The Real Deal of Flipping a House
Buy a shack, fix it up, sell it, make millions, right? Well, not quite.
Flipping houses in the Bay Area definitely sounds like a lucrative business pursuit, especially with the real estate market booming right now. I’m sure you’ve heard the commercials on the radio advertising a seminar that will teach you how to flip houses and get rich quick. Personally, hearing those are like nails on a chalkboard to my ears. (I have the same feeling about the Cash Call commercials, but that’s a whole other post.) Flipping houses can definitely be profitable, but there is a little more to it than you may initially think. I have had the opportunity to fix up and flip a few homes in the area and wanted to share some behind the scenes tips.
It all starts with finding a deal. It’s not just about finding a house that is a heck of a wreck, but more about finding a good value that has room for improvement. Look for property in up and coming neighborhoods or locations that are close to amenities like downtown or commute paths. Or look for something we like to call “Grandma’s House,” a place with good bones that hasn’t been updated in awhile or could use a more modern floor plan.
Expect the Unexpected. Shows on HGTV do a decent job of showing some of the common issues you run into with opening walls, plumbing issues, roof leaks, etc. Once you start working on a house, especially an older house, you will almost always run into one thing or another that will require more work, and more money. Often on TV the investors flipping the house will stress over an unexpected expense, end up borrowing money, and everything ends up okay. If you’re smart about your investment, you should come out ahead, but as with anything, there are no guarantees.
Keep the numbers in mind. My wife and I enjoy designing spaces and planning renovations, but we have to keep the bottom line in mind for a project to work business-wise. Some numbers to keep in mind: the purchase price, the cost of renovations, the projected sales price, costs associated with buying and selling the property, how long the flip will take from start to finish, and what the taxes will be on the profit you make.
An example. Let’s say you buy a two bedroom, one bathroom home in original condition on a nice lot in High School Acres. You add a master bedroom suite (or about 400 sq. ft. of living space) and do a top to bottom remodel and landscaping. Let’s also say that you work quickly, so the project is done in four and a half months. It takes 10 days to sell it and 30 days to close escrow. All in all, you’re looking at about 6 months from the date you close escrow to purchase the house to the date you close escrow to sell the house.
Hypothetically, here is how the costs might break down.
- Purchase price: $1,305,000
- Improvement cost: $265,000
- Cost associated with buying and selling (transfer tax, title and escrow, real estate commissions, etc.): $104,000
- Sale price after renovation: $1,940,000
- Total out of pocket expense: $1,674,000
- Profit before taxes: $266,000
If you’re interested in investing in real estate, I hope this will serve as a starting point to learn more about what is involved in flipping a property.