Justin Pierce is a real estate investor and real estate agent who regularly writes about his experiences buying, renovating and selling houses in the Washington area.
Here are the four things you need to get started:
You need money. But it doesn’t have to be your money. What you really need is access to money. There are millions of individuals and institutions out there looking to fund real estate deals. More and more money is flooding the industry as home flipping once again gains favor.
Here are a few sources:
• Friends and family: This is where most people start. Do you have a wealthy family member or friend? Start talking to them about your aspirations, your plans and how you’ve prepared yourself to be successful. Many investors start this way. However, if you’re like me and everyone you knew growing up lived pay check to pay check or you hate to mix business and personal then keep reading.
• Private lenders or hard money lenders: There are a lot of wealthy people who are looking to make better returns on their liquid assets. They are more sophisticated — mostly — and they have set up businesses to lend money to real estate investors. They’re not hard to find. Many of these lenders advertise themselves on social networking sites and on real estate investment websites. You can almost always find one of them at your local real estate investing meet up. Beware — their rates are pretty steep, usually ranging from 12 to 16 percent interest and two to six points. The price is well worth the speed and flexibility that they provide. They also lend at a much higher percentage than a bank. If your deal is good enough, they may lend you all the money you need for purchase and renovation.
• Conventional banks: Banks are the cheapest option. I recommend talking to local banks and seeking a commercial loan but you can finance a flip with a conventional mortgage. Either way, banks will want full financials, good credit, a significant down payment and you’ll probably have to pick up all the renovation costs on your own.
• Mix and match: To make a deal work you can and should get creative. As an example, you can borrow $30,000 from Aunt Nelly and use it for the down payment on a conventional or hard money loan.
Be reputable! There are plenty of people cheating people out of their money. If you want to do this more than once you need to take care of your investors and lenders. I’ve only lost money on one deal. It was only a couple thousand dollars, but my investors and lenders were always paid in full. If you’re Aunt Nelly, be very cautious.
Always have more money than you’ll think you’ll need. These projects can easily overrun schedules and budgets. Make sure you have a cushion to cover debt service and structural surprises.
Fundamental real estate and construction knowledge:
You don’t need to know everything about everything but as soon as you commit to a flip project you just made yourself the chief executive of your own business. CEOs don’t need to know how to build a computer, but they have to know enough to sign off on the purchase of the company’s computers. They need to know enough to be able to hire a good network administrator.
You have to have a good, realistic and basic knowledge of your real estate market, construction practices and prices. You can pretty much trust a good real estate agent to guide you through the administrative requirements of a purchase and sale, but you can’t fully trust them to tell you what a property will be worth after it’s fixed up.
The real estate agent makes a commission only if you buy or sell a home. So, you have to take their assessments with a certain grain of salt. It’s tempting for a real estate agent to be optimistic with the numbers because they’re not on the hook for the property after you purchase the home.
If you’re overly optimistic about the numbers before you buy, you’re going to take a financial beating on the home when it comes time to sell. If you’re too conservative with the numbers, you’ll struggle to capture a deal because your offers will be too low, and you’ll waste a lot of time and money searching for properties.
You have to have a basic knowledge of construction and design. You need to know what sells in your market and how much it will cost to get that done in your home.
On your first few deals you’re probably going to want to have a good contractor give you estimates before you make an offer. The problem is: not all contractors are created equal. Prices, quality and reliability vary wildly from contractor to contractor.
Construction is something you’re going to probably have to learn on the job, but it’s one of the most critical components to any home flip.
Don’t renovate homes to your taste. Renovate to the market. A good way to get a feel for your market is to visit large builders’ model homes. Large subdivision developments typically hire designers to stage and paint their model homes, and they know what’s popular in your area.
A team of experts:
One person cannot be an expert on every aspect of a real estate deal. You’ll need to build a team of experts to call on when a question arises. This list is not in order of importance:
• Real estate agent: Agents can pull comparable sales for you and be your local real estate market expert. Again, you need to know enough to be able to interpret what they’re showing you.
• Real estate attorney: You need to have someone who can handle your tricky closings and peruse and write contracts for you if necessary.
• Accountant/bookkeeper: The key to business is knowing the numbers. You have to know your budget, how much you’ve spent to date and how much it will cost to finish the project at any instant and how much money you have available. You can have $50,000 in the bank and still be a broke flipper.
• Contractors and trades people: You need to know multiple good general contractors, HVAC techs, plumbers, electricians, flooring installers, painters, carpenters, landscapers, etc. Many people have thought they could tackle a renovation project by themselves and have failed. This is probably one of the biggest blunders first-time home flippers make. They often underestimate costs, time and damage to their back and knees.
• Finance people: You need to know people at the bank. You need to know people with deep pockets and you need to know hard-money lenders. You never know when a great deal will fall in your lap, and when that happens you don’t have time to go begging for financing. Great deals don’t last long. Cost of capital is also a big part of your project costs. You need to know realistically what the money is going to cost you to properly evaluate a deal. Know your sources of money, know what they like and know what they cost.
• Engineers: If you do this long enough, you’re going to run into projects that require an architect or engineer. I also recommend that you always get a survey on every purchase.
• Marketing expert: These deals do not fall off of trees and they’re very hard to find on the open market. You or someone on your team needs to set up a marketing system to find sellers who for whatever reason want to sell their home without the time or hassles required with a conventional sell. This typically entails websites, direct mail, print and online advertising, signage and lead management.
You need to have the courage to finally pull the trigger on a deal. Home flipping is not an exact science. No one can tell you with absolute certainty what a home will sell for after a given amount of renovation or what that renovation will cost you. Everything is an estimate.
You never know if you’re missing a major flaw in the home that maybe the sellers know about but they’re not telling you. People are always asking: Why are they selling the home for so cheap?
I debate all the time with my team and other agents about home values.
And the amount your home sells for sometimes just depends on who happens to be out shopping when your home is ready. No one can tell you why exactly two very similar homes sell at a $50,000 price difference.
Sometimes you can only hope yours sells at the top of that range when it hits the market.