April 24

First 5 Steps to Start Flipping Houses



One of the questions I get asked most often is: How do I get started flipping houses?  ​​​​

Before we get too far into things here, let's make sure we're talking about the same kind of flipping because there are a lot of people out there, including gurus and coaches who say they teach flipping houses, when in fact they are flipping contracts. They are wholesaling, folks. Why do they say they flip houses? Probably because it’s way sexier than saying they wholesale them!  

Flipping houses means you are buying, renovating, and selling houses quickly and for a profit. 

I want to qualify this even further, because we do this with tremendous respect for the community, the neighborhood, and the buyers seeking houses.

I'm going to tell you the exact 5 things that you need to do to start flipping houses. But, you've got to go do them! I can't do them for you; I can only show you what to do based on years of experience.

I talk to lots of hope-to-be-flippers and they often tell me they’re out and about looking for a deal. They claim to be ready ready ready. I ask a few questions and I quickly learn that they are not ready ready ready. In fact, they don’t have the things in place they MUST have in order to even make an offer on anything! 

These are the exact things I’m about to share with you. If you don't have these things in place, you are not ready to put an offer in on any property.

Unless you like to gamble and just go on hunches. But, I’m pretty you don’t want to make costly mistakes or look like a fool, so let’s tackle these 5 things.  

Step 1: Create a Business Entity

Now there are several types of business entities you can form. You need to talk to a real estate savvy C.P.A. and/or attorney to determine the most suitable entity for you. Because I don't know anything about you or your financial situation, I have zero business telling you what the best entity is.

If you do an online search for something like “house flipping business entities,” you're going to come up with different answers. The one you’ll see most is to set up an L.L.C. Nobody should be advising you except for licensed professionals who know everything about your financial situation. This is way too important to screw up or half-ass. Get personal, relevant and professional advice. 

Now, why do you need a business entity? Well, for lots of reasons but these are the top 3:

  • You need to keep your business and your personal finances separate. Uncle Sam will thank you and you'll get to enjoy a myriad of business write-offs. Who doesn’t like those? ​​​​​​​​
  • You've got to protect your assets and limit your liability. I talk a lot about minimizing risk, well this is another way to do just that.​​​​
  • In order to secure financing for your flips you're likely going to need a business entity. Any type of commercial loan or real estate investing loan, like hard money, will be required to be done in a business name. 

You must speak with a real estate savvy CPA and/or attorney to determine the best entity for protection and taxation for YOU.

Once you come up with a name, you get to do some more fun stuff! 

1- File directly with your secretary of state to save some money

2- Buy your domain name (.com is best) 

3- Get a logo you love (check out 99designs or an online DIY site)

4- Get business cards

5- Create a free Facebook business page

Now, post consistently on social media to let your network know what you're up to. If people don't know you're looking for distressed properties, guess what? Yep. No leads.

Build Your Success Team

Quick Tip: Don’t ask a prospect to be on your "power team" or "success team" or anything "team." Just have a normal conversation with them and see if you mesh. If so, let them know you’d like to use them for whatever it is they provide. Don't make it weird! Haha. 

Step 2: Find Your Real Estate Agent

Ask your friends, family and neighbors for referrals. There are lots of us real estate agents out there! When you are trying to decide if they're they best fit, look for these qualities: 

  1. Responsive. When you reach out to them, they need to be getting back in touch with you quickly. The house flipping business is a quick one. You've got to be able to make quick decisions and jump on the good deals. 
  2. Available. If you need to go see a house quickly, they need to be able to accommodate that. 
  3. Strong understanding of the nuances of the neighborhoods and local demographics. Ultimately, this needs to fall on your shoulders. You need to spend the time learning the neighborhoods, driving the neighborhoods, and studying the data. Until you know those nuances, you've got to have a Realtor you can rely on for that info.

What will the real estate agent need to be able to provide?

When determining the exact areas you will target, you’ll need sold data, including months of inventory, average days on market, property criteria, school zones, etc., specifically for certain zip codes or neighborhoods.

When determining the After Repair Value (ARV), you’ll need sold data and photos so you can determine the level of finish out required to hit that value.

Step 3: Identify Financing Sources & Creative Buying Strategies

Hey, I’m all about minimizing my risk everywhere I can, as I’m sure you’ve heard me mention a few times. I may sound like a broken record, and that’s ok because I think it’s important for people to have an honest understanding instead of going by what they hear from random people who aren’t actually flipping houses. Because, why would we ever listen to them? I digress...

It’s crucial to know ahead of time how you will finance the project or how you will creatively structure the purchase. You must know the terms of any financing or potential purchase (specifically, the closing and carrying costs) in order to properly come up with a maximum offer. 

Here’s a list of the most commonly used sources of funding:

  • Hard Money
  • Private Money
  • Crowdfunding
  • Self-Directed Solo 401K
  • Rental Property Cash Out Refi

The vast majority of fix-and-flippers use a combination of hard and private money loans. A lot of people also use their retirement accounts and equity in current real estate holdings.

Let’s talk about hard money for a minute because I know the name sounds like “oh my gosh, if I don't pay them back on time, they're going to take me out back and take me out at the kneecaps,” but that's not the case. The name comes from the fact that they qualify the hard asset - the house - and not necessarily the borrower. It’s an asset-based loan, and that’s why it's called a hard money loan.

So, when I say you don't need a fat bank account nor excellent credit, here's what I mean by that.  Since most hard money lenders are only qualifying the asset, the property,  they're typically not requesting bank statements from you nor are they pulling your credit. 

Hard money lenders will have a threshold that they will lend up to. So, let's say that they'll lend up to 70% of what the house will be worth after you've repaired it (70% of the After Repair Value or ARV). For the sake of simplicity let's say that the ARV is $100,000. If the hard money lender will lend up to 70% of that, then they’ll lend up to $70,000. Beyond that, let's say the purchase price is $40,000 and the property needs $11,000 in work and another $4,000 in closing and carrying costs. All in, you’re looking at $55,000 (purchase price + repairs + closing/carrying costs). That is well below the $70,000 lender’s threshold, which is exactly how you can (and I do!) flip houses with little to none of your own money or credit.

Another thing to consider that a lot of newbies and seasoned pros alike don’t even know are options are these creative buying strategies: 

  • Seller financing
  • Buying on a wrap
  • Equity partnering with the seller
  • Buying subject-to

Those are strategies that require little to none of your own money or credit. You’ve got to stretch your thinking and understand the vast opportunities that are out there for you, that you may have no idea even exist.

Step 4: Line Up Your Contractors

Before you ever dive into a project, you have got to understand the numbers. And unless you are a highly skilled estimator, you can’t understand the numbers if you don’t have a contractor giving you a repair estimate.

Especially as a newbie, you need someone with a trained eye to walk the properties with you and give you an estimate based on the repairs needed and the level of finish out required to hit the targeted ARV. Even if you are a great estimator, if you’re hiring a GC, you better know the fee they charge, which will usually range from 10-20%.   

I use what I call key contractors instead of GCs. I manage the projects myself. My key contractor can do about 80-90% of the work. Basically, he can do everything that doesn’t require permits. Beyond this, I’ll sub out any plumbing, HVAC, electrical, and roof work that needs to be done. Running a project this way saves a lot of money that ends up as profit instead of overhead. However, most flippers don't start out as their own project managers. 

My advice to my students (and to you!) is to do whatever you need to do to have a successful first flip, so that you’ll want to do another one. If that means hiring a GC for the first few flips, then do it! If it will help you feel more confident while you’re learning the process, then by all means hire a GC. 

Knowing ahead of time who you will use will allow you to have an accurate estimate and run the numbers the most accurate way, thereby minimizing your risk. See . . . lots of ways to do so. 

The best ways to find them are referrals from real estate agents, other investors, online forums, friends, family and neighbors. 

Finding and managing contractors is not as difficult as some make it sound. It's all in your approach, due diligence, and just making smart choices. If you go into this assuming it's going to be difficult, then that's exactly what you'll experience. 

Quick Tips for Vetting Contractors:

  1. Get references
  2. See quality of work in person
  3. Make sure they are qualified to deliver the level of finish out your target neighborhoods require
  4. Examine non-verbal cues: are they on time, are they responsive, are they nice to engage with, etc. (Don’t settle for energy suckers!)

Step 5: You've Got to Have Support

You do not need to figure it all out on your own and you shouldn't. Why reinvent the wheel and make things more complicated than they should be? Let's choose the route of ease and flow. 

You have got to know where you're going to turn for support before you actually need it. Otherwise, searching around in a panic for the right resource could cause significant project delays, which will impact your profit.

And you need to know ahead of time who you will turn to when:

  • Things go wrong with the time management of your project
  • A hefty repair item comes up that you didn’t anticipate 
  • You need help making a quick decision on your project
  • You need help solving problems
  • Something comes up that you just don’t know how to handle
  • You feel defeated, frustrated or stuck

Being resourceful is one of the top qualities I see in people who are successful. There will always be something different you learn on each project, and surprises tend to pop up. Honestly, these are two reasons I love flipping houses! But, I also had my mentors and experts, and knew exactly who I would go to for help.

Every problem can be solved. Maybe not by you, but knowing where you’re going to turn for help will keep the project (and your profit!) on track.

All entrepreneurs experience the roller coaster of emotions: excitement, frustration, loneliness, fear, and everything in between. These feelings are completely natural! But if you’re in isolation without someone to reach out to who completely understands and has been there, this can lead to quitting way too soon. Usually, people quit just before something amazing is about to happen. Being an entrepreneur is 90% mindset, and you have to work on this every single day.

Unfortunately, there are so many people that are going to yuck your yum. Meaning, they're going to poo-poo all over your house flipping dreams. You may hear, “That's dangerous” or “That's reckless, you can't do that” or “You shouldn't do that.”

You know why they do that? It's because they're not doing anything extraordinary in life. They aren’t bravely going after anything. They’re just spewing fear and hate, because they live in fear. If a person is spouting opinions at me, but they aren’t out there flipping houses or doing whatever it is I want to be doing, then their opinion does not matter to me.

In order to have any sort of say in my life, they've got to be in the arena, just like Brené Brown talks about. And if you haven’t read any of her books, please do yourself a huge favor and do so. Read Daring Greatly or Dare to Lead, then go back and read all of her previous books.

Remember: you are the average of the 5 people you interact with the most. So, look around. Are you spending time with people who are elevating you, elevating your game, and lifting you up, or are you with people who are pushing you down all the time?

You have to take control of your life. You have to make changes. If you keep doing the same thing expecting different results, Albert Einstein said that's the definition of insanity. So, don’t be insane.

Why are these the first 5 steps?

Because these are the things you need to know in order to calculate your maximum offer, and you get this info from the above sources:

Except for the buffer, which I’ll give you now. The buffer is a contingency amount and should be 2-5% of the ARV, depending on the ARV amount. An ARV of 100k or less should use a 5% buffer. An ARV of 500,000 should use at least a 2% buffer, and so on… This is totally separate from the buffer/contingency you would use in the repair estimate, FYI.

So, now you know the first five steps you must take to start flipping houses!

Now I'll share with you the Secret to Flipping Houses...

How do you determine what that is exactly? From the four-letter word I love so much: DATA.

The data tells you all of the answers, which is why you can be successful flipping houses in any market under any market conditions. This is the difference between FlippingSmart™ and going off of hunches.

Over to You

I hope you will take this highly actionable article and do the steps. It is very clearly outlined for you. Just follow the recipe. If this makes perfect sense to you, or if you have any questions or encounter difficulties when trying to implement this strategy, let me know by scrolling down and leaving a comment!

Want to dive even deeper into ALL of these things and so much more? 

Join the Workshop: First 5 Steps You Must Take 

to Start Flipping Houses

Debbie DeBerry | The Flipstress

I've been in real estate in Austin, TX since 2003, involved in 500+ transactions, from traditional brokerage to rentals to flips, and everything in between.

I am The House Flipping Coach for Women, and teach you how to start and grow your house flipping business, the smart way. 

So that you can know freedom and security. 

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