How does house-flipping work?

Question

I love watching these shows about house-flipping. I see the headaches and problems they encounter but still seem to think it would be fun and a great way to make money. What I can't figure out is how seemingly ordinary people (i.e. not already rich) can afford their own residence while also buying another house and sinking as much as $50k in renovations into it?

If you already own your own home, do you just go to the bank and get another home loan? I would think the bank wouldn't approve such a risky venture at first. And even if you DO get approved, how do people get $50,000 in liquid cash to be able to do the renovation? I just don't undertand. I can understand how someone does it if they have investors, lots of personal money, or know construction workers who can do the work for cheap. But for others flipping who are doing their FIRST house, how do they do this?

Answer 1

That's why a lot of these have teams who do this. Three or four get together, often including a real estate agent (who can scout for and sell the properties) a money person (accountant, banker or mortgage broker) who can arrange financing, a contractor type ( to supervise/do the actual work) and often a money partner - a person like a doctor or lawyer with money they need to invest. normally at least one and preferably several need good credit to pull off the financing.

Almost all of these scenarios involve the flipping investor(s) to get temporary financing which is normally at a high interest rate. This gets them going for a few months while they do the renovations. That is one reason they are often talking about getiing things done quickly and worrying about delays. Every day delayed costs them hundreds, if not thousands of dollars. there is a lot of profit in these things, but if you get over your head, or delayed, or the renovations go over budget, you can easily lose money.

There are other ways to do it. Sometimes you can buy from a bank REO (Real Estate Owned) Department and they will be so happy to sell they will provide financing. Also the VA has a program for investors of their VA foreclosed homes. They have a Vender Financing proghram where anyone, including nonvets, can buy foreclosed homes with little down, at a good rate and no worry about credit scores. All ou have to do is show proof you have income to pay the mortgage. Those who will live in the house can get a 6.5% loan for Zero down. Investors the same but 5% down, You can get a streamlined loan process for 20% down.

Good luck

Answer 2

We sold our home in CA & moved across country to flip in Florida. The hardest part is finding the right property. In this sluggish market, you need to buy below appraised value. Foreclosures aren't as easy to buy, banks want market value or just a schmidge below, and they can be difficult to get a hold of. Auctions are a great source, but you have to have the cash upfront - which most of us don't have.

Once you find that ugly house in a great neighborhood, then you have to do all the work yourself. Contract work out only when necessary. Figure out time versus cost. In our case, spending two extra mortgage payments made more sense than paying for labor. Contractors will eat up your profits, and unfortunately you'll have to put sweat equity in your first few flips. Keep your receipts for all improvements so you can deduct them for tax purposes.

We're about to sell our first flip and it looks like we might make $40k Gross Profit before loan costs, realtor fees and taxes (which means we are barely breaking even)..... they never discuss the Net Profit on those house flipping shows. But hey, I made an ugly house beautiful and I live essentially rent free for the summer. Haha.

Answer 3

A lot of first-time "developers" get leveraged to the hilt for their first conversion. However, it is best to think about it from a bank standpoint. Every financial institution has their own criteria for an "acquisition & construction loan" (this is a loan that allows the borrower to acquire the property with money factored in for renovation costs). Some of the values that a bank will use are: (1) the appraisal value of the house; (2) the total value of construction costs; and (3) the appraisal value of the house after renovation. (By no means is this criteria list exhaustive; your particular bank may have additional factors). Also, a bank will consider how much money you bring to the deal. Totaling all these factors, the bank comes up with an LTV ratio, of which, they based the total loan amount upon.

The trick is, you must find a cheap enough property (especially when you are a first time renovator) so that all of your numbers work (ie. once you complete renovations, and you obtain a permanent loan, will you be able to afford the monthly payments?). The obvious step is to sell after you complete renovations, and this is where the real profits roll in. However, it is still up to your own due diligence to make this all work, so make sure you know your neighborhoods, as well as local lenders.

Hope this helps...

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Answer 4

My parents actually did "house flipping" before it became popular. They had the money to put down and the assets to be able to continue in this venture. If you already own a home and want 50K in contributing to home improvement, I would consider refinancing, or taking out a second mortgage. This is only with the fact that you KNOW that the house will make a profit after the renovations for you. In more simplistic terms, the house that you paid, plus the renovations (keep in mind how much you have paid at this time) and what you can See it for. If you can make a profit after this, you are flipping that house and good for you! That's fantastic. Good luck :)

Answer 5

Geez I don't know but I wanna do the same thig eventually. Fun and profit. It will be lot of work but very rewarding. I would look it up on the internet. I hear you can take a few week course somewhere in lower PA but I forgot the details. You could do a little investigating maybe read some others expiriences on how they started. I would think you would have to have a lump of $ to start off. Good Luck! ;) JB

Answer 6

Oh man, oh man! If it was as fun and easy as it looks on TV, everyone would be doing it. You don’t see half of the headaches and problems that are involved. And, as it turns out, at least one of those TV flippers was doing shoddy rehabs and the so-called sales at the end of the shows were faked. SO....

Before you jump into the flipping arena (in a dropping market I may add), please take the time to educate yourself. Start by finding an investor meeting in your area by going to www.nationalreia.com and clicking on Groups. You want to learn market prices in your area, average days a home stays on the market before it is sold and how to estimate rehab costs, for starters. Most REIAs bring in speakers to talk on various subjects and you can learn a lot just going to the meetings and weekend seminars.

If your credit is not great, you can take work on improving your credit score while you are learning the market. You will probably meet mortgage brokers and hard money lenders in your investor group. Do your own due diligence on them. Most of the investors I have encountered are great and are really helpful (once they get to know you) but there are sharks out there too. So kind of keep an eye open in the meetings to see who is respected, who is avoided, etc.

Also, a really good way to learn the business is to birddog properties for other investors. They will tell you what their parameters are and that will help you figure out what you should be looking for. Full disclosure: I wrote a book on birddogging. But it is a great way to earn extra money while learning the investor business.

Hope this helps.

Best of luck to you,

Barbara
www.therealestatebirddog.com

Answer 7

When you're just getting started find a Hard Money Lender (if you can't find a private investor). The HML will loan you 70-75% LTV including the cost of repairs. You'll need cash or a credit line to purchase the materials and the HML will reimburse you from your loan proceeds when the materials are INSTALLED (not just on site).

Keep in mind that a HML is going to charge you somewhere in the neighborhood of 15% interest and 5 points up front but as long as you're buying at less than 75% LTV and fixing and selling quickly it doesn't matter.

If you're not buying at less than 75% LTV including repair costs, YOU'RE PAYING TOO MUCH and you'll end up as just another amateur "flipper" who got in over their head. I get at least one call a month from someone looking to sell "mid-flip" because they're going in the hole. They all share one thing in common, THEY PAID TOO MUCH.

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