If you're new to flipping then you MUST get an experienced partner. By experienced we mean someone who has actually flipped houses successfully.
Many people think that all they need is a contractor. This is wrong.
Being that the partner you need has experience in flipping houses you have two things to offer.
- Money. Here you have to money to either buy the house, do the rehab, or maybe both.
- The Deal. Here you found a great deal to partner with someone that has the experience.
If you can't offer one of the two then no one will want to partner with you.
The difference between a contractor and an investor.
A contractor, even a great one, is only good at being a contractor. This means that they know HOW to fix things.
The investor on the other hand knows WHAT and WHY certain things need to get fixed. We've seen many investors get in trouble for doing what the contractor thought needed to be done.
You should only hire a contractor to do the work. An investor should determine what that work is.
Once you found the experience to be able to handle a flip you need money.
This does not mean the money needs to be yours.
We built PRYME Homes by partnering with a lot of investors that have money. We would combine our knowledge and resources with their money to get deals done. Now, we have many investors willing to lend to us for any deal we want to do.
Lets go over the different sources of money you may be able to use.
1. Hard Money Loans(HML)
This is a very common and popular route for many first-time investors. HML are usually a business that lends money based on the deal.
This is great choice when you have very little money and a great deal.
How HML typically work is they will verify that you have a good deal, usually 70% of ARV minus repairs. Then they will lend based on those risks. These are usually short-term loans 6-12 months and the property is used as collateral.
Here is the downside with this, it's expensive. As we have seen the market get hotter, at least here in Texas, we've seen HML drop their fees. But this is only for investors that have done a certain amount of deals with them.
Usually their fees are 2-4 points and 10%-14% interest.
What does this mean?
2-4 points is 2%-4% of the loan amount. So say you're borrowing $100K you would need to pay $2K-$4K upfront.
10%-14% interest is applied to the rest of the loan. Usually this interest is per annum. So, you would pay $10K-$14K over the course of however long you had the loan.
Using the $100K loan it'll break down like this...
$2K-$4K (2-4 points upfront)
$833-$1166/month(10%-14% interest) if it takes you 6 months to flip it then it'll be
$4,998- $6,996 ($833 X 6 - $1166 X 6)
So, why is HML so bad? In this example you're spending 7%-10% of the total loan just on the money costs. This is not including the 6 months of monthly reserves some require as well as other fees that are incurred.
We're not trying to scare you from using HML. We just want to make sure you take into account all of the real costs.
2. Individual Investors
We used to refer to them as Private Money Lenders but HML started using this term too. They justify it by simply saying that they are also PML.
So what's the difference between a HML and an Individual Investor?
An Individual Investor is 100% negotiable. This means you can borrow money at any terms you can negotiate.
When we first started we developed a relationship with someone that had money. He started lending to us at 2 points and 12% interest. Now, we're borrowing money at 8% interest only paid all on the backend.
What does that mean?
All of the monthly payments accrue and once we sell we pay them off! This is great because it leaves more working capital in our pockets for the project. We are essentially paying them using the profit that's generated rather than coming out of pocket during.
If the investor wants money payments you can factor that into the loan. So you can actually borrow your monthly payments. Yes, you will be paying interest on that money. But, 8% or even 10% on say $5k in payments is less than $50/mo! Well worth it!
While this option sounds great, you need the credibility for this. People aren't willing to lend to someone they've never met or can't prove experience. All of our Individual Investor have to come to us because of our credibility.
The last way to get money is through a partnership. Like we said above, our first lender was actually a partner. We had found a great deal. He had already bought a couple wholesale properties from us in the past. This had helped him know that we are very transparent and know what we're doing.
But, this didn't prove flipping experience. But because both of us have extensive construction experience he felt comfortable enough to do 50/50 on it. Now, this is VERY expensive money. We could have gone through the HML route but we really wanted to build a relationship with him.
He was more than happy to split the deal 50/50 when all he had to do was lend money. Of course his money is 100% protected by the property which we bought for 50% of value.
After he saw what we're capable of and we negotiated a 2 point and 12% loan for the next one. After this his friend heard about and he came in at 1 point and 12%. Then another investor found out and so on. Now we borrow money at 8% interest only paid in the back end!
NOTE: When borrowing money we rather do more interest and less points. Here's why, interest payments are spread over 12 months. Points are paid upfront. So when we negotiate with a lender we try to go up on interest and down on points.
Finding the deal is the last part to the 3 things needed to flip a property.
You can do this 3 different ways.
1. Through an agent.
This is the most popular way. Which is why it sucks! The reason this typically "sucks" is because everyone does this. When everyone goes after one thing the price goes up!
Trying to buy properties through the MLS is very competitive. Sometimes you end up overpaying for house because so many people are bidding the price up.
You have to be careful with overpaying. We know this may seem common sense but many people have a fear of missing out. This causes them to overpay for properties.
Another downside to buying off the MLS is because it's open to everyone there are investors that move faster. We typically have an offer out to a property the same day it comes on the market! So, unless you know what you're numbers are and can move that fast, we will beat you every time.
All said and done, we're not saying this can't be done. We're simply saying this is harder.
2. Find it yourself.
This option is by far the best one. If you can find the deals yourself through marketing you eliminate a lot of competition. This means you can get much favorable prices and terms
The downside to this is, it takes time and money to execute. Marketing isn't cheap nor is it is to automate.
You also face a large level of competition if you're in a hot market like the one in San Antonio, TX.
Buying from wholesaler maybe your best bet if you don't have the time and money for marketing. Wholesalers are people that all they do is generate deals. If you can find yourself a few great wholesalers you can generate all the deals you will ever need.
The issue with wholesaler nowadays is that they tend to shop the deals for the highest offer. This like buying of the MLS may cause you to pay too much. If you can show them that you're a dependable buyer they may be more inclined to bring the deals first.
When buying from wholesalers never go off the values and repairs they say a property needs. Always run your own numbers. Get your contractor's out to verify the renovation cost.
Wholesalers have brought us deals where "their contractor" quoted was off by $15K or more. Being this far off can really hurt you when flipping houses.
Now that we have covered the 3 things needed to start a flip let's cover the actual flip.
When flipping houses the biggest most important part is making sure you have a detailed Scope Of Work.
Scope Of Work (SOW)
The SOW is crucial for the following reasons:
- Helps get detailed bids from contractors.
- Helps keep the project on track.
- Helps when paying contractors.
- Helps with the budget and time.
Let's break these down further.
1. Helps get detailed bids from contractors.
When hiring a contractor, GC (General Contractor) or a tradesmen, they need to clearly understand what must be done.
Many contractors will give you a low bid and say yes I can do a new kitchen. But then the change orders come when that bid didn't include the installation of the appliances. Or maybe they "forgot" to include the install of the hardware on the doors.
You may think that we're kidding. We're NOT! We're not trying to say that all contractors are terrible people. The problem is that many people claim to be contractors when they're really not. They're simply overpaid handyman.
A detailed bid can help you prevent this headache. This is where having an experienced rehabber can help tremendously. You must go through every room and clearly detail what must be done. You have almost be redundant. If the blinds need to be removed you need to specifically say "the blinds and any hardware". If not they will only remove the blinds!
2. Helps keep the project on track.
Sometimes these projects can take 6+ months. If you have multiple projects going on it's very easy to forget some details. You may be at the end of a project and realized that you didn't order a shower door that takes 3 weeks to get here! True story.
3. Helps when paying contractors.
A detailed SOW is very useful when determining pay schedules. All of our contractors get paid when a particular scope has been completed. This also helps for to go in an check their work. You never want a contractor to either bounce around or get too ahead of themselves.
It also helps you keep track of what you're paying for certain SOW so you know for next time.
4. Helps with the budget and time.
On every project, you MUST keep a close eye on your budget. It's very easy to lose track of the budget towards the end. Many investors only think about the big-ticket items. But they forget the little things towards the end.
We've spent over $1000 at times buying little finish touches at Home Depot. These little things can add up to $10K very quickly.
With time and experience, if you tracked everything, you will get more efficient at estimating SOW and timelines. This helps tremendously when borrowing money and bidding projects.
NOTE: Don't forget to factor in holding costs. This includes but it's not limited too money cost, insurance, taxes, utilities, and lawn maintenance.
Hiring A Contractor
Now, that you have a very detailed SOW, you can proceed to hiring your contractor(s).
You have two options here.
- Hire a GC
- Hire individual tradesmen
There are times when you want one over the other. Let's go over that now.
1. Hire a GC
When flipping houses hiring a GC is one the preferred method for many new investors. They believe because it's just one person they need to deal with it'll be easier. We understand why this is appealing but there's a very big issues with this.
When you're hiring a GC you're essentially hiring someone to manage your renovation. This can cost you north of 20% of the rehab budget. To us that's A LOT of money. Especially when you working with tight deals.
Most GC's now-a-days don't actually work. They instead hire the people that do the job and add on their management fee to the price.
Other than being expensive, some GCs tend to jump around the project a lot. They start something in one room then jump and do something else in another room. The issue here is that many times they miss little things because they're jumping everywhere.
We've also seen that many GCs actually rarely go to the projects. When your flipping houses a project must be visited on a daily basis. This keeps the subs from messing something up that will now cost more to fix because they covered it up.
2. Hire individual tradesmen
At PRYME Homes we do this 98% of the time. There are a couple reasons why we like this so much:
- Save money of the GC fee. We completely cut out the GC which means we get the job done at cost. This alone can save you tens of thousands of dollars when flipping houses.
- Control of the project. We can control who does what and when. This is crucial to making sure everything stays on track. We can schedule all of the contractors so everything flows.
- Replace contractors. If you hire a GC, it's harder to replace them because they tend to jump around on the SOW. But with a tradesmen, you can replace them just for their SOW.
When flipping houses speed is everything. For many investors, you have money you've borrowed and are paying interest on. If you hired a GC that has a small crew this can delay your project a lot. In a small crew everyone does everything. This makes it really hard to do more than one scope at a time.
The downside. Hiring individual tradesmen requires more work.
You have to find them. This means calling around, asking for referrals, going to other peoples projects.
Even after you found some "good" tradesmen, you have to keep looking because they may not last. Ever since we have been renovating houses we have needed new tradesmen after each project. Sometimes they only last one project. Other times, we need a different skill level.
There's no "one size fits all" tradesmen. If you have a great worker for high-end tile jobs they may be too expensive for lower-end. We don't use the same workers for a $500K house as we do for $150K house.
Once you find them, now you have to manage them!
There are two areas to managing contractors. This is the same for either GC's or tradesmen.
1. Managing Expectations
This is big! Many investors are not clear on what they expect from a contractor when they're flipping houses.
What we mean by this is, being clear on what you expect the finish product to look like. We know, you're probably thinking, "I want the finished product to be finished!".
We get it. But you can't assume that they're interpretation of "finish" is the same as yours.
We're more demanding of our contractors than other people are. We expect the corners of every trim piece to be even. We expect that all flooring go under the door jams. We expect our tubs to be covered so they don't get scratched or dented and much more.
You have to eliminate all guessing from their heads. You want to make sure you both see the same finished product.
2. Managing the SOW
It's not enough to just give them the SOW and "hope" they do it right. We go to our projects daily! This helps us make sure that they're not jumping around.
We also can check on quality this way. If you go daily you can see something that just got done wrong but can be fixed. If you're like so many investors we've met and go once a week, it may cost a lot more to fix things.
Managing the SOW also helps in determining if you're ahead or behind schedule. Again, remember staying on schedule is important because of holding costs.
Hopefully by now everything went great and you're getting ready to sell this amazing renovation!
This part is NOT the easy part. Many investors overlook this part when flipping houses.
There are a lot of things that must be done in order to sell for the most and the quickest.
Let's start with the right price.
Pricing To Sell
There are two things to consider when pricing a house.
1. Appraised Value
Appraised value is what will the home appraise for when a lender sends an appraiser to your home. This is very important because, if it doesn't appraise it may not sell.
An appraiser will look at similar homes to yours and start comparing apples to apples. They will make adjustments if things don't match up exactly. Like an extra bedroom or bathroom or maybe updated cabinets. Once they have made all of their adjustments they come up with a value to your home.
This is very important. If your house is similar to other renovated homes but you price it $10K higher, it won't appraise. Updated cabinets are updated cabinets. It doesn't matter if theirs is off the shelf from Home Depot and your's are custom. When appraiser looks at other properties he looks at pictures. So they can't tell if the quality is cheap.
2. Perceived Value
This is the value that a new homeowner will put on your house.
If they go to a house and feel like they're getting a deal that's great. If they go and feel like it's overpriced that's bad.
A higher perceived value from your buyers will help sell faster, not necessarily for more. This is why you don't want to over-improve the house.
Typically what we do when deciding finish out materials is look at the COMPS. Here we determine the Appraised Value first. Once we did this we now look closely at all of the SOLDS. Here, we're looking for minor updates we can do to stand out. We know that by doing XYZ we will appraise for max ARV. But, what do we need to do to sell for max ARV and fast? That's where you make little tweaks that a homeowner will love.
The Details That Sell
Appraisers don't look at the details. They look at pictures. If you have new cabinets and the comp appears to have new cabinets then that's it. It doesn't matter if your cabinets are custom.
But, custom cabinets may help sell it faster. You obviously need to keep cost in mind.
The details that sell are for the homeowner not the appraiser. Now, you need to walk through the house and look at it as a homeowner. Do you need to put blinds on the windows? Do you need nicer landscaping? Should you stage it?
A homeowner will walk in and picture themselves living there. If they see they still need to do more stuff to finish it out they may not like it. The majority of buyers don't know how to install blinds. So now they're thinking they need to hire someone to do it.
Staging is so important when flipping houses. Good staging will make the buyer feel right at home. They can see where the couches go. They can visualize their furniture there.
We stage every house we flip. The reason for this is speed of sell. The house looks completed and therefore sells faster.
When you're going to sell you will list it with an agent. Please spend the extra $100 or so to get professional pictures taken. Buyers shop for houses online. If they come across yours and your pictures are from a phone that won't look good.
We seen beautiful rehabs with terrible pictures. The issue with this is it gives the house a bad feel. They usually look darker and smaller.
Professional pictures makes your $50K rehab look like a $100K rehab. I brightens the home up. Makes every room look huge. It really grabs their attention.
If you grab their attention online then when they show up to the house they're more excited. Now, if you don't do this and they see dark pictures they may feel different. Now, they're going to the house curious to see what's wrong with it.
Many investors think that when flipping houses you go for the highest offer. This really depends on the offer.
You may get an over asking price offer but it's FHA or VA. This means that if the house doesn't appraise for that extra amount they won't get the loan. This is an issue because by the time they are notified they can't afford it you have lost weeks.
Always look at the terms. Is the offer contingent on anything?
Many times they submit an offer contingent on their home selling. This isn't a big problem if they are already under contract to sell. But, if they haven't even begun to sell their home then it could take months. You don't want to go under contract for months. Also, what if it doesn't sell? Now you have a BOM (Back On Market) on your listing.
A listing that went from ACT (Active) to AO (Active Option) to BOM doesn't look good. To most buyers they're thinking, "what's wrong with the house?". This is terrible for you.
We have sometimes taken a lower offer because the terms were better.
When you're flipping houses you will realize that everything is negotiable. Even concessions.
Many time buyers will ask for concessions. This is money from YOU!
Now, this may be because they're an FHA buyer and can't afford the closing costs. In this case what we've done is the following.
Offer $230K with $4K in concessions
Our Counter $234K with $4K in concessions
So we went up in price so they can get the $4K they need to close. This way the $4K comes from the bank, not us!
Another reason for concessions is, repairs.
We did a quick flip once and the inspector said we need to update the plugs to GFCI. So the buyers got a bid for $3,500 to do this and asked for that amount in concessions. They also threw in a couple of other silly things that brought it to $4,500.
Our counter, NO to the other things and we will get the GFCIs to code. It cost us $500 to do this!
We went from $4,500 down to a $500 fix. But this is something your agent needs to be able to negotiate.
Choosing The Right Agent
Many investors flipping houses try to go for the cheapest agent. This is NOT the time to save money. A good agent can not only sell your house fast but also solve any problems that come up.
There have been so many times when we have had to teach the buyers agent how to close a deal! If not they would have lost their buyer which means we lose too!
Nowadays everyone wants to be a real estate agent. Most agencies will add any new agent to their team. So if you thought that because it's a big name realty you're good, think again.
The best way to find a great agent is to go to local investors and see who they use. Then interview a couple of them to see which one you feel more comfortable with.
You also want to make sure they are familiar with that area of town. In San Antonio, we have many different areas of town. This means that there may be different issues that arise.
You don't want an agent that deals in high-end homes selling a starter home. The commission isn't the same for and sometimes they're not as motivated.
There are really good agents that can adapt to any area, but they're not easy to find.