I have flipped more than 155 houses in my career, and while I am still learning, I have figured out a few things over the years. One mistake I see many new flippers make is in how they remodel a house. To make the most money flipping houses, the simpler a flip is, the better.
We all see the HGTV and TLC shows where a team rebuilds every house to make $50,000 each time. But that is not reality. The house-flipping shows don’t show us the behind-the-scenes details, the true costs or how much work goes into a home rehab. While a massive remodel makes for great TV, it usually does not make for a great investment in reality.
Real estate data company ATTOM reported the average profit on house flips in the United States was $65,520 in the second quarter of 2018. But ATTOM also notes that this is most likely not an accurate number to use for what professional flippers make on each deal, as the figure takes into account all houses (flip properties or not) bought and sold within the year, and only factors the purchase price minus the selling price. Any experienced flipper will tell you that those are not the only important numbers.
Personally, my flips average about $30,000, and I suspect that is a pretty accurate number for most house flippers I know. The number decreases with lower price range flips and increasesÂ if you are doing high-end flips.
I have done flips that needed almost no work and flips that needed $100,000 remodels. The big jobs always seem to have the biggest potential profit in the beginning, but something always happens to eat up that profit. Big remodels take more time, more money and more resources. If you have contractors working on one house for six months, that limits how fast you can get other flips completed. Here are some other problems you may run into with massive remodels:
â€˘ The more repairs you make on a home, the more problems come up. When you tear into walls, you almost always find more things that need to be repaired than you budgeted for.
â€˘ The larger a remodel, the harder it is for the contractor to bid on the job and accuratelyÂ forecast the time frame. You may even lose contractors on these types of projects because the scope of the project is bigger than anticipated.
â€˘ Time is money. It can cost you as little as $50 to $100 to own a house flip. If a job takes three months longer, it can mean $10,000 more in costs.
â€˘ The longer you hold a property, the more you are at risk to a changing market. We have been in an appreciating market for the last seven years, but that will not last forever. If prices start going down, the huge remodel projects that take forever could be a disaster.
I would love to be able to make every house have an open floor plan with a kitchen that flows perfectly and the bedrooms all in the correct locations. However, that all costs a lot of money. In my experience, moving kitchens, changing floor plans or creating additions rarely pay off. Using super-expensive materials can also eat up all your profits. If a bathroom is functional and looks decent, is it worth spending $5,000 to make it perfect? What if you have to remodel three bathrooms?
Another problem that arises on flips is over-improving them for the neighborhood. Most house flips are sold to owner-occupied buyers who will get loans. The bank will require appraisals, and if an appraisal comes in low, the seller is usually the one to eat the costs. A house that is over-improved may get a contract that justifies all the work done, but the appraisal could make all that work for naught if it comes in low. I have had multiple low appraisals come in this year on flips that were not over-improved. If your property is more upgraded than every other house in the neighborhood, you are asking for trouble.
It is easy to spend a lot of money remodeling a flip, but spending a lot of money will not make you more money in most cases. The trick to running an affordable house flipping business is making economical repairs. Do this by working hard to:
â€˘ Find good contractors, subcontractors and employees.
â€˘ Buy most of your materials at major stores with managed professional accounts.
â€˘ Minimize the remodels on houses, and choose smaller projects over huge projects.
â€˘ Constantly work on getting houses turned quickly so you are not exposed to the market.
â€˘ Realize that a house does not have to be perfect to sell.
Real estate investors spend a lot of time analyzing the business and profits. Some of the most profitable houses may be minor rehab projects because they have lower expenses. Spend the time to shop for affordable contractors and crews. You do want to make sure a house is safe and the major systems are all in working condition, but the house does not have to look like a Joanna Gaines special to earn you the most money.