Hearts are breaking over the announcement that Fixer Upper is coming to an official end. Over the past few years, Chip and Joanna Gaines created a massive following on their hit HGTV reality show. Turning old or dilapidated homes into dream-worthy dwellings is the couple’s specialty. But the decision to end the series is largely based on the couple’s need to step back for the sake of their family.
So what about all the aspiring fixer uppers and house flippers out there? It’s possible to harness that Chip and Jo inspiration and turn it into something tangible. In fact, we think the Gaines would want nothing more than for you to follow your dreams.
The overall process is pretty straightforward. Purchase a home for a price lower than market value, fix it up, and eventually sell it for a higher price. If you’re aspiring to flip homes, here’s how to make enough profits to keep the wheels turning.
1. Have the money for a down payment
There are a few options when it comes to finding a lender for a flip home. No matter what, it’s important to have the down payment capital. Whether you are purchasing your first flip or your 100th, you must have money in the bank. Ideally, you want 20% to 25% of the cost.
The avenues for finding your lender can be a bit winding. Typically, traditional lenders frown upon having more than four to 10 loans out at a time. Don’t be dismayed if they reject you. Instead, try the portfolio lending route. These are local banks that lend their own money and typically have looser requirements and restrictions. Of course, if you can find a private lender, such as a family member, go for it.
2. Find the right market
As you already know, real estate markets vary from place to place. Finding the most profitable market for a flip is crucial to making money, especially if you’re planning on making a living doing it. Familiarizing yourself with where you’ll receive the largest return on investment is one of the biggest roles in playing this game. Because of this, you’ll want to be geographically open to where the markets are most profitable.
Money recently reported which markets are performing best. Baltimore leads the pack, averaging a 96.6% return on investment. If you can find a good real estate agent, he or she should be able to provide some numbers on performance in different markets.
3. Get a good lay of the land
Once you’ve found the market(s) where you wish to play, figure out the lay of the land. Know where buyers are wanting to live right now — the coveted school districts, best neighborhoods, and areas with proximity to entertainment and restaurants. Many of these factors weigh heavily when a buyer is searching for a home. Conversely, avoiding certain areas due to higher crime rates, flood zones, and the like is equally important for resale value.
4. Buy at the right time
It doesn’t take a pro to know you never want to buy a flip at the height of the market. Since 2000, RealtyTrac has been analyzing data on over 32 million home and condo sales. It discovered some interesting insights, including the best month to buy. That month is October. Why? It’s lucrative due to the way it falls just after kids head back to school and just before the holidays arrive. Buyers are able to negotiate a price 2.6% below market value on average. Keep this in mind when making your purchases. The runners-up? February, July, and December.
5. Build a reliable network of contractors you trust
If DIY isn’t your thing, you’ll want a reliable team of pros to come in quickly once you’ve made the purchase. Having an efficient and money-conscious crew of people will keep your budget where it needs to be. This means you’ll want to submit some invitations for bids on the job, as well as require references. If you feel confident in your crew members, treat them well so they’ll stay on board for future projects.
6. Get good at estimating the cost of your flips
The better the risk the better the returns, or at least that’s the idea. If you don’t know what you’re signing up for, jumping all in to the flipping business can turn out to be a big flop. The key is to properly and closely estimate your costs. The financing, closing, carrying, repair, and selling costs are all part of the game, so calculate accordingly.
A good rule of thumb is a little something called the 70% rule. The 70% rule advises flippers to pay no more than 70% of the home’s “after repair value.” For instance, if a home’s “after repair value” is $150,000 and it needs $30,000 in repairs, you should purchase the home for around $75,000.
7. Know your profit margins
All flippers want to procure the highest gross margins possible. Of course, buying a home at the lowest possible price and selling at the highest possible price is the ultimate goal. As it stands, the national average gross margin on flips is around $29,000. Doing the rehab work on your own is a surefire way to increase your profit margin. The fine line is making sure you aren’t holding on to the house for too long. Flippers generally try to only have the home in their possession for about 90 days.
8. Sell at the right time
Just like there is a good time to buy a home, there is a good time to sell a home. According to a recent Zillow study, homes that were listed between mid-March and mid-April sold 15% faster than homes that were listed outside of that time frame. To boot, these homes were sold at a 2% higher price, as well. While that might not seem like much, it makes a difference when you’re looking to flip homes for the long haul.
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