Flipping Houses For Canadians For Dummies Cheat Sheet

"Flipping houses" sounds as easy as 1-2-3: 1) Buy a house significantly below market value, 2) fix it up, and 3) sell it. However, when you actually try to flip a house, you soon realize that it's tougher than it sounds. The beginner faces several hurdles, not the least of which is tracking down properties with potential and buying them for cheap.

This Cheat Sheet brings you up to speed in a hurry on house flipping basics and helps you clear the most common hurdles.

Finding houses to flip

The first step in the house-flipping process is the most crucial — finding a property with profit potential:

• Look for dontwanners in your neighbourhood — vacant, unkempt homes the owners “don’t want.”
• Search government tax sale notices and search their surplus property listings for opportunities.
• Network with bankruptcy, divorce, and estate lawyers.
• Team up with a licensed real estate agent.

Making a profit when you buy a house to flip

When you invest in real estate, you make your profit when you buy a property, and you realize that profit when you sell it. The goal is to find a property you know you can sell for significantly more than it costs you to buy it, fix it up, and sell it. Here’s how you achieve that goal:

Financing your flips

Where do you find the money to finance your flips? Here are a few sources to consider:

• Your own savings
• Home equity loan or line of credit (on your current home)
• Bank loan (you’ll need cash for a down payment)
• Personal loans (from friends or family members)
• Hard money loans (from investors)

A mortgage means you don’t have to sink all your savings into an investment property, and if it’s secured by the investment property itself then your principal residence is shielded from loss. If the property sells for below market value, then you may be able to secure extra financing for the renovation as part of the mortgage.

Start with a relatively easy project

When you’re just getting started, it’s best to pick an easy property to flip — a great house that’s cosmetically challenged. Then, make the following improvements (also referred to as whiteboxing):

• Fix or replace whatever’s broken
• Clean everything thoroughly
• Repaint the interior walls, all white
• Install new wall-to-wall carpeting where it makes sense to carpet
• Replace all light switch and outlet covers
• Replace all register covers if they look worn
• Spruce up the landscaping

The idea is to freshen up the house to give it a nice, clean, manicured appearance. You want the house to be in “move-in condition” and up to market standards.

Don’t waste money over-improving a property — a common mistake. Invest only enough money to bring the property up to market standards. Investing $100,000 in a property where homes sell for $150,000 won’t make that property worth any more than $150,000. Homebuyers who are in the market for a half-million-dollar home will shop in areas where homes are selling for a half million dollars or more.

How to read a property listing with flipping in mind

A property listing typically contains a ton of details, all of which can be very helpful in your search for a flippable house. Some of these details, however, are more useful than others. Focus your search on the following golden nuggets:

• List price: A super-low list price can signal a buying opportunity, or it can raise a red flag, making you (and others) wonder, “What’s wrong with this one?” As a house flipper, these are the properties you’re looking for.
• List date or time on the market: How long has the home been on the market? Your best opportunities are typically homes listed in the past couple of days (and no one knows about yet) or homes that have been on the market for weeks – a home that’s not selling may have an owner willing to concede on price, especially if weeks have become months. Your agent can tell you the average time a home is on the market in any given neighbourhood so you can properly gauge what’s considered “a long time.”
• Remarks: Watch for key terms in the property listing such as “sold as-is,” “motivated seller,” “in need of a little TLC,” or “needs work.” These phrases translate to “You’ll get the house for less because the current owner doesn’t want to clean, paint, or re-carpet.”  

5 common house-flipping blunders

Many eager, ill-informed investors become overenthusiastic about the big picture and lose sight of the critical details that can make or break a deal. They pay too much for a property, underestimate the cost of repairs and renovations, fail to inspect a property or research the title, or enter into contracts they don’t fully understand.

Some common house-flipping blunders to avoid include:

Speculating on the housing market  

Like the stock market, the housing market has its ups and downs. In a hot market, investors often become infected with irrational exuberance — the belief that current appreciation rates are an accurate representation of future rates. Don’t bank on double-digit increases in housing values, and be prepared with a Plan B, such as holding a property and leasing it out to tenants until the market recovers.

Failing to inspect the property

Don’t rely on the listing alone or the vendor’s claims. A professional, independent property inspection is essential so you know what you’re buying and can properly estimate the makeover costs. Complete a final walk-through the day of the closing to make sure the house is still in the same condition as when you last saw it (even, and maybe especially, if you’re buying it as-is) and that whatever you’re expecting to be included in the sale is still on the property. Sometimes the seller takes all the appliances when those items were supposed to remain in the house. Work to resolve any issues before you close — you have no recourse after that.

Underestimating the cost of repairs and renovations

Beginning investors often experience sticker shock when they hire contractors to perform repairs and renovations. Just make sure you have your sticker shock before you buy a property, not after you own it — when it’s too late to do anything about it.

For necessary repairs and renovations, you should have an accurate estimate of all costs before you buy a property. You can jot down notes while you’re inspecting it and then consult repair and renovation services to obtain estimates.

Doing shoddy work to save money

Sellers have all sorts of tactics to cover defects in a home. They may carpet over a floor that has extensive water or termite damage, pump out a septic tank that’s gone bad so that the toilets keep flushing for a couple more months, or install wood paneling in the basement to hide defects in the foundation.

As an investor who wants to remain in business, you should treat these tactics as taboo. Don’t sell your soul for a few thousand dollars.

Over-improving a property

Transforming a bungalow into the Taj Mahal may be a noble vision, but it ultimately lands you in the poorhouse. Know the housing market in your area and routinely visit open houses to remain abreast of current trends and market demands. Gauge repairs and renovations to meet or slightly exceed what’s currently selling in your area. Your renovated home should be more appealing than comparable homes in the area, but not excessively more appealing.

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