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)
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.