. Did he negotiate a maximum percentage for the loan at 70% of ARV and had the extra draws (above his original $28K rehab estimate) readily available? If the funding was maxed out at 65% of ARV (a more usual norm now), based on investor’s original $150K ARV estimate he would run over the loan amount by $2500, not even counting the extra 4 months of carying costs, and would have to dip into his own reserves, therefore further reducing the $11K profit.
    3. Was he ever in a risk of losing the property to HML due to possibly exceeding the term and/or original amount of the loan?

    It also would be interesting to know if the loan was with interest only monthly payments or a no-payment balloon.

    Thank you in advance,

    David

    • Phil Pustejovsky says:

      Hard Money Lenders are more stringent on beginners than those that have been doing successful and profitable deals for a while.
      In the example I provided, the person had done several deals with that Hard Money Lender.
      1. The Hard Money Lender provided weekly draws as work was completed and there was enough of a pad/cushion to cover the monthly payments.
      2. The Hard Money Lender ended up providing draws that slightly exceeded 65%.
      3. No.
      Build a great relationship with a Hard Money Lender and you may be surprised what they will do for you that they won’t do for others…just don’t tell your friends how flexible your hard money lender has become because once you do that, you will have killed the golden goose :)

  18. I have been working with people with alot of money and I have expressed my feeling about how it is my dream to buy and sale real estate . I just can not seem to get anyone to help me,so I am going to save until I get enough money.See I ran across a deal that would get me started but I need 15,000 for 2 properties that just need cosmetic .What would you do?

  19. I talked to my landlord about this oprtion and she strongly tried to discourage me from going this route, because of the risks. I know that there are risk in anything that we do but is there a way to minimize the risks or avoid them all together? She brought up that sometimes after you get the contract for the house the potential investors pull out for whatever reason, then you are stuck with making a house payment for a home that you dont live in or can do anything with, until you do find a buyer. Another point she brought up, that I did not know about, was that I could buy a house from someone and that house is in the process of being forclosed on. She said that this was against the law. So in this instance I am stuck with a home that I cant sell, I have broken the law, and a list of other things that I could have to deal with. Any help would be appreciated.

    • Phil Pustejovsky says:

      Sounds like your Landlord is worried that you may become their next competitor :)

      1. Is there a risk in a buyer backing out? Yes! Are there ways to reduce that risk? Yes! Watch my video Biggest House Flipping Mistake.

      2. Stuck with payments? Huh? How do you get stuck making a house payment when you neither agreed to take over the the payments nor do you own the house? Sounds like this person is just trying to make up things to scare you.

      3. Against the law to buy a property from someone in foreclosure? Watch my video, Is Flipping Real Estate Illegal?. Each state is different, but you may want to google “Your State Foreclosure Prevention Act” to double check if there are any special rules to follow when someone is behind on payments. Plus, oftentimes, we do these deals and the person isn’t in a foreclosure situation.

      I hope this helps!

  20. Alex J. Franklin says:

    Hi Phil,

    Why is it….I have never, ever heard anyone, including Flipping Shows, Tutorials, even you…..ever mention the amount of “TAXES” paid on each deal??? We know that Property, and Transfer Taxes are included in closing cost. But what about Capital Gains, State, ect. Is it no one, I mean no one is paying Tax on flips???

    • Phil Pustejovsky says:

      If you earn income, expect to pay income taxes. Whether you are flipping houses, selling cars, performing medical services and/or every other profession, the gov’t is going to take their cut. If you don’t want to pay income taxes, one way to accomplish that is to not earn income.

      • I honestly wish you had this inomrfation and several of your different blogposts in a movie page, do you make many video tutorials? I enjoy most of your main topics and it genuinely demonstrates that you really put a bit of effort into them. It is really nice to at last explore a blog which the writer cares about. Do you allow other sites to use your material? I would love to give you people some credit for your stuff? We would particularly want to include this one if it’s alright. I’ll just bookmark this post in case you can’t find time to get back to me.

  21. EARLhALSTEAD says:

    Phil, you are the “bomb”(smile)

  22. Hi Phil,

    I am really loving this blogs learning a lot. I appreciate what you are doing. Thanks.

  23. what are some creative ways to market to retail buyers?

  24. So do you generally shoot for making $10K per deal? And do you actually buy the house and then sell it to a contractor/investor, or just get it under contract and then assign the contract?
    Thanks for all the great tips!

    • Phil Pustejovsky says:

      I don’t have a set amount I am looking to earn. Each deal is different. You save a ton of money by not closing on it, but instead assigning (or selling) your equitable interest.

  25. ps – are you a hard money lender?

  26. Seneca Hampton says:

    The video made perfect sense. I am just stuck on one piece: if this was a hard money loan wouldn’t your real profit only be $3,250? Seeing how you still owe him 5% and 15% per year? I just want to make sure I am following, this is good stuff.

    • Phil Pustejovsky says:

      Which direction are you referring to? Flipping it to contractor investor buyer or Buying, Renovating and Reselling?

  27. Carey Usher says:

    First of all, Thank you for posting the information and allowing access to the E books. I”m reading still. I am learning a lot from your book and will read the others. I also read up with others as well. Any information on creative Real Estate is valuable.

  28. NickStango says:

    If I buy it for $60k and flip it to another investor, how do I avoid closing costs? And if I don’t want to use my own money to buy it, what about the cost of the hard loan? or is this a scenario were i get a contract to buy without using a broker and then just find an investor who will buy the property and make the finders fee so to speak?

    • Phil Pustejovsky says:

      You can assign your equitable interest to the new buyer and get your money as a fee at the closing between the original seller and the new buyer.

    • Terrence Tinnin says:

      were can I find hard money lenders who doesn’t required a credit check and a down payment?

      • Phil Pustejovsky says:

        Most hard money lenders require a down payment until you really build a solid track record. As for credit, most true blue hard money lenders don’t care about the credit score.

  29. Kim Melendez says:

    If I was to find a contract investor buyer, how would I secure the original property? What type of funding would be the most beneficial? In the example hard money loan was the best.

    • Phil Pustejovsky says:

      You secure the original property with a purchase contract with the seller. The funding will depend on how you structure the deal. The best funding is no funding at all.

  30. Ok so if you go ahead and flip to a contractor and the seller is welling to go down to $60k would you still go through with a hard money loan or it be best to pay out of your pocket?

  31. Hi Phil,

    This was awesome video. I am new to real estate investing. How can I become one of your mentee?

    Thank you,

  32. Scott Wilson says:

    If you flip for $10,000 to a contractor you would still have closing costs and some other incidentals right?

  33. HapsaiGeorge says:

    Thanks a lot
    phew i learn a lot …..

    Thanks again………

  34. Jimmy Tsang says:

    Is your concept of flipping houses equivalent to buying and selling real estate option contracts, similar to playing with stock market options?

    • Phil Pustejovsky says:

      Not exactly. Stocks and creative real estate is like comparing apples to oranges. There are so many differences, it’s hard to try to create similarities.

  35. Kofi Adu-Bekoe says:

    Phil is right, however how do you find this rehab contractors.

  36. hildah says:

    Hi Phil,

    Thanks for all your amazing videos- you are a great teacher and it’s apparent that you know your stuff and love to teach/share it!
    I have a question: when flipping houses, do you recommend a beginner flipper like myself obtain a realtor license? especially for rehab flips? I ask because I am running into roadblocks when attempting to tour properties without a realtor and I imagine it would save a few bucks on the selling end after a flip. Thanks.

    Hildah

  37. What I want to know is how you find a 150k home for only 64k… I think that’s more important than how you handle it once you have it…

  38. Hey Phil ,
    I’m a resent architecture graduate in the state of New York . It has always been my dream to get into the housing market one day . Ive worked in construction since I was 16 , I’ve done exterior and interior work. I went to school for architecture because I though it was a better education then construction management , but ultimately I want to become a builder. Right now I’m starting an architecture mill work shop in Long Island . I design and fabricate high end cabinetry work . I don’t have a website as of yet but I have a portfolio that I could email to anyone interested . Anyways I seen a few of your videos and your the fist person that’s giving good useful information from what I seen online so far . I think your theory makes seance and at the end of the day we all know secrets to different industries and methods to get things done faster and more cost affective . After I’m done with my investment in my business I’m going to start saving up money for my first project and I would like to find another invest that has experience in the housing marked. Any thoughts or suggestions ?

  39. How do you know when if you’re being too cautious, even when you’re run the numbers?

    My sister and I inherited an 885 sq ft. 2/1 condo Stockton, CA, 12 hours’ away from us and in a neighboring state. The assessed valuation is $50k. One sold in May for $53k. Two have been on the market for weeks for $60k and $69,900. I’ve been told by two realtors that it’s difficult to get loans in this complex because there are so many renters. Typical rents are $650. The HOA is $225, but that includes water. The real estate values are expected to rise 9% in that area, but considering how low they are now, that’s not much appreciation.

    Except for what may be an old leak in the shower ceiling from the upstairs unit and a leak under a sink, what’s needed appears to be cosmetic, including carpeting in the bedrooms and living room, and new kitchen countertops because of burns in the formica. The bathroom and guest vanity sinks are chipped, too, and also may need new faucets. Additionally, we’d need a new kitchen sink, faucet, and painting. We’ve had the condo professionally cleaned and are waiting for the repair estimate, but it could be $5-7k. The handyman/project manager, who also has rentals/flips of his own and has worked in this complex previously, said that unfortunately, there’s a 2 of 5 chance in that complex for the renters to trash the place. I own rentals in SoCal, but they’ve been turnkey. I’ve never rehabbed.

    I had looked at buying my sister’s interest and using it as a rental, but now I’m not so sure because of the quality of the area. It would take a large chunk of the money I’d have to work with, as well. My options are: us selling it together, as is (and clearly we wouldn’t get anything near $50k; one local realtor said to ask for $37k); buy my sister’s interest, fix it up, and sell it; my sister and I fixing it up and selling it; or buy out her interest, fix it up, and use it as a rental.

    What would you do?

    Thx

    • Phil Pustejovsky says:

      Not own a condo for long rental purposes. Always a bad idea. Either rehab and flip to a long term investor buyer or flip as is.

  40. how do you find the investors to sell the house 2

Speak Your Mind

*