April 1, 2022
A Beginner’s Guide to House Flipping and Pre-Inspections
If you’re looking to make some extra money, buying a fixer-upper can be a profitable choice if you know how to invest your money wisely. When house flipping, there are many vital things to consider before you start the sometimes long and arduous process. Whether it’s your specific real estate market or that the home needs serious upgrades, every house flipping move you make can affect the home’s bottom line and asking price. Read on for a helpful guide that features some house flipping tips and things you should know about getting a pre-inspection before the home goes up for sale.
What is House Flipping?
The concept of “house flipping” is that you purchase a home with a short holding period and the intention to resell it quickly. While most homeowners buy real estate as a long-term investment, the act of house flipping provides you with a faster way to make money after the initial purchase takes place. This short-term real estate transaction lets you leverage your asset to earn money once the flip is complete and the home sells. Many investors look for homes that require basic updates and repairs at a low cost. Like most other investments, the idea is to “buy low” and then “sell high” after the changes are complete. While house-flipping can certainly be lucrative, it’s important to point out that there are never any guarantees because the real estate market is in constant flux.
How to Get Started?
If you’re interested in house flipping, there are some basic things to keep in mind, and each of these will play a role in determining whether you’re making a smart investment.
- Begin by thoroughly researching both the national and your local real estate market. You can consult with a real estate agent to give you some comparable prices of homes sold in the neighborhood(s) you’re interested in. It’s also essential to determine what buyers are looking for in location, upgrades, and square footage. Planning and doing your research will help to ensure that you’re making a wise investment in a home that should sell quickly.
- Always start by budgeting your house flipping plan to avoid paying too much for a home. Set a predetermined limit for how much you’re willing to pay, and never go over that when making an offer. You should also keep the budget for all renovations, repairs, and upgrades in mind. Finding a decent home at a reasonable price is the best way to get a great return.
- It’s vital to hire a home inspector who can help you pinpoint any necessary repairs and issues. A pre-inspection is highly recommended since the inspector’s findings could be the difference between buying the home and moving on to something else.
- Once you buy the property, subtract the cost of the home and the cost of all upgrades and repairs. Your final number will be the bottom line, which will show you how much profit you’ll make once the flip is complete and the home sells.
The House Flipping 70% Rule
The 70% rule of real estate investing should serve as your guide when you look for a home to flip. The rule states that you shouldn’t pay more than 70% for the house after the repair value minus all repair costs. The ARV or after repair value refers to the home’s estimated value after all of the repairs and upgrades are complete. For example, if the house has an ARV of $100,000 and needs $25,000 worth of repairs, the rule suggests that you should pay no more than $45,000 for the home. This gives you about 30% wiggle room to pay for miscellaneous items like minor repairs and other costs, and also accounts for the amount of money you’ll profit when the home sells. Here’s an example of how the 70% rule is calculated:
ARV of $100,000 x 70% = $70,000 – $25,000 = $45,000
The Importance of Ceiling Value
Once you’ve found a home to flip and you’re ready to put it on the market, make sure you understand the ceiling value. This term refers to the maximum asking price for which you can list the home. Many state or local governments often mandate this “price ceiling.” And, if you ask too much for the home, it could sit unsold for an extended period of time, resulting in more buyers being hesitant to make an offer. Always speak with a local, experienced real estate agent who can help you come up with a fair market value. You can always start by listing the house for a little more since you can negotiate the final price down with potential buyers later.
Structural Improvements to Consider
Even if the home you buy looks like it’s in excellent condition, there are some crucial upgrades you should consider. For example, if it’s an older home with knob and tube wiring, it’s definitely recommended that you do a complete electrical upgrade. Hire an inspector to look at the plumbing to determine if there are signs of rust, wear, or damage. The insulation in the home should be in good condition, and it should feel like it’s at a comfortable temperature when you run the HVAC system. Check the roof to ensure it’s in good condition with no signs of leaking, missing shingles, or other damage. It’s always a good idea to inspect the main components and systems of the home first to determine which improvements are most important and necessary.
Room by Room Renovation Guide
Here are some suggestions to help you renovate each room of your house flip to get a higher asking price.
- Exterior: Paint the outside of the home or install new siding to improve the curb appeal. Remove dead tree branches, add fresh sod and grass, and update the landscaping to make the entryway more attractive. Fix broken outdoor lights or replace fixtures and dead bulbs. You can also paint the front door a new, bold color for an easy update.
- Bathrooms: Install new flooring and fixtures in the bathroom to give it a fresh new look. Inspect the plumbing and confirm that it’s working correctly without any signs of leaks. A quick tile job around the shower or tub can be an easy yet effective improvement.
- Living room: Apply a fresh coat of paint and some new flooring to transform an older living space instantly. If the home is broken into separate rooms, consider knocking down a wall to create an open floor plan, which many buyers love.
- Kitchen: Update old, outdated appliances with modern stainless-steel ones. Replace old countertops and install solid surface materials like granite or quartz. If the cabinets are in good shape, you can repaint them and add new hardware to make them look more contemporary.
- Garden: Look for signs of pests and remove weeds and dead plants from landscaping and gardens. Plant new shrubs and flowers around the home to give it a cheerful, lively look.
- Bedrooms: These rooms are easy to update with fresh paint and new floors. If the bedroom has a small closet, consider changing the layout to make it larger.
- Laundry room: Install new tile and add a new washer and dryer to this room if you have space in the budget. If you’re able to, install a sink to make the room even more functional.
- Additions: If you have a lot of money to spend, consider adding an extension to the home to give it more square footage and a higher asking price.
Adding the Most Value
Most homebuyers today want to spend their money on unique properties. To add the most value to your house flip, make updates that appeal to younger buyers and modern families. A sleek glass railing along a staircase can be a contemporary alternative to a traditional handrail. Install some high-tech upgrades like a smart thermostat, security camera system, and a doorbell alarm camera. An updated garage door with frosted glass panels can make the home look modern. If the windows are old, install new energy-efficient windows so that the house looks new. This is also a great incentive for buyers. If you have room in your budget, consider installing a new deck or covered patio since many buyers enjoy spending time outdoors.
Selling the Flip
After all of your upgrades are complete, it’s time to put your home on the market. Make sure you hire an experienced, qualified real estate agent who knows the local market well. Ensure that your listing includes essential details like the square footage, special features that make it unique, and the significant upgrades you’ve made. Hire a professional photographer to take beautiful, detailed pictures of every room as well as the outside of the home. The right marketing plan will make it easy to sell your flipped home quickly for a profit.
The Importance of a Pre-Inspection
You should never buy a home to flip before hiring an experienced inspector. A pre-inspection helps you determine whether the property is worth the investment, and it gives you a clearer picture of the upgrades and repairs you’ll need to make.
Here are a few key items to include in your pre-inspection:
- Check the exterior and make sure the lawn is graded correctly, all outdoor structures are sound, and the siding, roof, and driveway are in good condition.
- Look closely at the electrical system to ensure that it’s been installed correctly. If knob and tube wiring are present, you’ll want to add that to your list of upgrades.
- Check all plumbing, pipes, and components to look for damage, broken parts, or leaks.
- Inspect the foundation carefully to look for cracks, buckling, water damage, or unevenness.
- Make sure the home’s HVAC system is working correctly or that it only needs minor repairs.
- Look at the attic to ensure there are no signs of leaks and that the home has ample insulation.
- Examine the home’s interior and look for uneven flooring, signs of water damage, or peeling paint.
- Quickly check each appliance to make sure that it’s working.
Minimize the Risk
Getting a pre-inspection before buying a house to flip can minimize your risk of losing money. Here are a few things to keep in mind that may help keep your risk as low as possible.
- Major issues like extreme roof damage can cost you a lot of money, so ensure that the roof is in good or repairable condition.
- If the home has a basement, look for signs of previous flooding or foundation issues that can cost a pretty penny to repair.
- Only hire a qualified inspector to look at the home. They should be fully licensed and experienced in doing pre-inspections for investment property.
- Always research contractors before hiring someone to do upgrades and repairs. Look at customer reviews and ask for references before signing any contracts or agreements.
The Most Common Home Inspection Findings
Here are some of the most common things that inspectors find when inspecting property:
- Water damage in the basement, interior walls, and signs of mold
- Plumbing leaks
- Faulty electrical wiring, exposed wires, or knob and tube wiring in older homes
- Non-working appliances and/or HVAC systems
- Roof issues like missing shingles, leaking gutters, and broken or missing flashing
- Foundation problems like cracks, buckling, or shifting foundations
A home inspector will make some recommendations for repair. Use these recommendations to help you determine whether or not investing is worth it. Here are some of the recommendations your inspector may make:
- Replace the electrical system completely
- Repair or replace the roof
- If the home has asbestos or mold, professional remediation and removal services are required
- Update the HVAC system, insulation, and windows
- Re-grade the lawn and remove dead trees or tree limbs
If you’re looking for ways to make money on a house flip, be sure to keep the tips from this guide in mind. House flipping can be a great way to make money quickly if you plan ahead and do your research. With a quality pre-inspection, you’ll have peace of mind knowing whether or not the property you’re interested in is worth the cost.
Photo credit: Master1305