How to Flip A House?

Are you a first-time home flipper hoping to make some money? In this video, we’re going to talk about four things you need to know if you plan on making any money when you flip a house. I’ll also give you a bonus formula for a quick back-of-the-envelope method of assessing property.

Do You Want To Flip A House?

Flipping houses looks easy and fun, right? I don’t know. Thanks to HGTV for bringing this into our minds and our living rooms, we get a lot of calls about this. It’s tough to get started on flipping houses. There are just two pieces that you need to know. First, there’s the money. And if you’ve got the money, honey, the next thing is doing the work. You just have to figure out how to balance all of it.

Let’s start with the money first, as the work is divided into several different parts. If you have no experience, you’re not going to be able to get a bank that’s willing to lend money to you. If it’s not a job, a career, or even barely a hobby right now for you, it’s just a dream. If you’ve never done this before, no commercial bank in their right mind is going to give you money to plunk down on a house claiming that you’re going to fix it—especially with no track record behind you to prove that you know what you’re doing.

A Hard Money Lender

You’re going to have to go to a hard money lender. A hard money lender is somebody who is going to lend you the money and then charge a really high interest rate. You’re likely going to have to do something like this to get started, get your foot in the door, and get your business off the ground. Once you make connections and you have an established track record, you’ll probably be able to find other financing options.

The interest rates on these loans are very high because these guys are taking on a lot of risks. Look at it from their perspective. Here’s a person who’s never flipped a house before who suddenly decides, “Hey, I think I can be good at flipping houses.” They’re taking a really big chance on you, and that’s why they’re charging high interest rates.

You’re also looking at potentially paying a one-time fee, which is usually a few percentage points, plus 8% to 15% interest on it. So if we take your $250,000 house that needs $50,000 worth of work, you’ll want $300,000 from the hard money lender. They’re then going to charge you a few $1000 up front just for starting the process. You’re then going to pay a 15% per annum of interest.

So for the $300,000 that you’ve borrowed, you’re going to owe $45,000 over 12 months. If you can flip this house in six months, you’re looking at $22,500. You’re going to need to add that to your purchase price plus your construction costs. You’ll also need to account for the few percentage points that they charge as well as any purchase costs, transfer costs, recordation, and things you have to pay on the actual purchase. So make sure that you consider all of those in and that you know what your actual acquisition costs.

Doing The Work

Next, you need to consider the ability to do some work. The ability to do it yourself—or to be a general contractor and manage everybody else who’s doing the work—is important. Maybe you don’t have the money, but you’re handy. You can paint, change some light fixtures out, change hardware, and do things that don’t require a license or a permit. Great. This is going to save you money, but it does not replace the need for licensed contractors when it comes down to doing big things like plumbing, electrical, structural, and additions.

Doing the work yourself is a slippery slope because sometimes people merge into areas where it may or may not require a permit. Depending on the jurisdiction—and if you run afoul of their laws—they may end up putting that big old stop-work order on the front of your house. Then you’re going to have problems.

The other option—if you don’t have the money and you don’t have any handy skills to do the work—is to just be the general contractor. You can get the money from the hard money lender, and you’re going to save some money on contractor fees.

Being A General Contractor

It’s important to understand that managing trades is tough. They don’t complete their jobs. They don’t show up sometimes. They complete 80% and then just disappear off to another job and they seem to never finish. And then their tools are at your house. Or you come home from a weekend vacation where you’ve told your contractor, “I want you to get the F out of my house,” but by the time you get home on Sunday night you walk in and find out he’s re-caulking the molding on your crown molding in the living room. Not that this has ever happened to me. It has. Additionally, supplies could be late and they can disappear.

Being your own GC is tough. There’s a premium for managing a job and if you’re willing to take this on, you’ll probably save yourself a few $1,000. This is built into the cost of any bid if you go straight to one contractor. What that contractor does when you go to him is to say, “All right, here’s the electrical work that I need.” If he doesn’t have an electrician’s license, then he goes out and finds the electrician.

 Most of the bigger contractors are going to have their own electrician and their own electrical licenses. It’s the same thing with plumbing and structural. You don’t want to end up being in the position where you’ve got somebody being the middleman if you can do it, as that’s the last place that you could potentially save money.

So if you have any of these strengths—if you’ve got the money to fund it, if you can do some work yourself, if you can be the general contractor, or any combination of those three—then you are going to save some significant money.

How To Assess Your Property

The fourth thing that will help you make money flipping houses is how you assess the property. There’s something in the industry called the 70% rule, which means you don’t want to pay more than 70% for a house’s ARV, or after repair value.

For example, let’s say you minus the cost of renovations and the after repair value is going to be $300,000. You look at the house and think, “I can sell this for $300,000,” and you assess that it’s potentially going to cost about $50,000 to fix it. If you take the $300,000 after repair value minus the $50,000, that gives you $250,000. You want to take 70% of this number, which is $175,000. That is your offer price. That’s what you need to get the house for. That, of course, assumes that you’ve got all your numbers, all your I’s dotted, and all your T’s crossed. There’s not going to be a ton of overruns, and you’ve also built in for potential overruns during construction.

Making Money On Your Flip

Don’t forget that the money you make depends on the three things. One, if you’ve got the money yourself, then you don’t have to pay those exorbitant hard money lender interest rates. Two, if you can do some work yourself, you’re going to save some money there. And three, if you have the wherewithal and time to be the general contractor, then you’re going to save some money there—but you’re also going to take on headaches. Any value that you add is going to pay you back many, many times over.

This is, again, not something that should be taken lightly. I highly suggest that you figure out how to study what other people do, even if they don’t want to share their secrets—because a lot of people don’t.

Finding houses, especially off-market, is key. Finding them once they’ve been listed on market will make it impossible to cut a deal that’s going to make sense for you. That’s where you want to have your ear to the ground on off-market deals so you can get that purchase price low. This is important in case your other costs of having to borrow, contractors, and construction run high.

If you have any more questions about that, make sure to reach out to me and I’ll be happy to connect with you!

Tearing Down A House

Are you thinking of building your dream home but don’t know if you should start on a vacant lot? What do you need to know? What is involved with financing a teardown and rebuild? In this video, I’m going to explain the pros and cons of starting on vacant land versus tearing down a house to rebuild a custom home. We’ll chat with my husband and land developer Jim to understand all the details of building fresh on your own lot.

Build on Vacant Land Or Tear Down?

Looking for a piece of land where you can build your dream house can be a nightmare for some. You might think it’s a better option to buy a property with a small house, tear it down, and build your own. You’ve probably heard people talk about this process as McMansioning. This is where a small rambler house on a lot is knocked down and replaced with a giant house—usually, that almost goes to the edge of the lot line.

Others think that a piece of vacant land is better, feeling that they can start fresh and build from scratch. While this might sound like a great idea, there are many reasons why that may not be the best thing for you. Vacant land needs infrastructure, like water, sewer, and utilities. There are all kinds of things that you need to do before you can even go in and pour a foundation.

When developers buy huge parcels of land to subdivide, they can often afford to bring utilities in because they’re spreading these costs over many, many lots. However, if you’ve got one little lot and any small thing goes wrong, it may cost you a small fortune to fix it. If that sounds like a pain in the asphalt, we have another option for you.

Understanding The Process Of Tearing Down

One option is to find a house that’s in a state of disrepair and tear it down. I know that sounds crazy, but sometimes this is the better way to go. Unless you tear a Unabomber-type house where the tenant was living out in the middle of the woods with no utilities or running water, you can assume there are already utilities available. If you buy a lot with a house that’s already there, most of the hard work has been done for you.

The Feasibility Study

While it’s usually easy to reconnect to these utilities, it does depend on the property. The size of the house you’re going to build is a consideration. For example, if you have a three-inch sewer but the new house is going to have six bathrooms, you may have to upgrade to a larger sewer. You may also have to upgrade your water. In some cases, you have to move the sewer altogether. These are incidental expenses on the cost of a house, though, so it’s not a big deal.

If the house has a septic system, the septic system may no longer be approved for that area. You may have to look at your options to upgrade the septic system or connect to the public sewer if available. Again, these are things that go along with the construction of a house, and you can figure these items out pretty quick. Once you get through all of that, that’s essentially your feasibility study. When it’s an existing house, a lot of times sellers don’t care what your end goal is with it. They’re not necessarily going to give you a 90-day feasibility study.

Do The Work Ahead Of Time

If you have a short time—say, 10 days—to do a study to see if you can rebuild your dream house on a lot, the best bet is to start ahead of time. You’ll want to have a basic idea of what kind of house you want to build, what size building pad you need on your lot, and whether it will fit there.

This will avoid zoning issues and only requires a call or visit to the jurisdiction (town, county) office in charge. If your house is going to be much larger than what’s on the lot or you’re going to have a variance issue, you’ll need to make sure your plan will work. Overall, you can save a lot of time tearing down a house instead of building on vacant land.

Demo Permits & Impact Fees

Once you’ve got all that done and it’s satisfactory to your plans, you will close on the property. Then it’s time to get the demo permit. Once you do, you can start to build. Permits are required both to tear down and to build. This is because they want to make sure you’re disconnected from all utilities and that you have a way of getting the trucks in and out of the property without disturbing your neighbors. It’s not a difficult process. The cost to demo a house is approximately $20,000.

Additionally, most jurisdictions have an impact fee for adding another household. When you’re building a new house,  this fee is because you’re going to be adding more kids to the schools and more cars to the roads. The impact fee is to offset the extra services that are going to have to go to that piece of land. Teardowns, though, typically do not include impact fees.

However, counties are changing their legislation so that they can start getting impact fees when there is a teardown. This is because they’ve determined that all the new housing isn’t necessarily what brings new traffic and new kids to the schools. Rather, it’s all the resales with bigger families that are bringing traffic and kids to the schools. They now want to go back and charge impact fees on these houses that were built and never had to pay it to begin with. These fees can be significant depending on the age of the house, even up to $30,000 – $40,000.

The Pros And Cons Of Tearing Down

Overall, tearing down is easier than developing a raw piece of land, mainly because you’ve got a lot of the infrastructure there already. The pros include utilities already on-site and saving an unbelievable amount of time not having to jump through county, city, and jurisdiction hurdles.

There are some cons to the process as well. Some sellers try to make a couple of quick repairs just to get more money or to have it sell quicker, not realizing the person buying is going to tear it down anyway. The buyer does not really care that a seller upgraded the countertops or put in new windows because it’s all coming down.  Another con is the market, as more and more people want to do these tear-downs. If you go to a desirable place like McLean or Bethesda, you have builders who don’t want to go through the whole land development process because it’s not their forte. They’ve been buying these tear-downs, and the pricing has gotten quite high on them. There’s currently a lot of competition.

Another con is that the average person that’s not well versed in the process—who are simply trying to buy a house to tear down—may not have the financing, education and the knowledge to be able to quickly strike on something where a builder might.

Should You Tear Down Or Build?

As a buyer, doing a tear-down and building the house doesn’t have much to do with profit. Rather, they simply want to build their dream home and live in it. They’re not building their house to have equity from the first day. Builders typically offer less on these homes because they are trying to get between 14% and 20% profit.

I hope this helped you decide between building on vacant land and buying a teardown. These pros and cons can help you choose whether or not developing a vacant piece of land makes sense for you or if you’d rather buy a house to tear down and build your dream home. If you have any questions about the process, please feel free to reach out to me. I would be happy to guide you along the way.

Land Development Process

Are you thinking about buying land to custom build your dream home? In this video, we’re going to examine the pros and cons of building your dream house on your own piece of land. This isn’t for the faint of heart, so we’ll talk to a Maryland land developer—who also happens to be my amazing husband—to learn more about the process.

***I highly recommend that anyone attempting to purchase (or sell) land with a real estate agent, ensure that the agent is well-versed in land and understands the contract, the process and your liabilities throughout the process. ***

Contract & Feasibility

Buying land comes with its own set of hurdles before you can pour a foundation and start building. As a homeowner buying one lot, you will go through the same process that developers go through for 10, 20 or 500 lots. There’s a lot to understand about the land – even prior to structuring your offer in terms of feasibility studies and contract contingencies.

You will want to ask for 90 days to study the land, and ensure your financing is solid.

Once the contract is ratified you will need to complete the feasibility period which is when you study the aspects of the land to determine what needs to happen prior to building. The first step is to confirm the zoning and determine if it is adequate for what you want to build, and if it’s not, is it possible to get a variance that will allow you to build the home you want. Re-zoning could take years, and it could become very contentious, so it’s best to know exactly what you’re facing with the land.

Next, find out if there are there are adequate utilities. Does the lot have access to water, sewer, and electricity. Water and sewer are the most difficult. You’ll also want to consider whether the capacities are there to develop the property.

Other things to know are if there are any easements on the property, whether there’s a homeowner’s association that has rules and regulations you have to abide by, whether the property has access to a road, as many properties may not, which is why the land was available to purchase..

It takes quite a bit of money during your feasibility study to see if you can even get to the point of putting a house on the lot that you want. It’s helpful to take a trip down to the county or the municipality you’re building in to discuss your plans with them. This might sometimes be a one-stop-shop—but not always.

Approval From the County And Rezoning

Sometimes you simply need to go to the county to submit plans, and then they tell you everything you need to do. Sometimes, you have multiple places that you may have to get approvals for. It really depends on the county.

Montgomery County and Prince George’s County require you to go to them for zoning issues. For planning issues, you have to go to park and planning. In the Northern Virginia counties, it’s usually a one-stop-shop.

If the property is zoned but it’s slightly under the square footage that is required to build a house, there is a process called a variance. A variance is a zoning tool that you use if your house is big and your setback or side yard requires extra footage. Say you need 10 feet on each side of the plotted lot for your house, with a deck that goes out 8 feet. You can go and apply for a variance to get the 2-foot difference done.

The Home Building Timeline And Costs

Something to consider is a time frame to write into your contract for a feasibility study. When developing one lot to build a house, Jim suggests the longer the better—though 90 days is a good standard to fall back on.  In 90 days—if you have your zoning—you can figure out what constraints you have on the property. You can also determine if there’s a clear title on the property, what kind of house you want to build, and what your site costs are going to be.

Of course, it’s important to know your costs as well as how much somebody is going to invest before they get to the point where they may even have to walk away. For example, you could likely hire an engineer to give you the parameters on what you have, which will cost you $10,000 to $15,000. This is completely different than a homebuyer that’s just buying a house and does a home inspection for $500-$1,000. You’d basically be spending $15,000 before you even know if you can do anything with the lot you choose. That money is going to a raw piece of ground that has no existing house on it that you don’t know whether you can build on or not.

Pros And Cons Of Building A Custom House

One of the obvious pros of building a custom house is getting your dream home—if everything works out. If you have a spot that you need your house built on and it has to be on that parcel of land, then maybe it’s worth doing. Additionally, the price of a parcel of ground is often far less than an approved lot.

The cons are mainly going to be the time and cost spent on build a new house. You also risk the money you’re putting into it. You need to be ready to spend $10,000 or $15,000 and also lose $10,000 or $15,000 if you have to move on to the next parcel.  Another con is equity. We often tell people when they build a house that they’re not going to walk away with instant equity. You may be into it for more than you could turn around and sell it the day you close. You also may have to wait a while to build up that equity, especially if you bought land in an area that’s not developed yet and you’re the pioneer—though this is how people make good money.

There’s another way to do this if you don’t want to build a house on a raw piece of land and go through this whole process. It’s called tearing down, where you see people building McMansions and tearing houses down. We’re going to cover that in another video, so be sure to check that out!