INSIDER: The Business of Flipping HomesMarch 1, 2018
Miranda Fair, MBA Candidate
Flipping homes has become a popular style of investing, especially considering the number of current television shows that highlight flipping. Many people are left with the impression that they, too, can immerse themselves in a world of sparkling granite, colorful tiles, and rich hardwoods, all while making a handsome profit. But fixing and flipping a home should not be romanticized, as successful flippers have knowledge that extends beyond farmhouse bathrooms or modern living spaces.
Successful investors who flip homes have a knowledge of local laws. They know the difference between a general warranty deed and special warranty deed, along with which is more beneficial depending on their role as buyer or seller. Successful “flipper investors” can make basic plumbing or electrical fixes themselves, and they can quickly estimate costs of repairs. Perhaps most importantly, good investors are supported by a great team that can help fill any gaps in their knowledge or experience. Flipping a home involves more than fun interior design decisions, but with the right knowledge, you, too, can become a successful investor in flipping homes.
In their book The Business of Flipping Homes, William Bronchick and Robert Dahlstrom provide a thorough and comprehensive guide to flipping homes, from the first step to the last. They share their years of expertise, providing readers with the tools they need to succeed. A thorough understanding of the process of flipping homes can greatly increase profits for investors and even for brokers. After reading this book, you will be equipped not only with the knowledge that you need to be a successful investor in the home-flipping market, but with practical tools, like templates for advertisements, contracts, business cards, and joint-venture agreements. So, what makes a successful investor? Let’s take a closer look at some of the most important, and perhaps most overlooked, strategies to maximize your efforts as a short-term real estate investor.
THINK POINT #1: Build a Foundation
As an investor, it is not enough to know how to choose a stunning backsplash—you must know how to find distressed properties, how to navigate contracts, and how to calculate remodeling costs. But how can one person know how to successfully accomplish so many different tasks? Build a team. In the same way that a strong foundation makes a strong home, a strong team makes a successful investor in the home-flipping market. Your team is your foundation, so prepare it carefully.
You will increase your chances of success, and thereby profits, if you put together a solid team that you can call on to complete a job quickly and with excellence. Bronchick and Dahlstrom recommend that you have a broker, an attorney, a title or escrow company, an accountant, contractor, a lender, and a partner on your team.
Agents and brokers can help you navigate the world of real estate and find properties that meet your investment needs. Brokers can be your most valuable resource, helping you to find distressed properties in great areas. They can broaden your search by having access to MLS (multiple listing service), strategically looking for listings with keywords signaling a distressed property. After you have flipped your house, brokers can also help you sell the property at a great price. So, find a good broker, and add them to your team.
Next, find an attorney. While you can write up contracts yourself, enlisting the help of an attorney will ensure you are well protected from a legal standpoint. Look for attorneys who specialize in real estate, since they will need to understand the nuances associated with buying and selling properties.
Make sure you have a go-to title or escrow company that will look out for your investment needs. It is also important to find a company that has the expertise to handle more complicated transactions, like double closings or seller financing. Don’t just have a company at hand—make sure you develop a relationship with a specific point of contact within the company.
Add an accountant to your team, not just so that you know your records are proper and orderly, but so you can pursue an appropriate tax strategy. For example, the authors urge investors to consider acting as a corporation when they flip homes. This protects the individual investor by limiting liability. Operating as a corporation also prevents the individual from having to pay self-employment tax and decreases the chance you will be audited.
You should also have a contractor or a network of handymen that you know will do quality work on your remodel. Look for contractors who have experience with more complex projects in case you take on more difficult projects in the future. Also, be careful to hire contractors who have obtained proper licensing and insurance.
Make sure you have a lender ready to fund deals as you need them. Build a relationship with a bank or mortgage company not only so that you can obtain financing, but so you provide buyers with a source of funding, as well.
Finally, having a partner can be beneficial for many reasons. A partner who is more experienced will be able to act as a mentor, guiding you through your first several months as an investor. Partners can also be valuable when trying to fund a project—perhaps they have good credit or are able to self-fund. Find a partner who will bring something different to the project than you do. If you have funds, make sure your partner has experience.
How can an investor’s team benefit brokers and agents? Developing relationships with investors is a strategy that can ensure you have a steady stream of reliable, repeat business. If you have a more comprehensive understanding of the flipping process, you will be better equipped to help investors, develop relationships with them, and secure a steady stream of leads. So, get on the team.
Find a trustworthy, hardworking, and experienced investor and then establish a solid relationship. Begin by helping investors find properties to purchase. Remember that investors must both buy and sell a property, so if you establish a good relationship with investors while helping them purchase homes, they will likely ask you to help sell the home, as well. This means a steady stream of reliable business for you, as many investors flip a significant number of homes per year. Partnering with real estate investors can also have unique benefits for rookie agents. If you are a rookie agent, spending time with any serious investor will help you to quickly gain knowledge and experience that will help you when working with your conventional clients.
THINK POINT #2: Find the Exit
After you build your foundation, a solid team that will support you, you need to find an exit strategy. An exit strategy is your plan to release the property after you have flipped it, especially with consideration to contingency situations. If all goes well, you will flip the property to a buyer who makes a good offer, and you will walk away with a nice profit.
But what if this isn’t the case? What if halfway into the remodel you discover a structural problem that will drastically increase your repair costs? What if you complete the remodel but no one makes an offer?
Several considerations must be made when putting together an exit strategy. First, think about how everything will play out if all goes as you expect. Then, prepare solutions for any other possible situations you might encounter. If you encounter a significant structural issue that will increase costs, do you have a partner who can provide funding? If the property does not sell quickly, have you considered renting the property? Or are you able to hold the property until it sells? Before you purchase anything, consider your exit strategy. Make sure you have strategies in place to deal with anything unexpected so you can maximize your profits and minimize losses.
THINK POINT #3: Create Emotional Value
Now that you have your foundation, your exit strategy, and you have purchased a property, you are ready to begin the interior work. On television shows about flipping, clients often walk away with their “dream home.” It may be tempting to update the entire house until it is beautiful and perfect. However, keep in mind that investments are not your dream home—they are someone else’s. Avoid the urge to update the entire house. In fact, Bronchick and Dahlstrom advise that you only invest in projects that will add two times as much to the value of the home as they do to the cost.
If you remodeled the entire house, the resulting value would probably not reflect the extra time and money that you put into it. Remember that this is an investment, so you want to choose projects that will maximize your profit. Focus on increasing value while minimizing costs. Focus on updating those items that will significantly improve the value of the home, specifically striving to increase emotional value instead of appraisal value. A kitchen is one of the most important parts of a home, mostly for emotional reasons. So, if you invest in updating the kitchen don’t feel the need to also replace the windows. They simply don’t carry as much emotional value as a kitchen does, but they can carry a significant cost. Clean and modernize the bathroom, but don’t worry about the garage. Make choices that will increase the emotional value of the home, but restrain from fixing everything.
Obviously, investing in safety is also crucial, and you should not take short cuts. So be sure to choose the projects that will make the house safe, in addition to those that add emotional appeal.
THINK POINT #4: Stick to It
Flipping houses might seem glamorous to some. To others, it might seem like a quick way to make good profits. However, according to Bronchick and Dahlstrom, the number of investors who stick with flipping homes after a few months is small. In fact, new investors are often enthusiastic when they attend a real-estate seminar, but after three months only 10 percent of those who started are still in the game. Achieving success often takes much longer than just a few months. The authors note that becoming a well-known investor takes at least five years.
Investors should be encouraged in this, though. If you put forth effort and persevere, employing the strategies and tools provided by Bronchick and Dahlstrom, there is a strong chance that you will be successful. Remember to build a successful team. Foster relationships with brokers, attorneys, contractors, lenders, title companies, and accountants. Assemble a group of reliable people who will produce quality work. Prepare your exit strategy. Make sure you can adapt to any scenario you might encounter. Focus on adding emotional value, and remember that this isn’t your dream house, it is your buyer’s. If you follow the guidelines set forth by the authors, you will have the tools you need to persevere and be successful.
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Bronchick, William and Robert Dahlstrom (2017), The Business of Flipping Homes, Dallas, TX: BenBella Books, Inc.
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About the Author
Miranda Fair, MBA Candidate
Miranda spent ten years dancing professionally both with The Walt Disney Company and in New York City. During her dance career, she graduated Summa Cum Laude from Liberty University with Bachelors Degrees in Finance and Psychology. She also worked as an event producer for Flash Mob America and led the social media campaign for the election of the Lieutenant Governor in North Carolina. Miranda is currently pursuing an MBA with a concentration in Economics at Baylor University and plans to pursue a career in economic development.