House Flipping 101: Real Estate Knowledge

Many people think they understand real estate because they’ve watched a few HGTV shows and gone to a few local open houses. To put it simply, that’s just not enough knowledge to go into a house-flipping business.

There are several things a good real estate investor knows about the market. The most obvious is the difference between a bad deal, a good deal, and a great deal. If you are looking to flip houses, you shouldn’t have to go to Zillow or the local property tax website to figure out the value of a house you are interested in. You should be able to see the listing and immediately think, “Oh my gosh, that’s a great deal” or, if it’s not a great deal, “Pass.”

You will also need to be able to identify how much of an impact various repairs will have on the value of the property. For some properties, a few cosmetic updates will go a long way. Other properties need the entire kitchen to be gutted and replaced before a new homebuyer will even consider it. Your ability to identify a “great deal” and to know the impact various repairs will have on the home value will be the two primary difference-makers in whether or not your house flip is successful.

But these two pieces of knowledge alone won’t be enough. You’ll need to have a good understanding of local crime rates. You’ll need to know the up-and-coming areas, where some of the best deals are hiding in plain sight. You’ll need a working knowledge of school districts. You’ll need to understand current real estate inventory levels. In short, you’ll need to know all of the factors that will impact how a potential buyer will view your house before you purchase it.

There’s a common saying out there that goes something like this: “All the money you make in real estate is made when you purchase the property.” This is a bit of an exaggeration, but it’s not that big of an exaggeration. The reality is that one bad purchase will destroy your dreams of making any money on a property, and could cause you to lose thousands. The risk is extremely high.

This is where I’m going to offer a shameless plug for having an expert REALTOR®. Those of us who study the market day-in and day-out can identify the deals out there. You can and should make up for your lack of real estate knowledge by accessing your real estate agent’s knowledge base.

That said, is every REALTOR® out there a good fit for a house-flipper? No, many are better in other niches and would be lost when trying to help you on a house flip. So here are a few things to look for in an agent who would be good at advising you on house flips:

1. Has she ever flipped a house herself? This is extremely important because book knowledge alone isn’t good enough. You can get book knowledge by yourself without the help of a real estate professional, so you need someone on your team who can bring something else to the table – experience. This comes into play not just when it comes to evaluating a property’s value but also when it comes to getting financing, finding good contractors, assessing property repairs, etc. Don’t sell yourself short with a REALTOR® who doesn’t have house-flipping experience.
2. Can he look you in the eye and say, “You shouldn’t buy this?” Buying an investment property is a risky financial decision, and if you can’t trust your REALTOR® to tell you to walk away when you should, then you need a new REALTOR®. There are several considerations here. Is your REALTOR® direct in communication? Is he honest enough to talk you out of a purchase even though that means he doesn’t make any money? Is he confident in his knowledge? You shouldn’t be working with any real estate professional about whom you would answer no to any of those questions.
3. Does she typically sell homes in the general price point that you are interested in? A REALTOR® who typically sells homes in the $500,000-600,000 range may not be the best choice when it comes to making a $50,000-75,000 purchase. I’m not saying that she wouldn’t be able to help you at all, but that the most value she would provide is at the price point she works with the most.

There are other considerations, but those will get you thinking in the right direction. And hopefully this post as a whole (which is intended to be a starting point, not an exhaustive discussion of real estate knowledge) will help you get on the right track in your thinking before you take the plunge into flipping a house.