The following is a massive guest post by 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
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. 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.
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. If you study the asset allocation mix of college endowment funds and high net worth individuals, you’ll see real estate weightings of anywhere between 5% -25%. Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Check out my Fundrise review as well.
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Updated for 2017 and beyond.