What Does it Mean to "Flip a House?"

House flipping is buying a house below market price, fixing it up and selling it for a significant profit. The goal is to get in and get out as fast as possible. You want to avoid as much of the carrying costs as you can. Depending on the price of the house, the monthly payments can eat up your capital rather quickly.

Finding The Right House

You can't make a profit if you are paying retail for a house, so you need to find a house that quite obviously is in need of repair. This makes it easier to negotiate with the seller since they weren't willing to pay to keep the home maintained, it only makes sense that they will have to give that up in equity. The nose is a powerful negotiating tool. The worse a house smells, the lower you can get the price. Even if it is cat poop or a kid with a bed wetting problem whose smell permeates the house, since no one wants to move into a stinky house, the problem will have to be addressed.

You can find the right kind of investment houses by looking into foreclosures, probate, or just driving through the neighborhood and finding a house that appears unkempt and/or abandoned. It's really quite easy if you're willing to do the legwork.

Buying The House

There are many ways to finance a house, but the best way is owner financing, but getting a regular mortgage or working with a hard money lender (since you won't have the home very long anyway) is also a possibility. Dip into your 401K or borrow from your family. Since you are buying a hard asset with real value, if you've done your homework then you'll be able to recoup your money and it's not a high risk venture.

What to Fix

When it comes to preparing the home for resale, you want to spend your money so you are getting the most bang for the buck. While it's tempting to decorate according to your personal tastes, this is not the time to get emotionally involved in a homes appeal. Make your decisions based on what will give you the best dollar return for your investment in the particular neighborhood your house is in. The conventional wisdom is to buy the worst house in the best neighborhood. I've yet to see any evidence that contradicts that advice.

Kitchens and bathrooms are the two top home areas where you will get two to three times your investment back. Kitchens sell houses, so it is important that you use materials that appeal to your potential buyer. For lower end neighborhoods a Pergo floor will add a lot of value, while in a higher end neighborhood you'll have to put in a more expensive tile or hardwood floor in order to sell the home.

Never reduce the bedroom count in a home. That is a sure money loser. Conversely, adding another bedroom to your home or upgrading the Master bedroom can add a lot of value and allow you to increase your resale price.

Take the time to make the outside of the home nice. While your kitchen may be what sells the house, the curb appeal is what draws them in. Plant new sod, add flowers in appropriate areas and give the outside a splash of color. Put in fences and walkways where it will add value. Create a nice backyard living area by adding a deck or patio. When the buyers come around and ooh and ahh, you won't be sorry that you took the time. You'll want to start the outside landscaping and repair early on in the project so it has time to grow and look nice in time for your open house and subsequent sale.

Keeping to Your Timeline

One of the most critical things you must do besides managing your materials budget, is to manage your labor costs by hiring reliable, reputable contractors to do the work you can't do or don't have time to do. Bad contractors can put you far behind schedule and end up costing you much more than they were worth (especially if you thought you got yourself a bargain?you generally get what you pay for). For a $350,000 home every month you hold on to that house your carrying cost of $2,500 each month you are working on a project could have helped pay for getting the house done quicker and with better quality workmanship. Manage this aspect of your project wisely

Selling the House

The sweetest feeling you can imagine comes on the day you've completed all the work and you bring your realtor in to look at the home and pull the comps on homes of comparative value in your neighborhood. After calculating your purchase price, your remodeling costs, your carrying costs and your realtor's commission you should be able to price the home at a price two to three percent below the market (because you'll sell the home much faster and likely get multiple offers) and still bring in a minimum of $50,000 profit. Sometimes I've seen the profits as high as $300,000 on a home that sold for over $1 million. Not bad for two to three months of work

And On To The Next

The decision to flip again often depends on the level of pain one experienced during the flip versus the amount of profit gained on the home. Usually, the profit easily offsets the hassle factor and most people decide to flip again. Some even choose to make it their primary business and build a team to facilitate and support that. Whatever you decide to do, the potential profits are quite high if you do it right and don't get emotionally involved in your purchase.