Now that we are fairly deep into the Southern California housing market recovery, you probably have heard more and more people talk about real estate investing. One of the more popular forms of investing in today’s society is house flipping. Although flipping a house is not rocket science, it definitely is not as easy as they make it seem on TV. I don’t watch too many of those shows myself, but it seems like they always make money no matter how many mistakes they make or how behind schedule they are. Unfortunately the real world does not work like that. If anyone has ever thought about flipping a house in Ventura County, below are 5 basic items that you must do in order to successfully flip a house.
Buy in an area you know
As we will get to in a minute, knowing your numbers when buying and selling a property are crucial to your success. In order to do this as accurately as possible, you should be familiar with the area that you are looking to buy the house in. There are many things that can affect the value of a house and some of these will be determined by the neighborhood. With all of the real estate sites on the internet, it is pretty straight forward to research what other homes in the area have sold for, but it is not as straight forward to know why a house may have sold for that price. In many cities, a couple of streets away from another can mean the difference between a “good neighborhood” and a “bad neighborhood.” Other area specific items that affect prices include main roads, school districts, sub-divisions, crime rates, etc. With Ventura County prices, any one of these items can potentially offset your calculations by tens of thousands of dollars.
Know the ARV
To be successful at flipping houses, you need to become an expert in calculating the home’s After Repair Value (ARV). The ARV is the price the home is worth after it is renovated/updated. This is the number that all of your other calculations will be based on. The most common method for calculating ARV is by using comparable sales (comps) that have sold in the area within the last 3 – 6 months. My favorite websites for finding comps are Redfin and RealEstateABC. For a more detailed explanation of using comps, you can read our post on how to pull your own comps.
Estimate Your Repair Costs
Whether you will be renovating the house yourself or hiring a General Contractor (GC), you need to have a good estimate of your repair costs. There will always be surprises when renovating a house, so your estimate will most likely never be perfect. However, if you are buying the house correctly in the first place, you will have built in enough margin to make up for unforeseen costs. There are a couple of ways to go about estimating repair costs. You can utilize resources like the book on estimating rehab costs to learn how to estimate costs yourself. Another method is to get bids from contractors on a house that you are interested in. Be wary though that most contractors will be hesitant to give bids on houses that you do not own or have under contract.
Once you know your ARV and have a good estimate of repair costs, you need to make sure that you buy correctly and not overpay. Besides your repair costs, you also need to factor in holding costs, realtor commissions, money costs (if you are borrowing money), and selling costs. Many investors use a formula called the “70% rule” to calculate their purchase price. This formula states that your offer price should be ARV x 0.70 – repair costs. If bought using this rule, you should have enough margin to account for all of your costs and walk away with a decent profit. Although this rule is fairly conservative and some will state that you will not find many homes that you can buy using this rule in a seller’s market, it may not be a good idea to go much higher than 70% for your first flip.
Manage your contractor
We have written previous posts about finding a good GC. Even if you do find a great one, you still want to make sure that you manage them correctly and are kept up-to-date on what is going on. Whether you visit the job site on a daily basis will be up to you, but you should at least get some kind of report on the progress being made on a regular basis. Most good contractors will have multiple jobs they are working on. Even if they have the best of intentions, it could be easy for them to defer your job for a few days while working on another job if they are not kept on task. Also, you want to make sure that they are not making their own decisions that will increase your budget or delay your timeline. We recommend never paying contractors up front and only paying them after completing some amount of work. We have found that weekly payments are usually a win-win situation for both parties.