If you are a flipper, you want to hire an experienced Realtor. Brand new Realtor’s do have more time on their hands, and you can get them to run all over town to put in a bunch of low-ball offers, however, new Realtor’s typically don’t have the right knowledge for flipping. For example, they may not watch over your after-repair value and they are certainly not going to invest in your ongoing success. You need to be 100% accountable for your own numbers, otherwise it’s going to be game over.
We just had a client come to us with a portfolio of five properties they bought, renovated, and tried to sell. Now, they are sitting on the market with five properties and continuing to pay carrying costs. They are in a bad, bad situation.
I want to go back to the fundamentals of flipping and talk about the core basics of how to make money on a flip, so you don’t end up in the same position.
Four Ways to Make Money on Flips:
Control your transaction costs: This could be an off-market deal where you aren’t paying Realtor fees.
Control your renovation costs: This means putting in some sweat equity yourself or hiring someone who is going to give you a deal because you’ll be doing a lot of volume.
Control your cost of borrowing: Money is expensive and interest rates to borrow are high.
Buy at the right price: By working with an inexperienced Realtor you could end up overpaying by $20,000 or more for a property. This would cut out a huge chunk in your profit margin.
This unfortunate client didn’t control any of these variables. He was leveraging close to 100% at an interest rate of 10-12%. Next, he didn’t control his renovation costs and he bought these properties at (more-or-less) fair market value. To add onto this unfortunate series of events, his market timing could not have been worse. He bought all his properties in the spring, renovated them over the summer, and put them up for sale in the fall. This client put his properties on the market for a price that was too low, and we all know that prices suffer in the winter months. As time went on, he was forced to keep lowering his price which made him lose most of his profit to carrying costs.
It’s a sad story but it’s also a cautionary tale, if you aren’t on top of the four areas of flipping – you’ll be dead in the water before you even start.