What Is The Best Way To Make Money Fixing And Flipping Homes?

Pre Flip Fixer

Pre Flip Fixer

The following is a massive guest post by Samurai Mark Ferguson, who became a licensed real estate agent in 2001 after graduating from the University of Colorado with a Business Finance degree. Mark runs a team of ten real estate professionals and is an avid real estate investor. Mark owns 11 long-term rental properties and fix and flips 10-15 homes every year. 

I have been a licensed real estate agent since 2001 and I am real estate investor. I love selling houses, but it is much more fun to buy a house, fix it up and sell it for a profit. I have fix and flipped close to 100 homes in my career and you can make a lot of money fix and flipping homes. It is also possible to lose a lot of money if you don’t do your homework or know what you are doing. Despite my experience, I still lose money on occasion!

Fix and flipping homes may seem like a pretty simple concept. Buy a house that needs some work, fix it up and sell the house. The truth is it takes a lot of time to find the right deal, find the right financing, find the right contractor, decide what to repair, maintain a property, value a property, make sure all the needed repairs are done and then sell the house. Fix and flipping is not something you can spend a couple of hours on a week and be successful. If you don’t take the time to do things right and mess up any of the parts of a fix and flip, you can turn a nice profit into a big loss.

How much money can you make fix and flipping homes?

Fix and flipping houses is not an easy side job that will make you a fortune while you continue to work at your day job. You may see fix and flippers on television appear to make $100,000 on a fix and flip, but television can be deceiving. It is extremely rare to make $100,000 on a flip, unless you are dealing in high value/high risk properties. Most of the television shows I see about fix and flips leave out many of the costs associated with a flip and overstate the profits.

I try to make $25,000 on each flip I complete that I buy for less than $150,000. If I buy a flip for more than $150,000 I hope to make more money, because higher value flips use more of my resources and I cannot buy as many properties.

I network with and meet many investors who also fix and flip homes and my margins are very similar to theirs. It is important to know what other investors are expecting for a profit, because you will be competing against them when trying to buy properties. If you are buying homes off the MLS or at the foreclosure sale expecting a $50,000 profit when other investors will settle for $25,000 in profit it will be hard to find any houses to flip.

Although it is tough to make $100,000 on a flip I have done it twice. Those were higher dollar properties purchased for over $200,000 and sold for over $350,000. The real money is not hitting it big with one flip, but in flipping multiple properties that make a modest profit. I have 9 fix and flips in various stages of the process from on the market and under contract to waiting for a contractor to start work. Those 9 fix and flips should make me $250,000 or more in the next 6 months or less. If you are wondering about my math, I want to make at least $25,000 on each flip, but I average about a $33,000 profit. That means I should make around $300,000 from these 9 flips once they are repaired and sold. I am the sole owner of my fix and flip business and that is all profit to me, although I do have to pay staff who help with the fix and flips, my rentals and our real estate sales team.

What are the costs associated with fix and flipping?

I mentioned that fix and flip television shows like to overstate the profits and understate the expenses. Many of the flipping shows tell you the purchase price, repairs made and the selling price. They fail to mention the other costs like financing, selling (real estate commissions), carrying (insurance and property taxes) and much more.

I am a real estate agent so my costs are lower, but a non-agent would have the following costs on a flip that was bought for $100,000 and sold for $160,000.

  • Purchase/loan costs $2,000-$8,000
  • Insurance $500-$2,000
  • Property taxes $500-$3,000
  • HOA $0-$6,000
  • Maintenance (yard, snow removal) $250-$1,000
  • Selling costs $10,500- $15,000

As you can see the costs add up even without doing any repairs to a home. The costs range from $15,750 to $41,000 on a flip that only cost $100,000. This is a huge variance and would be completely unacceptable in most businesses. This variance shows why it is so important to do your homework before buying a flip and here is why there is such a huge variance.

  1. Financing a fix and flip is expensive and most investors do not have cash. Some investors may be able to pay cash for a property or two, but most of us need to borrow money. Hard money is a common way to finance flips, but can cost you 4 points (percent of the purchase price) upfront and as much as 18% interest. I use a portfolio lender who charges me a 1% origination fee and 5.25% on my money and requires a 25% down payment.
  1. Every fix and flip has different costs. Some houses have HOAs and some have none. Different states have different amounts for property taxes. Different areas will need varying amounts of maintenance. Insurance costs vary by state, company and house as well.
  1. Selling costs will vary depending on the house as well. Many buyers will require closing costs to be paid by the seller which can be 3% or more of the selling price and you have to pay a real estate agent. You will have to pay title insurance, a closing fee or an attorney depending on where you live.

You have to know the costs in your area for these items. If you misjudge the financing costs, it could eliminate all of your profit.

How long will it take to complete a fix and flip?

Another misconception about fix and flipping is it can be done quickly. Despite my experience, it can take me 6 months or longer to sell a flip once I buy it.

It will take weeks to line up a contractor, usually at least one month to complete repairs, a month to find a buyer and then another month to close the deal. With the best case scenario you can flip a home in about 4 months if you want top dollar. If your contractor takes longer, it takes longer to sell or a contract falls apart it is easy to reach six months. The longer you own a flip, the more interest, carrying costs and maintenance costs you will have. Always assume you will have a property longer than you think you will.

Should you buy fix and flips hoping for appreciation?

When I fix and flip homes I never buy a house needing it to increase in value. Many areas (San Francisco) are seeing huge increases in prices and it may be possible to buy a marginal deal and make money by holding it until the market appreciates. Many investor used this technique before the last market crash and when prices decreased many fix as flippers went bankrupt. My area in Northern Colorado saw decreasing prices during the crisis as well, but I continued to flip homes through good and bad markets. If you buy houses at the right price, you can still make money if prices go down. If you pay too much for a flip and the market turns, you may find yourself in a heap of trouble.

How do you find deals to fix and flip?

One of the hardest things to do when fix and flipping homes is buying houses cheap enough to make a profit. I want to make at least $25,000 on my flips and that profit is based on the current market value. It surprises many people, but I buy 95% of my properties off of the MLS. I hear investors tell me the Colorado market is dead for fix and flips, but I have 9 now and I completed ten in 2013. There is a lot of competition on the MLS, but you can still get deals if you know what you are doing!

Here are a few tips to get great deals off the MLS:

  1. Know the highest price you can pay to make enough money before you make an offer. If you are making a low offer, you may need some wiggle room for negotiations.
  1. If a great deal comes on the market, make a great offer as soon as possible. I am an agent and I can make an offer in less than two hours after I see a great deal come up for sale. I have gotten many deals by being the first one to get an offer submitted.
  1. If you are in a highest and best situation, make your best offer! I do not base my offer off the list price in highest and best. I base it off of what price I need to pay to make my $25,000 profit. Sometimes I offer 10 to 15 percent more than list price and other times I offer less than list price. Don’t think because a house is under priced that you can steal it without another investor making a higher offer.
  1. Look for houses that have been for sale for more than 60 days. Sellers with houses that have been on the market an extended period are more likely to accept a low offer. When I say low, I mean about 20% less than list price. If a house is clearly overpriced and that is the reason it has been on the market, I won’t waste my time on it. I am looking for houses that are listed at market value or slightly below.
  1. Do not limit your search to certain types of properties. Some investors only want to buy a REO, but I have bought REOs, short sales, estate sales and normal sales as fix and flips. REOs are hard to find and many of my deals have been traditional listings that needed work or a quick sale.
  1. Make your offer as appealing as possible. Cash is king and most sellers prefer cash, because a cash deal has a better chance of closing than a financed deal.* Remove your inspection contingency if you really want to give yourself a great shot at getting your offer accepted. I am experienced enough to know the major issues I need to look for and I usually do not get an inspection. I don’t recommend this for beginners.
  1. If you really want to make a business out of fix and flipping homes, become a real estate agent. One reason I can act so fast is I am an agent; I can write my own offers, set up my own showings and save a commission on the buy and sell side. That means I can pay more for a house than most investors who are not agents and make just as much money.

* Even though I present my offers as cash I still use financing. My lender requires no appraisal and can close in 15 days. I write into the contract “I may use a portfolio loan to finance the deal, although I have cash to close the deal if needed. None of the terms will be changed and no appraisal or loan conditions will be applicable.” If the seller does not like this I can pay cash and then refinance after closing at 70% loan to value.


How do you get financing on a fix and flip?

Financing fix and flips is a great way to buy more properties and make more money. It is not easy to find lenders that want to make short-term loans, which is what is required when you flip a home. The lender makes less money the shorter a loan is and it is riskier. Hard money is one way to finance flips, but you will need some of your own money even though many hard money lenders say they will finance an entire deal. I have to put down 25% on my fix and flips and I have to pay for the repairs out-of-pocket.

I am lucky that my local bank finances fix and flips at only 5.25% with one point. Hard money lenders will charge 2-5 points and 12-18 percent interest, although some hard money lenders will allow a smaller down payment and finance some repairs. The catch is hard money lenders like to work with experienced flippers and usually only offer their best loans to repeat customers.

If you want to start fix and flipping you are going to need your own money to get started for down payments and repairs. If you don’t have money you need to find a partner or a rich uncle. I use private money from my sister for part of my fix and flipping business. My sister has saved up over $100,000 for my nephews college and she feels I am a safer than the stock market and more lucrative than a CD. Private money allows me to use less of my cash and gives a better return to my sister than a 1% CD. Don’t be afraid to ask around for investments from your friends and family as long as you can pay it back!

Can you make more money on fix and flips with more expensive houses?

Those that read Financial Samurai know Sam lives in the Bay Area and housing is not exactly cheap. You can make more money fix and flipping expensive houses on a per deal basis. But, an expensive house is going to come with more risks and more costs. Even though you may make more money on an expensive flip, I prefer cheaper flips for a number of reasons.

  • An expensive flip will take more money for down payments and interest. A house that costs $500,000 will require a $125,000 down payment.
  • An expensive flip will need more repairs, because high-end buyers expect more. Materials and labor will be more expensive and the repairs will take longer on a high end flip. It will be harder to find contractors qualified to make high-end repairs and they will charge more in labor.
  • A high-end flip will take longer to sell than a cheaper property. There are more people who can afford cheaper homes and they are easier to sell. Your finance and holding costs will be more on the high-end property because of the prolonged holding periods.
  • It is harder to value a high-end property. A key to fix and flipping successfully is knowing what your house will be worth once it is repaired. Most high-end houses are very unique and there are few similar properties to provide an accurate value. If you are off 10% on your value on a $750,000 house that is $75,000 out of your pocket!

I prefer to flip many low-end homes over one high-end home

Post Flip

Post Flip

Many unforeseen issues come up when flipping homes and I prefer to have five flips over just one and here’s why. I have lost money before on flips, but it did not hurt me much because my other flips made money and made up for the loss. If I had one high-end flip that lost money, I would be in trouble because so much of my money is tied up in one house.

I lost money on one house because the previous owners sued the bank claiming the bank had foreclosed wrong. I can’t sell a house that had litigation against it so I could not do anything until the court saw the case. I tried to offer money to the old owners to get them to drop the case, but they were convinced they were going to get a free house. I hired my own lawyers to speed up the process and it took just under a year for the courts to review the case. Once the judge saw the claims he immediately threw out the case, but it cost me over $10,000 in lawyer fees and one years interest.

By having multiple low dollar flips I was still buying and selling houses while that went on. If that had happened to a high-end flip with all my money, I would have been stuck for a year doing nothing but counting my losses.

I also would need about $125,000 in profit on a high-end flip to equal the profit of five low-end flips. After expenses and repairs I would need to sell a flip I bought or $500,000 for over $800,000! In my experience it is much harder to find that much room in a high-end property, while it is possible to find a $100,000 house that will sell for $160,000.

How do you repair a fix and flip?

Besides finding a fix and flip, the next hardest is repairing a fix and flip. I would not suggest doing the work yourself, unless you have no job and know what you are doing. Many flips go bad because someone thinks they can fix up a home themselves on the weekends and save thousands. The truth is your time is worth something and you will probably lose money if you aren’t a professional contractor.

It will take the weekend warrior ten times as long to fix a home as a professional and the financing costs will eat up all the profit, not to mention make your family hate you. I did all the work on a fix and flip myself and I learned a lot about construction and how to lose money.

When you do repair a home, get bids from multiple contractors. Try to use contractors that have been referred to you by people you trust and get everything in writing. Angie’s List is a great resource to find contractors, if you need a place to start. Do not pay your contractor a ton of money upfront. If it is a small job you should be able to pay your contractor after the job is done. If it is a large job, you may need to pay your contractor in increments as the job is done. Don’t pay half or all the money upfront. Check up on your contractor often to make sure he knows that you are paying attention.

Guidelines on what to repair in a fixer:

1. Always make sure the home will qualify for financing; meaning all the major systems work, there are no holes in the walls or safety issues.

2. Look at the condition of the homes that are competing with your property. Make sure your home is just as nice if you want to sell it for as much as the competition is asking or sold for.

3. Don’t spent more on repairs than a neighborhood will support. Your end buyer will most likely need financing and their financing will require an appraisal. If you are trying to sell your house for more than any other home in the neighborhood then the appraiser will have no com parables to justify your high price. If the appraisal comes in low you may have to lower the price or find a new buyer, but remember a FHA appraisal will stick to the house for four months!

How do you sell your fix and flip?

You’ve almost made it to the end! Selling a fix and flip is simple. Hire the best real estate agent you can find, trust their value and let them sell the house for you. Many people want to save a commission and list a house themselves, but it usually costs the seller more money in the end than the agents commission.

If a seller thinks they will save an entire commission, which may be 5 or 6 percent (all commissions are negotiable), they are wrong. Most buyers use a real estate agent to represent them and if a seller wants to attract buyers they will have to pay at least the buyer side commission. That means the seller is only saving half of the commission and now the buyer has representation and the seller does not. Who do you think has the advantage? Real estate contracts are extremely complicated and a seller needs a professional to help them understand the contract and the process.

Valuing a home is even trickier and the most important job an agent has. If you over price a home it becomes stagnant and buyers will wonder what is wrong with the house. If you under price a home you will leave money on the table. An agent will know exactly where to price a home so that it sells quickly, but not too quickly. I tend to sell my houses after they have been on the market three weeks.

If you want proof selling a house for sale by owner loses the own money, check read this statistic:

FSBOs accounted for 9% of home sales in 2012. The typical FSBO home sold for $174,900 compared to $215,000 for agent-assisted home sales.

A lot of money can be made flipping a home

There is a lot to fix and flipping as you can see by the length of this article. There is much, much more I could share about how to make money fix and flipping homes, but the best teacher is experience. If you are interested in learning more about flipping I encourage you to visit my blog at www.investfourmore.com. I have a monthly fix and flip update I publish every month that talks about new deals, repairing properties, how I bought properties and I include pictures and videos. If you are interested in becoming a real estate agent or investing in rental properties I cover those subjects as well.

Thank you for reading and please let me know what you think below!

Mark


Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Chris says

    Insightful article Mark, I’m closing on our fourth property today and have slowly built up three rentals (and a primary) to supplement our retirement. Fix and Flipping seems like an enjoyable venture (for those of us who are drawn to RE). I’m curious, what are the tax implications of your business. Put another way, is much of your profit eaten up by taxes? Also, would you recommend Flipping as a semi-retirement business?

    Thanks, Chris

    • says

      Hi Chris, the profits are taxed as ordinary income so quite a bit is eaten up depending on your tax bracket. That is the nice thing about rental properties is the taxes are much lower on the income, especially with depreciation.

    • says

      Hi Jay, it is very tough and sometimes the only way to learn is to do it! I imagine quite a few first timers don’t make much money and most make much less than they thought they would. If you think of it as the cost of education it is money well invested.

  2. says

    Great detailed post. I see you use hard money, are you concerned you would be leveraged too much if the market took a dive like 2008ish also were you flipping houses back then as well? What’s your end game? Do you plan to fix and flip for life or acquire enough rental income to get to a comfortable living?

    • says

      Hi Even,
      I use a portfolio lender for my financing, not hard money. Hard money is much more expensive, but I outlined the costs for hard money. I have been flipping since 2001 with my father and we flipped right on through the crash. Our crash in Colorado was actually sooner around 2006. If you buy right and sell quick a market down turn is survivable. We still made money on almost everything through the downturn. More opportunities to buy!

      I don’t plan to be actively flipping properties for life, but for at least 10 more years. I am 35 and hope to have 100 rentals by the time I am 44. At that point who knows where I will be and what I want to do. I may move on to bigger projects or even commercial at some point.

  3. says

    Great article Mark, I’ve always wondered what went into flipping (beyond what they show you on those TV shows). Since you fix & flip so many houses, do you have contractors that you keep coming back to on each project, or do you go through the vetting process with each new house?

    • says

      Finding contractors is the hardest part! I have had times when I could trust one or two and let them do their thing, but I get a bid on each job first and I have been hiring many new contractors this year trying to find good ones to handle all the work.

  4. says

    Mark,

    I like the tenet how you invest with NEVER the need for a house to appreciate to make money. That is super smart.

    It makes me wonder though: why aren’t more people in Colorado trying to fix and flip then? Seems like your volume is pretty healthy. How has the competition evolved over the years?

    Having a good team of electricians, plumbers, contractors is super important. I’m being reminded how much a homeowner can get mugged with my current remodel, if they don’t know what’s going on exactly. (new post coming).

    I also like how you suggest buying multiple homes to flip instead of one pricey one, due to risk diversification. I’ve been always focused on buying the best property possible, and less concerned on price b/c I don’t want to deal with multiple things, just one. For example, my new rental home is generating $8,700/month gross rent. I would rather have that then rent out five properties at $1,740 a month gross rent. I think I would shoot myself, b/c it’s just me. Thoughts?

    Sam

    • says

      Hi Sam, there are many people trying to flip in Colorado. One reason I used to buy at the foreclosure sale, but stopped, was because prices have gotten out of control from investors. One way I get my properties is going to small towns with less competition and being first to make offers and making the best offers. Being an agent gives me an advantage because I can pay more due to commissions savings. The volume comes and goes, I have 9 now, but I could go months without seeing a decent property worth offering on. Competition in Denver is much tougher (I am 60 miles North).

      I think strategies for rentals are much different than for flips. Flips are about turning quickly and volume to me. Rentals on the other hand are about good locations, stable tenants, cash flow and ease of management. I do have many rentals in the $100,000 to $200,000 range, but that is where my sweet spot for rental rate to purchase price ratio is. I am actually more strict on what I buy with rentals than with flips.

      • says

        Had to jump in real quick.

        What is the criteria for your rentals, kind of in the same boat with Sam in terms of just searching for long durations to find the best spot then letting it sit because it will *always* be in demand (never true but you get the just).

        Quick bullets on your criteria for a rental?

        • Ricky says

          He just listed his criteria…cash flow positive, below market value, good location, etc…the only thing you can do is do your best at forecasting and follow through with good management.

          • says

            I can add a few more criteria. I want them newer than 1960 and as new as possible. I prefer them to have less than $20,000 in work. I try to get at least 20% cash on cash returns in the first year. I want properties 20% less than market value.

            • says

              Thank you for the response. Spent a couple hours going through your site.

              Have always been against rental income because of that but now have a list of 5-6 trusted niche realtors, just need to find a way to weed through the bad houses.

              Always been against housing, but as noted above due to cap rates which change as you go to different cities.

  5. says

    Pretty insightful article. My uncle used to flip houses and he used to make between $20,000 and $50,000 per flip, but he also lost money on some. He used to do most repairs himself and hire a few people to help him out, but now his back is all a mess and he doesn’t enjoy doing it anymore.

    I never asked him about the costs involved in flipping houses, I always assume it was easier than this.

  6. Marco says

    Hi Mark – Thank you for a very detailed and enlightening post. Wow, you sure know your business. Amazing that you can juggle five flips at a time. Like Sam, I think it would be too stressful for me. How do you handle it?

    Also, with the legalization of Marijuana, are you seeing more demand for housing and/or more people interested in investing in Colorado, in general?

    Maybe I missed it, do you do any house flipping outside of Colorado? Any other markets that interest you??

    Thanks again!

    • says

      Hi Marco, I have not noticed legalization having much of an affect, but oil and gas has big time. Colorado has a huge oil boom right now.

      I don’t flip outside Colorado.

  7. g says

    You have a knack at flipping houses, I would be too stressed out to flip anything – with the exception of a burger! I rather buy in a good location and rent it out. Thank you for your article and all the best in your wealth accumulation :-)

  8. says

    Mark, does your portfolio lender give you a cash out refi loan immediately after closing? Regional bank?

    Have you considered spec building?

    • says

      My portfolio lender does not do a cash out refi until after a year of seasoning. They are regional. I have thought about spec building, but that is about all. I’ve never done it.

        • says

          Jon, I was confused by your question. If I pay cash for a flip then I can refi it with my portfolio lender, but they will only give me 70% loan to value based on the most recent appraisal or sales price which ever is lower. To base that 70% on more than the most recent sale I would have to wait a year. I am taking cash out, but I still am virtually putting 30% down.

  9. nbsdmp says

    Mark, great article! I have to admit, I’m addicted to watching HGTV and all of these re-hab/fix-up shows…and it always bugs me when it portrays how wildly profitable it is. It was good to hear you say that most of the time these programs are exaggerating or if nothing else leaving out some of the facts that skew what the actual profit is.

    One question I have is on taxes because that is what kills me in my business. I assume you are an LLC or an S-Corp correct? All of these profits on short term flips are taxed as personal income correct? So you can make $400k/year flipping homes but are their tax advantages to this business that keep you from paying ordinary income tax (other than the typical write-offs)? Is there a way that allows you to roll the profits over from a previous flip into new investment opportunities?

    I admire your hard work in building a great career and path to FI!

    • says

      I do use an S corp and there is no legal way I know of to avoid taxes being ordinary income on each flip. You can’t roll them into another property without holding the flip for at least a year and as a rental(some say more than a year as the IRS is not clear).

  10. S says

    Nice of you to share your secrets. Amazing what the web can deliver to you. I own some rentals but I am not in the flip business though I do have some friends who are involved in it. I’m considering “partnering” with one of them on a flip to learn from them. It would be helpful to do it with someone who has some experience on a property worth less than $150,000. That way my downsize risk is minimized. If it goes successful, I could go out on my own.

  11. Ace says

    Mark,

    Thanks for the very detailed article. I kind of always figured flipping was far more complicated than what is presented on television.

    Overall, I’m in agreement with going after the lower cost properties. It is so much easier to get a good purchase price, renovation costs are much lower, and there is a far larger pool of available buyers.

    Thanks again!

  12. says

    Thanks for the article, Mark. Mr. 1500 and I have flipped several homes in the past, and I think the top tips for not losing money are:

    -Don’t over-improve the house for its neighborhood.
    -Use a Real Estate Agent to sell the property.

    We have always done the work ourselves, living in the home during the renovation. It was more of a hobby, and we did it so we could make enough money to buy a lake house. Once we bought that lake house, we used contractors to expand the floorplan, and that was where our mistakes started. DO YOUR RESEARCH ON YOUR CONTRACTORS!!! Better to pay an extra month’s interest on the mortgage than to have to pay for the work to be done twice.

    And if you find a contractor you trust, even if their price is a little more, use them as often as you can. Finding a contractor you can trust is worth their weight in gold!

    I also feel that if you establish a relationship with an agent, you can negotiate commission terms. If the agent earns a full commission during the purchase of the property, and knows you are going to be buying and selling with regularity, they may be willing to reduce the amount of commission they charge you to sell your freshly flipped house. It is certainly worth asking.

    • says

      Very good info! If you are living in the house and repairing it while you go, that is a great way to do it. If you hold it two years you get to keep all the profit tax free!

    • says

      Trust. The key word for remodeling and building. Too much shady crap going on and financial muggings! Post coming up.

      I would never consider home renovation a hobby unless you’re into pain!

      • says

        By far my biggest headache is finding good contractors, who don’t take forever or try to rip me off. I have even thought of hiring my own in house crew to fix my properties.

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