So you wanna try flipping houses? I’ll give you some pure basics to get you started.
1. Locate an undervalued home for sale that is structurally sound but requires some pretty extensive cosmetic work. When I say cosmetics I mean rehabbing the siding, windows, kitchen, bathrooms, carpets, appliances and painting the walls. To find an undervalued home, I would recommend using a Realtor.
2. Once you’ve found your target home, you are going to need financing. One source of funding that rehabbers use are “hard money lenders”. These types of loans are secured by the value of the house you are going to flip and are usually issued by private investors. Talk to your Realtor about finding hard money lenders or check with your local real estate investing group. For those of you from Bucks County, the local investing group would be DIG (www.digonline.org).
3. Ok, you’ve found the home and got the financing. Now is time for the number crunching. First determine your After Rehab Value or ARV. This is the value of the property once you’ve finished all the cosmetic work. This can be determined by your Realtor. Here is the basic format for determining your bottom line and what your offer should be for you to make a minimum of $10,000 cash on the flip (The Golden Rule).
ARV minus:
- Repair Costs
- Holding Costs (monthly loan charges)
- Sales commission (5%-6% of ARV)
- Closing Costs ( transfer taxes on the buy and the sell, 1% for each in Bucks County)
- Hard Money Costs (points-probably around 3%-5% of the loan)
- PROFIT ($10,000 MINIMUM!)
Now, what’s left is what your offer is going to be. Simple right? Again, for more details please consult a real estate professional.
BUCKS COUNTY EXAMPLE
Your average home in Falls Twp is selling for around $230,000; so we’ll make that our ARV.
ARV $230,000 minus:
- Repair costs $20,000
- Holding costs $6,000 (takes three months to flip and sell)
- Commission $11,500 (5% commission on the sale)
- Closing Costs $4,000 (transfer taxes of 1% on the buy and then on the sell, estimated)
- Hard Money Costs $5,000 ( 5 points estimated)
- PROFIT $10,000 MINIMUM
EQUALS YOUR OFFER $173,500
Now, can you find houses selling for $173,000 in Falls Twp? You bet. I’d love to show them to you!
-Keith Reilly
