Seems like many people have the thought of flipping a house rattling around in their head from time to time. There may be some discretionary funds available, or access to a line of credit, or Uncle Rico’s retirement money being offered up – more on him later. Whatever the reason is, house flipping can be a great way to earn – or lose – plenty of money. We got our start several years ago buying, remodeling, and reselling homes in the Arcadia neighborhood of Phoenix. We got pretty good at it and fortunately it grew in to a bigger construction and design business.
My personal opinion is that there aren’t as many great deals available these days in our area. Keep in mind “our area” is a small neighborhood in Phoenix called Arcadia. Most of the low hanging fruit has been grabbed so now you have to climb fairly high in the tree to get your hands on anything. And as with anytime you climb higher, the fall can be greater. But with decreased competition in the marketplace, there can also be a lucrative upside of being the only one with inventory in a high demand market. Lot’s of moving parts and treacherous waters to navigate here… decisions, decisions. I can’t speak for other areas of the Valley – or the country for that matter but I’m sure there’s plenty of opportunities all over the place to flip homes as much as your heart desires. So… if you’re reading this… and your heart desires to giving flipping a try… here are 10 tips – in no particular order – that I hope will help your endeavors go smoothly.
1. Ditch the emotion. But keep the emotion.
Yes sir! I like to be contradicting. Or do I? I dunno. But I think so. So let’s break it down… I’ve always tried to adhere to the general rule of “never make a big decision on high emotion”. Buying a home… is a big decision. Get it? If you don’t, be worried. Emotion, albeit great, can and will manipulate your decision making. Damn you emotion. But emotion is also beautiful. It’s what inspires us. It’s what fuels us. It’s what dreams are made of. I sound like a made for tv drama… which is emotional. And I love it. Keep the emotions… just keep them under check.
2. Debt Service
This is your cost of capital. Got it? You need to know what your money costs… because money is never free. If you borrow from a traditional banking institution it may be say, a 5%-ish interest rate, involve appraisals, lots of paperwork, and some extra hoops to jump through. But it’s affordable money so it feels good. If you borrow from Uncle Rico, it may be 7%-9% interest and include side agreements like mowing his lawn weekly or rubbing sunscreen on his shoulders. Which may not feel good. If you borrow from the “private money” or “hard money” pool, it may be 10%-14% interest and include fun things like origination points. But otherwise very little barriers to entry. Anyways, know your cost of capital and always keep track of it. Interest rate is important, but so are upfront fees and costs associated with loans so take all of those in to consideration. A 12% interest ticker on a fully deployed loan balance of $800,000 will cost you some serious dough each month. Heaven forbid your flip sit on the market through the winter. But it may be better than rubbing sunscreen on Uncle Rico’s shoulders.
3. Location, location, location.
You’ve heard this before, yes? Then I won’t go much further other than saying it’s true.
4. If you build it, he will come. NOT.
Remember point number 1 at the very top? Believing that if you build it he will come is being emotional. This is called going old school Kevin Costner on it, or “going Costner” for short. Think: Field of Dreams. I suggest leaving this type of emotion suppressed in some very quiet deep corner of your body. Allow it to come out at surprise Birthday parties or while watching Rom-Com’s – not while flipping a home.
How about we break up this post with a super ‘Before’ photo. Keep reading, the ‘After’ is below.
5. Know your insurance: property insurance, builder’s risk, general liability. All of it.
Insurance. Not an exciting topic but a very necessary topic. Nobody believes there will be a fire at their home until they receive a text message photo of a car burning in their driveway. Understand your property insurance. Understand your contractor’s insurance. Make sure your contractor understands their own insurance. General liability. Builder’s Risk. Work Comp. All of it. Spend some upfront time on the not-so-fun things to increase the likelihood of all your time being spent on the fun things.
6. Think vanilla.
This is where you get bored and consider giving up on me. But then you remind yourself there is probably a funny joke somewhere below or a witty remark that will rejuvenate this read. If this is your first flip… keep it vanilla. Most of society likes vanilla and you need to cast a wide net. Don’t go all chocolate chip rocky road peanut butter sorbet on that house because some people have peanut allergies and will not like it. Once you have a couple successful flips under your belt… then perhaps… go a little mint chocolate chip all up in it.
7. Know your market’s selling season.
This is critical. Every market has their prime selling season. Buyer’s as far as the eye can see going Hunger Games on each other to try and be the lucky one to put a home under contract to purchase. In the Phoenix area, generally Spring and early Summer is best. You want to bring your home to market when there is the largest group of buyer’s out shopping for a home. Time it just right and it could pay dividends.
8. Don’t rely on a real estate broker for build costs, and don’t rely on a contractor to set your resale pricing.
If there is one point to remember it is this: everyone please stay in your lane. Just this year alone I have seen countless investors relying on real estate brokers for building costs and come up way short. Way short. Would you ask your CPA for legal advice? Would you ask your doctor for tax advice? Then don’t ask a real estate broker what the costs of home construction are. AND, adversely, don’t ask a general contractor what your home should resale for. GENERAL PUBLIC SERVICE ANNOUNCEMENT…Brokers, when asked about the costs of construction: provide the source (a licensed general contractor), don’t be the source. General contractors, when asked about resale pricing: provide the source (a licensed real estate broker), don’t be the source.
That is my one and only rant for this post. Whew, it felt good.
Here’s the ‘After’ photo to the above ‘Before’ photo. The ying to its yang.
9. Estimate accurately, then fight to control costs.
If your market is anything like Phoenix’s market then it is changing rapidly. Increased building costs are a real thing with real consequences. Estimate all of your project costs cautiously and conservatively – broker fees, closing costs, build costs, debt service, etc – and then fight like a wild dog to maintain those costs. It’s smart to carry an adequate contingency allowance as well.
10. Work hard and be nice to people.
I truly believe that if you work hard and be nice to people good things will happen. Don’t forget about the plumber or the escrow officer. The next door neighbor. The buyer’s agent. The city building inspector. There are a lot of people along the way who will work very hard to make your dream become a reality. Work hard and be nice to them. The rest will sort itself out.
Thanks for reading and happy house flipping!
Austin
