Flipping Houses 101 Guide: Finding a House
At Kiavi, we like to think that there are 6 F’s of real estate investing: Find, Finance, Fix, Fill, Flip, and, most importantly, Fun. In this post, we’ll be sharing knowledge from our expert flippers, who have flipped hundreds of homes, on the first of the F’s: Find.
Finding houses to flip involves two parts: selecting a market and finding a flip property. Let’s take these on one at a time.
Start with your home market
Before you can start the process of finding a specific property, you have to decide which home market you want to focus on. If you’re just starting out, the answer is often straightforward: your own backyard. Unless you are an experienced flipper looking to expand his/her business, you often don’t need to look further than your own market to find houses to flip that will be simple and profitable for you.
Flipping in your own geographic market presents several advantages. First of all, you know the area. You know which parts of town are becoming more or less popular, and you have a feel for the culture and attractions of the different neighborhoods. This means that you’ll have a better idea of a home’s potential value beyond what’s on paper (listing price, specs, comps, etc.).
Secondly, being physically close to the actual project itself will save you time and money. You’ll be able to visit the property regularly, whether before purchasing or during the rehab project itself. You’ll be able to meet with contractors, and potentially vet a few different contractor teams before accepting a bid. Meeting in person with a general contractor team, much like a job interview, is the best way to pick up on intangibles such as professionalism that may be lost over the phone. Having to travel long distances to and from a site to do these tasks can present a huge headache and added stress.
Being close to the property also means you’ll also be able to show the home once you list it for sale, rather than hiring a third party. Remember, every third party you involve in your project is an added cost that will lower your margins. The more you can do yourself, the better.
A home market is also defined by the home type. If you have limited flipping experience, you’ll want to focus on the most liquid products on the market, which are often single-family homes at median home price points. Think of this as your classic 3 bed, 2 bath home, nothing too flashy. The high rate of sale and purchase of these properties - both from homeowners and investors, cash or financed - maximizes your exit strategies. These properties will require less equity than homes on the higher ends of the market, so you’ll be risking less of your money.
Lastly, focus on homes that require moderate renovations as opposed to more extensive ones. Scoping larger projects takes skill, experiences, and a trusted contractor team, so until you have several flips under your belt, don’t take on too much.
Find the property
Once you’ve identified your target market, there are many different deal sources you can, and should, look into to find a house to flip. Here are a few:
- Short sale
- Traditional (MLS)
- Seller direct
It’s important to recognize that deal sources can change depending on market conditions. For example, when home prices are low, auctions tend to be a good place to find houses to flip, whereas seller direct can be more lucrative when home prices are high. We’ve listed the sources above roughly based on their potential as home prices rise.
In a distressed market, auctions are great ways to find underpriced properties in need of rehabilitation. Homes selling at an auction have been foreclosed on, and are being sold by the lender at a discount to minimize balance sheet loss. These steep discounts present significant arbitrage opportunities for investors, and competition is often limited because the homes have not been listed on the general market.
There are downsides, however. When dealing with a foreclosure auction, you’ll often run into liens on the property which you would inherit upon purchasing. Make sure that your title company has done its research so you know what you’re getting into and that you have a title insurance in case anything comes up. Auctions will also often require you to purchase the property in full, on the spot. If the auction is taking place at the courthouse steps, you’ll need to have large sums of cash or cashiers checks on hand to win a bid and make a purchase. If the auction is online, some other options may be available. Generally speaking, you’ll likely need to buy a property fully and in cash, making financing difficult.
If a foreclosed home doesn’t sell at auction, a bank or lender will then own it. These homes are referred to as Real Estate Owned, or REO, listings. Given that banks are not in the business of buying and selling homes, most will be eager to get these properties off their balance sheets, and thus will sell at a reasonable discount. Some lenders will send out a list of REO properties out via email or newsletter, but investors can also simply call local banks and ask if they are trying to get rid of properties. Like above, be wary of liens and of fundamental damage to a property before buying.
When a homeowner defaults on his/her mortgage, banks may give them the option to sell the home "short", or sell the property for less than what is owed on the mortgage. Banks will sometimes prefer this to foreclosure, given the time-consuming and expensive process they must undertake to sell properties they foreclose on (such as auctions and REO’s). If a bank approves a short sale on a home, this could provide a good opportunity for a buyer to acquire a property at a discount, from a homeowner who would like to sell quickly.
There are some downsides to buying a short sale property. The sale process may take more time than a traditional retail sale to complete, because the lender must approve the short sale and sale price. Also, the approving lender will rarely agree to pay for any extras that a regular seller would normally agree to, which could mean higher closing costs for the buyer.
That said, as with any source, you can find houses to flip among short sales, so don’t count them out. Ask a real estate agent about short sale listings and look for phrases such as "subject to bank approval," "pre-foreclosure," "third-party review required," and "pre-approved by bank"--they indicate a home is being sold short.
The most traditional way to find (and list) a house for sale is via the Multiple Listing Service (MLS) website. MLS is a service that allows sellers to post listings to many different sites and aggregators all across the internet, and buyers to search across thousands of real estate agent listings quickly and efficiently. If a house is being sold, chances are that it’s listed on the MLS website.
The main downside of finding houses to flip on the MLS is the high level of competition you will face as a buyer. Given the thousands of people using the service, homes priced under market value are snapped up very quickly, so it’s hard to find a property which truly presents a unique opportunity. Also, you have to be a realtor to access the MLS, which means joining your local Realtor Association. These associations will require fees, about $1,000 or so a year.
When home prices are high and the market is relatively healthy, finding houses to flip can be difficult. In fact, some of the best deals may not even be on the market as the seller hasn’t even decided to sell yet. Seller Direct (sometimes called Direct-to-Seller) means approaching homeowners at strategic times -- when they have not listed their homes yet -- and making an offer on off-market houses.
Tools such as FindMotivatedSellersNow, PropStream, and Rebo Gateway aggregate and curate publicly available data (post office, utility, MLS, public transfer), and create "propensity to sell" models which help predict when a homeowner may be willing to sell his or her property. Once an opportunity has been identified, these service providers allow you to send targeted mail and marketing collateral directly to potential sellers. Check out their websites to look for houses and to get more information.
The most well-known seller direct platform is HomeVestors. You’ll probably recognize their "We Buy Ugly Houses" marketing slogan from billboards and commercials all around the country. HomeVestors is a franchise with a variety of one-time, recurring, and transactional fees. In return, you’ll get access to a wide breadth and depth of real estate expertise, an extensive network, and marketing capabilities which you can use to make offers on homes across the country. Kiavi also offers exclusive terms and pricing to HomeVestors franchisees, including leverage up to 100% of the cost basis.
Do your homework!
Before buying a house to flip, make sure you’ve done your homework on all of these sources and poked around to get a feel of what each has to offer. Again, there is no best or worst place to find houses to flip, and Kiavi customers have seen success from each of these and more.