HOUSE FLIPPING HURDLES THAT EVERY INVESTOR CAN PREPARE FOR AND EXPECT

In recent years house flipping has become a gateway strategy for investors looking to make money in real estate. Flipping houses is a relatively straightforward business model that makes sense to even the newest of investors. Because of this strategic ease, flipping has gained considerable attention in the media and pop culture. That being said, just because the business model is simple does not mean that the process is easy, there is a great deal to consider when diving into the world of house flipping. 

In this article, we will be touching on some common difficulties that house flippers can expect to experience, such as, where do I find the money, where do I find the deals, and how to prepare for when it takes longer and costs more than you planned. The hope is that by the end of this article you will have a better idea of what house flipping really requires, as well as, have a little more confidence knowing what you might encounter throughout your journey.

3 COMMON CHALLENGES FOR HOUSE FLIPPERS – NEW AND EXPERIENCED

These days television does a pretty good job of showing what goes into flipping a property, i.e. the demolition, the construction, and the sale. What TV tends to leave out (and what we consider to be important) are things like, how the deals were sourced, how the deal was funded, and what steps the investor took to ensure the deal was viable prior to buying the house.

Challenge #1: Where to find the Money?

It goes without saying that if you are planning on flipping houses you are going to need money. Now unless you plan on financing the entire project with your own cash then you are going to need to source the capital from somewhere. There are a multitude of avenues that you can explore when seeking financing. We will be talking about some of the most common approaches, starting with, family and friends and moving to private lending institutions.

Family and friends are a great way to find dollars to finance your flip deals. These are people that know you and trust you and are willing to give you funds to complete your deal, typically for a portion of the end profits, some level of interest, or both.

Another option is a private or personal loan, these are individuals that are willing to provide financing on your deal for an agreed upon interest rate along with the security of a trust deed on the property.

We know that not everyone has access to friends and family willing to give out money or high net worth individuals that will loan you capital. In that case some of the most common and accessible options for financing deals are private lending institutions. These are professional lending organizations that specialize in lending money to people and businesses, including those who fix and flip houses. Private lenders look at your deal and lend you money based on the integrity of the deal and your experience rather than your income and tax returns like a typical bank would. Because of the convenience of a private loan, you should expect to pay higher than standard interest rates along with additional loan fees. But this is an effective way that people all around the country pay for their projects.

Some other less commonly used forms of financing are listed below but are also viable options for acquiring capital. Be sure to consider all of your options when it comes to financing. As a quick financing tip, prepare for your deals to take longer and cost more than you originally planned.

• 401(k) financing

• Home equity loans

• Business line of credit

Challenge #2: Where Can I Find Deals?

We want to start by saying that this is a heavily discussed topic that warrants its own post, as a matter of fact there are entire books written and seminars on the subject. But, for our purposes we will take the 10,000-foot view and touch on some major themes regarding where to look and what to look for when finding properties.

You’ve probably heard the saying, “Location, location, location.” Well, this is especially true of houses that need to be flipped, but not the way you might think. The location of the home needs to be desirable, yes, but more importantly having a comprehensive knowledge of the location can be invaluable when locating, nominating and acquiring properties. The same way you probably have a deep understanding of your hometown is the same type of understanding you should strive for when investing in any real estate. That is why we suggest you use your knowledge to your advantage and think about getting started in your own backyard. If you can invest where you live it will be that much easier to understand markets and source deals.

If investing where you live is out of the question for one reason or another, then think about places that you have spent a considerable amount of time. We suggest the city where you went to college or a town that your relatives might live in. The advantage of knowing the people and having a network that you can tap into is a priceless resource. By leveraging an existing network, you might just find a friend or acquaintance that is looking to sell. Along with having an established network, your local knowledge will help you identify those neighborhoods that might be up and coming or those neighborhoods where buying a house might not be a great idea no matter how nice it looks when you are done.

Challenge #3: It took longer and costs more!

Before we dive into challenge #3 let’s talk about the flippers business model. The basic formula for most flippers is this, you need to purchase the property at 70% of the after repair value (ARV) minus the cost of the repairs. For example, if I am going to purchase a property to flip and I think the property will sell for $100k when I am all done, but it needs $20k in repairs to get it there, then I would need to purchase that property for $50k. By following this formula most flippers find that they put themselves in a position to turn a profit. Sounds improbable but this scenario plays out all over the country every day. Below we are going to discuss three reasons why this formula is important and how it can protect you and your returns in case of unexpected expenses, time delays, or contractor issues.

3 COMPLICATIONS THAT FLIPPERS ENCOUNTER

1. Unforeseen Costs

Most investors will have a budget that they compile based on bids and estimates that they receive from contractors. Often there are additional costs that are uncovered throughout the process that could not have been planned for. They can come in the form of water leaks, mold, structural/foundation problems and a laundry list of others. Experienced investors know to plan for these types of surprise costs by adding contingency (safety) dollars to their rehab budget. Because these issues are typically unanticipated you need to be flexible and able to adjust your business plan and timetable to address these issues while keeping the project on track and within budget.

2. Time Delays

Time delays and unforeseen costs tend to go hand and hand. Make sure that you prepare for the possibility that your project can be delayed for a host of reasons, weather, permitting issues, inspection issues, and other complications. Knowing how to navigate these delays and work around problems will keep your project moving towards the finish line. A seasoned investor will be able to divert efforts to where it is most needed and most efficient in order to reduce the amount lost time. 

3. Contractor Issues

Most accomplished flippers have a stable of competent contractors that they use on a regular basis that know how the flipper operates and what is expected. On the other hand, for those just starting out there are a few things you want to make sure of. First make sure the contractor is licensed and has insurance, you don’t want work being done by someone who doesn’t know what they are doing. Take the time to visit past and present jobs that the contractor is doing so that you can get an idea of the quality of work, you don’t want to pay for a service and be disappointed with the finished product. Make sure you have a back up plan if the contractor stops showing up. Know who to call and what you can do to keep the project on track. 

Conclusion 

This article was meant to inform those who are new to real estate or are interested in starting to flip houses. It talked about some of the common challenges that flippers face, such as, where to find money, where to find deals, and obstacles they might face and how to overcome them. Each one of these challenges is complex and could probably have a course written about it.  Our goal with this article is to help guide you in the right direction and give you things to think about and help your development as a real estate investor. Stay tuned for more articles and helpful real estate knowledge, good luck and happy investing.  

At Arch Loans, we offer quick, easy, reliable loans on single family homes, condos, and 2-4 unit properties. We can give quick approval when time is of the essence and needed to compete with other all-cash buyers.

At Arch Loans, we offer quick, easy, reliable loans on single family homes, condos, and 2-4 unit properties. We can give quick approval when time is of the essence and needed to compete with other all-cash buyers.

ARCH LOANS OFFERS:

• • Loan amounts up to 10 Million
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