The 8 Rules of House Flipping in the New Economy: Part 1

Many people want to know what it takes to be a successful flipper in today’s market. It’s certainly different than it was a couple years ago (even a year ago!), but for those who are diligent, analytical, and careful, it’s still possible to make a lot of money flipping properties in most areas of the country.

While you should keep in mind that every market will be different, and what may work in one area of the country may not work in another, here are some good general guidelines you should consider if you plan to flip in today’s down market:

  1. Best Condition & Best Price: It used to be that — to be successful — a house flipper needed to focus on having either the nicest house on the block or the lowest priced house on the block. With the number of houses on the market currently outnumbering the number of potential buyers by a very large margin, house flippers must now focus on having the house that is BOTH in the best condition AND the lowest priced among comparable homes.I’m sure a lot of people who are considering this are thinking, “How can I offer the nicest house at the lowest price and still make money?” It’s a great question, and the answer is simple — only consider fantastic deals when you’re buying. As the old adage goes, you make money when you buy. This is especially true in today’s market; if you can’t buy low enough to put the house in great condition and still sell below market, you shouldn’t be buying.That said, I can promise those types of deals are out there…just keep looking…
  2. Know Your Buyers: I was at a Real Estate Investment group meeting a couple weeks ago, when an investor who focused on rental properties asked me, “How do you expect to flip any properties? I had a friend who was buying properties worth $300K and trying to sell them for under $200K, and couldn’t sell a single one!”I’ll tell you what I told him — in my current local market, there are very few buyers who are looking for properties over $150K. Sure, there are some here and there, but for the most part, today’s buyers are first-time home buyers looking for move-in-ready properties in the $90-130K range. Why is that? It’s because these are the only buyers who are able to both qualify a loan and come up with a down-payment. (they are getting FHA loans that only require 3% down, and in some cases getting 100% financing if their household income is low enough to qualify).So, it’s no surprise that this guy’s friend wasn’t able to sell his $300K houses for $200K — there just aren’t enough buyers at that price-point, regardless of how good the deals are.Knowing your buyer base will allow you to appropriately focus your rehab and resale efforts — if the available buyers are looking for move-in-ready houses in the $90-130K range, you should be offering move-in-ready houses in the $90-130K range, nothing more and nothing less. I’m not saying the buyer base in your market is the same as it is in mine, just that you need to figure out what you buyer base is, AND FOCUS YOUR HOUSES ON THEM.
  3. Multiple Exit Strategies: Wanting to flip a house is great. Finding a house that can be successfully flipped is even better. But, in today’s market, any deal you consider should have multiple possible exit strategies — not just the possibility of a flip. And not just multiple potential exit strategies, but multiple strategies that you are convinced will work, if necessary.For example, I like to have at least 3 of the following 5 possible exit strategies before I consider a deal:
    • Wholesale to Another Investor
    • Minor (or No) Rehab and Rent
    • Minor Rehab and Sale to Investor
    • Minor Rehab and Flip to Occupant
    • Major Rehab and Flip to Occupant

    If you can’t find at least two different exit strategies for a property, don’t buy it. Because in this market, there’s just too much chance that your first strategy won’t pan out, and if that happens, you want to have alternatives.

  4. Know Your Comps: With the market changing on a daily basis, this is no time to trust something as important as comps to unreliable sources. That means you shouldn’t be using tax appraisals (those guys don’t even go inside the house to get their estimates), you shouldn’t be using websites like Trulia and Zillow (they may be right on, but they may also be very high or very low), and you shouldn’t be trusting your real estate agent unless they actually give you the data to verify for yourself.The only real way to find comps is to pull actual MLS (or tax record) data, and sort through it yourself. You’re looking for similar properties (pretty much same style, same # of beds and baths, same lot size, same condition) that have sold in the past 3 months within the same subdivision (or .5 mile radius). Don’t go back 6 or 12 months (the market has changed since then), don’t look at properties that are nothing like your own, and don’t look even 2 miles away (market conditions can vary drastically over even short distances).Your agent should be able to pull all the comp data you need, but it’s YOUR responsibility to make sure the data used is applicable. Too many agents will give you data that supports a high ARV, just to get you to buy the property. Trust the data, but only if you sort through it yourself. And if you can’t find any data for your area, ask yourself why that is? Is it “out of the way?” Is it a bad neighborhood where buyers don’t want to buy if they have an alternative (and these days they do)? Or is it such a desirable neighborhood that nothing has even been listed for sale in the past year (this is a good thing)? Even lack of data is an important piece of data when it comes to comps.

For more, check out Part 2 of this article

15 thoughts on “The 8 Rules of House Flipping in the New Economy: Part 1”

  1. Just recently introduced to your website. I am very impressed with the quality of information and your teaching style. I just read rules of flipping -part one and the info on targeting houses for flips in your market at $90 – $130 was helpful. My question is when was this written (ie. date) and is these numbers still your target point in todays market (may 2013) for your market?.

    1. Hi Bob,

      That was originally written back in 2009, and things have changed a little bit since then. While we’re still doing plenty of houses in the $100K range, the market at the $150-200K range has opened up a good bit in my area, so we’re doing some houses at a bit higher price as well. In addition, we’re doing houses in a couple new markets, and in those markets, we’re doing stuff in the $200-350K range.

      If you take a look at our “Results to Date” page, you can see the buy/sell prices for all our houses…

  2. First of all this is a very nice blog and very inspiring keep up the good work.

    I wanted to ask how did you finance your first house, did you have the money before flipping it saved up before and if not, under which conditions did you get the credit in order to make it happen?

    Also I saw on the result page you listed all the profits you’ve made on the houses, is this pre or post taxes?

    1. Hey Frantz,

      For our first project, we paid all cash. On our next several, we worked with a local bank that did portfolio lending — I highly recommend this route.

      And all the profits are pre-tax. There’s no way to know how much each will cost in taxes until the end of the year.

  3. Hi,

    Thank you for taking the time to answer.
    How much of the profits in percentages would you guess you would have to pay in taxes? Are there legal ways to save some taxes like investing into a new house and therefore not having to pay taxes because you are going into more deeper debth etc.?

    1. Hi Frantz,

      Flipping profits are taxed as ordinary income (no different than if you were earning money at a job). So, the amount you pay in taxes will increase with the amount of income you make in a year. On the first $9,000 or so you earn, you’ll pay 15% in taxes. On the next $25,000 or so you earn, you’ll pay 20% in taxes. On the next $50,000 or so, you’ll pay 25% in taxes. And it goes up from there.

  4. Quick question, I keep hearing about Wholesalers can you explain. What wholesalers are and what there roles are in house flipping. Is that a regional thing?

  5. How do I find out which way my local houseing market is trending right now? I checked the census reports but it’s very confusing and it looks like the reports are from 2010. Are there simple graphs reports for my local area?

    1. Hey Nick,

      I would find a good local agent/broker and talk to them. Census data is only updated every 10 years, so you won’t find anything newer than 2010, but a good, local agent will have a his/her pulse on the local markets, trends, etc.

  6. J,

    Thanks for the excellent blog. I have one question for you though.

    For finding comps – if I don’t have access to the MLS, and Zillow/Trulia can’t always be trusted, is there a website/software you recommend that I could access to find accurate comparables? I’m looking for something more hands on than relying on an agent.

  7. Hi,

    I just stumbled across your website and I really do want to get started. I have paid for and attended many workshops in regards to this, but never actually got started. I need a step by step plan from step 1 to the end on what I should do, in order. Does this website have that, or will your book have that?

    I live about 90 miles north of New York City, where the houses are a lot less than the city or Westchester County, a north suburban area, but I don’t have credit or any cash right now at all. I mean literally, so what should I do? Thank you so much!

    1. Hi Andrew,

      I wrote my books with the intention that they could be used as a step-by-step guide to getting started. The flipping book is laid out as 20 chapters, which each chapter being an incremental step in the process of doing your first deal. So yes, it is a step-by-step guide. I highly recommend you check out the book — I get emails from people everyday telling me that they spent years getting started, and the book helped them to finally take the leap.

  8. Hi J. Scott,
    I am getting started and really like the information on your site. My question, how to get information on my financial strength? I don’t know if I can start a project in the Oakland just $75k or less. How much money do I need to get started? I’d have to find investors or take money out of my property. I like how you have organized your site. Good work.

    Please respond back. I really could use some positive encouragement. So many articles tell you how difficult and grueling this work is, but I’m not working now, smart, practical and hard-working.

  9. I just stumbled on your name through Bigger Pockets. It’s great to see information on this subject with real integrity. I just ordered your book. Thank you!

Leave a Reply

Your email address will not be published. Required fields are marked *