How To Start A House Flipping Business Step By Step
Step 1: Know Where You Want To Go
We shouldn’t just jump in our car and speed away without knowing where we are going. That’s crazy and a complete waste of time and money. We’ve got to figure out our destination first.
In my opinion, this is the single most important step in this process. You have to know your destination. It needs to be very clear and definite in your mind. An end goal of ‘getting rich’ is too general and not definite enough to allow you to envision where you want to be. We need to figure out exactly what we want and how we want our lives to be so that we have a clear vision of what it is we are trying to achieve.
Would you like to be able to take your family on vacations whenever you want and for as long as you want? Do you want to be able to earn profits insteads of wages so that you can do this full-time and be in control of what you are doing and when? Do you want to be able to achieve all that you feel you are meant to achieve without waiting for someone to give you the opportunity? In order to do these things, we have to lay them out as specific goals.
You can take ‘getting rich’ and ask the right questions to figure out what you really want and why you want to flip houses. We could ask WHY we want to be rich. What would being rich do for us? What kind of things would you do if you were rich? What would your average day be like if you were rich? Answer these questions and write down your answers. Something about writing things down helps you to fully realize and remember your answers. Better yet, start a vision board.
Figure out what your true dreams are and try to make them as specific and clear as possible. Try to have concrete goals that you can work towards. Narrow your focus.
Step 2: Get Educated (don’t overdo it)
Now that we know our destination, we still shouldn’t just jump in that car and peel out into the distance. That might be funny, but it would not be funny for very long. Especially when you find yourself lost and frustated.
We need to get educated so that we know the best way to get to our destination. We need to study the roads and figure out not only the shortest path, but the path with the least amount of traffic jams. The traffic jams in house flipping are the things that slow us down and make it more difficult for us to get to where we want to be. This can be things like having a ton of over-leveraged rental properties with non-paying tenants that are trashing the place and causing you to bleed money at a staggering pace.
You’ve probably already started your house flipping education. Well, I know you have because you are here reading this. At least you are in the right place! That’s a great start. That shows me you already know what you are doing so far.
What do you need to learn and where can you learn it?
In order to figure out what you need to learn, we need to figure out which house flipping strategy to focus on.
Focus Your Energy On One Strategy
There are a lot of strategies out there. I’ve seen some really crazy and down right dangerous ones. Most typically just sound great and look good on paper but are super risky in reality. When you add the human factor to a lot of these strategies (tenants that don’t pay and completely trash your house, unscrupulous investors and sellers, unforeseen costs and repairs, lawsuits, and list goes on and on), they are just not a good way to go. You have to get back to the basics. To the tried and true things that have been working for a long time for a lot of investors.
My Recommended Starting Strategies (and I still use them myself)
Starting with birddogging and wholesaling is the easiest way to get into flipping houses without much risk and with little to no money. These are the strategies that I feel you should focus on. I call these the strategies with the lowest entry costs in terms of time, money and experience.
Give yourself a better chance of really making it by laser focusing on these two methods. Heck, just focus on one if you want. The great thing is that both of these can be learned quickly and interchanged for each deal as you see fit.
BirddoggingA birddog is someone that finds “leads” and gives these leads to an experienced investor to work.Here’s how to do it:
You drive around and find vacant houses and send letters to the owners of the vacant houses. One of the owners calls you and tells you they are interested in selling the house.
You then tell another investor that has the ability to act quickly about the lead and he/she sets an appointment to see the house and makes an offer to the owner.
If they come to an agreement and the investor ends up buying the house, he/she will pay you a finder’s fee. This fee can be as much as $2,000 or more.
I typically ask for $1,000 to $2,000 depending on how much potential I feel the deal has. I think most investors probably pay closer to $500 each if the leads are screened as well as I screen mine.
What I mean by screening is just that I make sure the potential for a deal is really there. That the sellers have enough equity in the home and there are signs of motivation to sell.
Some investors will pay small fees just for the lead (just giving the lead, whether they buy the house or not). Don’t expect very much if this is the case (probably between $25-$50).
WholesalingWholesaling is where you actually contract to buy a house and sell it ‘as-is’ to another investor.There are several ways to wholesale, but in the spirit of having you narrow your focus, I’m going to be discussing the assignment of contract alone. This is the strategy that involves the least risk and very little money. This is where you never take ownership of the house.
Here’s how to do it:
Market for leads (you’ll find out more about this further down in this article).
Start taking calls and analyzing the leads. Most investor buyers are looking to purchase investment property at 70% of market value minus the cost to repair the property.
So, if you find a deal where the house should sell for $100,000 and it needs $10,000 in repairs, you would want to buy it for $60,000 LESS THE AMOUNT YOU WANT TO CHARGE FOR THE ASSIGNMENT. If you want to be paid $5,000 for the assignment, simply buy it for $55,000 and offer it to an investor buyer for $60,000.
Estimating repairs can be difficult in the beginning. At first, I sure was clueless when it came to what repairs cost. The best thing you can do is find a contractor (preferably one that has worked for house flippers) that can help you with the basic costs of normal repairs. Just sit down and make a list of normal repairs and what they typically cost. Some of the items can be priced based on square foot or linear feet.
The key with estimating repairs is that you will never get it the cost correct to the dollar. You are just trying to get a good estimate. Be conservative in your estimate.
When you find what seems to be a deal that could work based on your analysis, you make the offer. If the seller accepts, you will sign a purchase and sale agreement (contract) with the seller that spells out the terms of the agreement. Most people use their own state approved contract for real estate transactions. I actually prefer a single page contract of my own that is straight and to the point. Most of the state contracts are full of CYA (cover your ass) stuff for Realtors and tend to be 9 pages or longer. Talk about taking forever to get the contract signed! I don’t enjoy explaining TIDE WATERS and other gobbledy-gook to sellers for several hours.
It’s important to make sure that your contract has ‘and/or Assigns’ after the buyer name so that you can assign the contract.
For the buyer name, you will use your name unless you’ve set up a DBA or company (read more about that below).
In the beginning, it’s best to have an escape clause. This is where you have a statement in the contract that allows you to back out if you are unable to find a buyer for it. The clause should be simple and could be something like, “This agreement is subject to further inspection of the property by the buyer.”
If the contract you are using has a section for a termination option, you can use that. This is typically used by buyers to pay a certain amount to be able to terminate the deal if they are not happy with the inspection or other aspect of the deal within an agreed upon amount of time.
Once you have the house contracted, you take it to a title company and have it receipted. This is where you pay the earnest money you agreed to with the seller (I typically only pay $10 or $25 for earnest money. It’s not a big deal unless you make it seem like a big deal (remember that).
Contact your buyers and let them know about the deal. You will end up finding out who the serious buyers are by doing this. You really only want to work with buyers that take action quickly and let you know whether they want the deal or not. Don’t waste your time with people that ask a million questions, like whether the bathroom toilet needs to be replaced. You are selling at a deep discount so those matters are irrelevent. Don’t waste your time with these people.
After a while you will develop a short list of ‘go-to’ people that you can call and tell about the property. It’s best to try and give them 12-24 hours each to see if they want the deal (one at a time of course). If they know there will be a lot of competition, they may not want to waste their time. If they know they have first dibs, they will be more than willing to check it out.
Once you’ve found your ready, willing and able buyer (must be able to close by the date you specified in your contract with the seller), you will sign an assignment of contract form with them. This is just a single page contract (you can download a copy of mine here: Flipping Houses Resources Page.
This assignment contract will then be taken to the same title company where you receipted the purchase contract.
You could get a non-refundable deposit from the buyer to help ensure that they are serious. Good buyers will not hesitate to do this if it is a good deal. Non-refundable deposits can be as much as you want, but are typically $1,000-$2,000.
There is an alternative way to do this. This involves finding investor buyers and figuring out what types of deals they want and marketing and directing your efforts to find those types of deals. This way you can find exactly what they want so that you already have a ready and willing buyer. These investors might also help you analyze each deal so that you are buying at a price that makes sense for them (and of course you get the house for a little cheaper so as to cover your assignment fee! You do want to make some money for your efforts, don’t you?)
There’s no wrong or right way to go about it. It’s really up to you as to which one fits better for you. You can try one method and then switch to the other or work at doing both at the same time. Your choice.
This doesn’t cover every possiblity, but it’s a great introduction and good starting point for you to know what you need to learn about the process.
Stay focused my friend.
What if you stand to make a HUGE assignment fee?
Good for you. If your end buyer doesn’t like it, find another buyer. You are the one with the deal. If it’s a problem for them that you stand to make a lot of money for simply assigning the deal, tell them tough S*!t. That’s the way it’s going to be. Simple as that.
Why I Don’t Recommend Rentals and Rehabbing – IN THE BEGINNING
Some people want to start out by picking up rentals. The reason why I don’t recomment that is because you should really have a certain level of cash reserves in case your places get trashed and go vacant, or tenants just stop paying and you have to spend a lot of time and money just getting them out. Rentals don’t generate the kind of quick cash that wholesaling and birddogging can.
Rehabbing is another one that I feel is better to start after gaining experience in wholesaling. This way you get a lot of experience in determining what the right prices are to buy the properties and in determining the repair costs, holding costs, selling costs and any other costs involved when rehabbing houses. There’s a lot more risk when rehabbing. If you start by wholesaling you might even end up developing a relationship with a local rehabber that can then help you to make the transition to rehabbing.
Don’t keep buying course after course trying to find that new secret way to do this easily. It doesn’t exist and you are just putting off getting out of your comfort zone. Focus on one strategy, learn as much as you can about it and start taking action to gain experience and make a real go at it. Doing this will separate you from 95-99% of other people.
Where To Learn
Here, of course, is the best place. I’m only slightly biased. But, you should also spend some time on the incredible forums over at Bigger Pockets and REIClub. These are great places to really fill in a lot of the gaps. I wanted to talk about figuring out where to start first, becuase when you spend time on the forums you will tend to get pulled in a lot of directions. You have to go in with a specific question to get answered. Search for answers to your specific questions and TRY NOT TO GET SIDE-TRACKED.
People tend to get side-tracked easily because it’s easier (MORE COMFORTABLE) to just keep learning other things than to actually TAKE ACTION. Don’t fall into that trap. Stay focused.
Incidentally, the NUMBER ONE place to learn is on the streets. You will learn more hands down by taking action and finding out what you need to know. You don’t have to know everything about a topic to get started. You should educate yourself on the basics and GET STARTED.
Taking action will put you out of your comfort zone. It will be uncomfortable, but only in the beginning. You can read an article I wrote for BiggerPockets on getting out of your comfort zone – click here.
Step 3: Start Marketing
You’ve got to find deals and you need to find buyers to buy those deals.
I’m a firm believer that it is much easier to find awesome deals by targeting motivated sellers. You aren’t looking for the right houses as much as you are really looking for the right sellers.
A lot of new people think the only way to start is to find a real estate agent and have them find listed deals for them. There’s simply too much competition and the deals tend to be too slim. It’s possible to work it this way, but why when it is much easier dealing directly with motivated homeowners.
Marketing For Buyers
It would benefit you to start immediately looking for cash investors. These are the people that you will try to sell your leads and/or deals to. Typically, rehabbers (people that fix up the houses and sell them) and landlords are going to be the people you want to find. These are the ones that are always looking for fixer upper houses, the kind you will be finding.
Other wholesalers can also be great people to network with. If you are having trouble moving one of your deals, you can see if they’ve got a buyer that would be interested. You would work out a split of the profits with the wholesaler if they do find a buyer for your deal.
Here are some excellent places and ways to find buyers:
Local Real Estate Investor Association (REIA) meetings
Calling ‘we buy houses’ advertisers (call numbers on bandit signs, yellow pages, online, etc)
Marketing your deals – you do want to market your wholesale deals (bandit signs, newspaper ads, craigslist ads, etc)
Have a Realtor look up investment properties that were sold recently and find who bought them
Calling ‘For Rent’ signs
Driving neighborhoods where you want to invest and looking for houses being rehabbed
Marketing For Sellers
To find deals, I recommend marketing directly to motivated sellers. This is the ‘We Buy Houses’ type of advertising. You are trying to find people that have a house they need to sell. This does not just mean people facing foreclosure, which is what most people immediately think of when talking about motivated sellers.
There are a lot of other reasons that people will sell their house at deep discounts. These reasons could include (and are certainly not limited to):
House needs a lot of repairs the owner cannot afford to make
Person inherits a house and would rather have cash
Landlord is sick and tired of dealing with their rental property
Owner needs to relocate and sell their house fast
Divorce situation where the single owner cannot afford the house
Owner just doesn’t want the hassle of selling their house the conventional way
I could list the techniques on how to do this marketing, but a much better way would be to show you what I do and how I do it. And, in case you didn’t already know, I’ve already posted about 34 weeks of all the marketing I did and the leads that came in. Be sure to check out the first and second week where I show my marketing.
Click here to check out the 34 weeks of marketing, analysis and deals done
A good place to start are my websites for real estate investors. These are house buying websites just like mine (DannyBuysHouses.com). Check out LeadPropeller.com to see how you can generate more motivated seller leads.]
Step 4: Start Building Your Team
As you start to find and work deals, you will find it necessary to have good people on your team. These are not employees. Rather, they are people like a great closer (title company), real estate attorney, contractor (to help determine repair costs), accountant (hopefully you will need this as it means you are making money!), and a real estate agent (some are worth their weight in gold).
Melissa has written a post about who should be on your house flipping dream team – click here that covers the details in more depth.
If for any other reason, check out the image for that post.
Step 5: Set Up Your Company
Here’s a question that comes up a lot. People tend to get themselves stuck on these kinds of questions (including myself, in the beginning) and I think it is because it really is just another excuse to not get started.
NOTE: I am not an attorney, nor am I an accountant, and I don’t play one on the internet. I’m not giving legal or financial advice so take these suggestions for what they’re worth.
When you are starting out, there is no problem with just using your name. As long as you are conducting business in an ethical manner, there really is nothing to worry about.
DBA or LLC?
My suggestion is to wait until you’ve done a deal or two and then set up an LLC. If you want to check into which entity would be best for tax purposes, contact a competent accountant/tax person (try to get a referral from a successful investor if you can). For asset protection, contact a good real estate attorney.
In the beginning, I did business with an assumed name (DBA – Doing Business As) because we were actually closing on the houses and I didn’t want my name on record. When birddogging and assigning contracts, you don’t take ownership at all, so this isn’t an issue.
If you really want to set up a DBA, you can find out more here: DBA Why and How
Step 6: Get A Business Bank Account
If you do set up a company or DBA, you should set up a business bank account. Remember, this is a business bank account and should never be used for anything other than your business. You don’t want to end up with problems because you weren’t running your business like a business. The protections that a business provides can be eliminated if you do not run it like a business. So don’t be spending money from your business account on something that is for personal use.
You should consider whether you want to start one with a large national bank or a small local bank. They’re definitely not the same. I’ll discuss some of the benefits and negatives of each.
Large National Bank
Large national banks can be more convenient. They tend to have more options in the way of online banking and apps. The negatives that really, really grind my gears is that everything is done by their rules. What I mean is that when you try to call to find out one simple thing, you end up in a crazy labyrinth of a menu system….only to end up being hung up on just when you think you reached the right person. Another issue is that you can’t typically go in and talk directly with a decision maker when it comes to a loan.
Small Local Bank
Small local banks are not as convenient when it comes to having branches all over the country (obviously) and online banking and apps that do as much as the large ones (though this seems to be changing quickly).
The biggest benefit to the small banks is the ability to build relationships and the ease with which customer service is handled. Those are enough for me.
We still bank with a large, national bank, but that will probably be changing soon. I can’t even deal with them anymore. Anytime there is a problem, Melissa (my wife) has to handle it. And I thank her very much for that.
Step 7: Grow Your Business
When you start making money, be sure to reinvest it back into your business. Ok, you should use a small part of it to celebrate your success. But the rest needs to go back into marketing and building your company. The first years are the most difficult and you have to do your best to build a strong company.
Spending money on marketing can be hard at first. It sure becomes easier after you’ve made a couple grand with a simple birddog deal or several grand wholesaling a house. Don’t be afraid to spend money on marketing.
Make sure you are always planning your strategy and keeping an eye on your goals. Please be sure to figure out why you really want to do this. Step 1 above is the most important of all of these steps. Believe me.
Rehabbing is where you close on a property, fix it up and sell it to an end buyer that is either going to live in it or rent it out.
The logical progression for most people is to go from birddogging, to wholesaling, to rehabbing. With rehabbing you will need a source of money, insurance, contractors, patience, design sense, creativity, a desire to turn a dump into a beautiful home. Did I mention patience? Good.
Author: Kelly Magnuson
May 22nd 2015
About Kelly: ...