The Business of House Flipping

The Business of House Flipping

Remember the time A Beautiful Mess hired this girl named Sarah to do the photos for the blog, and then she went rogue, moved to Phoenix, and started flipping houses? Well friends, I’m back—at least just for a few minutes here. I’m so excited to share some things I’ve learned from the flipping/home design world over the past few years, and to hopefully offer some practical advice for anyone who’s curious about how to get started!

I thought for so long that flipping a house was an unattainable dream that would never work out until I could save up all cash, but I’m here to dispel some of the myths that I myself believed. I do caution you: If you are serious about getting started flipping, please don’t consider my advice to be the only route. Spend time asking other real estate investors about their thoughts, and please do your due diligence! There are so many ways to finance these things, and I’m not a financial planning expert. So like, try this at home but also don’t try this at home? Try to do your own thing at your own home? Let’s stick with that and move on!

Live by the Golden Rule

When I first started flipping, my fellow designer and friend Grace Carpenter let me in on the best piece of advice (if flipping has a “golden rule,” this is it!!): You make your money when you BUY your house. In other words, the house needs to be a good investment from the start in order for it to be a good flip. I know the current climate seems uncertain, but for the savvy buyer, this might be the BEST time to keep your eyes peeled for good deals!

How do you know it’s a good investment? Research, my friend! You need to know your neighborhoods, what fully renovated houses are selling for (not just by square footage, but all factors—beds, baths, lot size, curb appeal, finishes, etc.), what homes sell the fastest, what’s highest in demand, and what style people in the neighborhood generally like. So keeping all of this in mind, once you know these things like the back of your hand, you will know if a home is a good deal or not. If it’s not a good deal, you won’t make money. You can’t allow yourself to buy a home, even if it’s the cutest home EVER (and yes, I have had to walk away from adorable homes because the seller’s pricing didn’t offer me any profit margin after renovations), if there isn’t room in the budget for renovations, finishes, landscaping, staging, realtor commission, and factoring in hard money payments if that’s the route you choose (more on that later).

You need to plan ahead and work backwards in your numbers to ensure that you’ll have something leftover to make it worth your time and effort! For example, I had done a lot of research into the historic Garfield neighborhood in Phoenix, and when I saw a homemade “for sale” sign out in front of a dilapidated, old brick house, I immediately knew A) how much it would be worth after renovations, B) how much renovations would probably cost, and therefore I knew C) how much I wanted to pay for it at the most, in order to make a profit. I was able to make an informed offer so that I knew how much I would hopefully make at the end of the deal! 

Think Outside the Zillow

Before I got into the world of flipping, here are a few terms I had never heard before: wholesale houses. Off-market pocket listings. Hard money loans. But let me tell you, these three things will change your world and you’ll never look at Zillow for homes to flip again. 

First, let’s talk wholesale houses. I like to call this the underbelly of the real estate world, because it sounds so much more interesting, and the word underbelly makes me laugh. Wholesale listings are houses that need to be sold FAST, so they usually only accept cash or hard money loans, they have a quick close, their conditions are as-is, there’s no inspection period, BUT they’re also priced well below market value. Usually these homes would not be approved for any kind of traditional financing, which is why they are cash or hard money only. These houses will never have signs in front of them, they usually won’t be on MLS—in other words, the typical homebuyer would have absolutely no idea that they’re even for sale. The best way to find these homes is to do a search for wholesalers in your area (specifically wholesale home listings), contact whoever is the contact person for that company, and then ask to be put on their list. It’s also helpful to make a personal connection, so ask to take them to coffee or lunch or something to pick their brain on getting started! In a hot market, when the wholesale homes go quickly, a personal connection with someone will benefit you as they are blasting out the house to their mailing list—they might send it to you first if you’re fresh on their minds. 

Next up, pocket listings! What are pocket listings, you ask? It’s a fancy term (impress your friends at the next cocktail party!) for listings that real estate agents might know about that might not show up on your typical Zillow or MLS searches. Like wholesale listings, they might not be eligible for traditional financing, or maybe the seller doesn’t want to improve the home but wants it to sell quickly. If you have any agent friends, it’s worth a shot asking if they have any pocket listings in the area you are looking to invest in.

Now let’s talk money! Obviously, as my fellow Ramsey fans know, cash is king. Do you have all cash to finance a renovation and a flip? AWESOME. Why are you even doing this!? Just kidding. If you’re not sitting on mountains of cash, your options are to either find a financial investor or to seek out a hard money loan. (Disclaimer: Hard money loans are a love/hate thing, but sometimes they are the only means to the end and they’ve ended up working out to my benefit, so I’d like to share a little bit about them!) So what exactly is a hard money loan, and why would you want one?

Hard money loans are short-term, high-interest loans with a quick application and approval process. Since you need to act fast in real estate, flippers often use this type of loan as a way to get financing quickly. With a hard money loan, you’ll make a high, interest-only payment on each month that you own the house. You still will likely have to have 10-20% of the loan as a down payment, but it is much easier to get a hard money loan for a home than a traditional lender loan since you’ll be working with a private lender instead of a bank. 

When looking into hard money loans, it’s important to do your research and understand the risks. Since you’ll be making high interest payments each month, you need to be able to renovate and sell as quickly as possible to maximize your profit and minimize the number of those payments.

My FIRST STEP as a new flipper would be to do a little area research—look up hard money lenders in your area, contact them and ask what their interest rates are, how much down is required, do they ask for any points, and anything else that affects how much money your loan will end up costing you. You might also need to form an LLC prior to securing a loan. (If you are local to Phoenix, I highly recommend Karen at B.E. Lending. I believe they also finance to Tennessee and North Carolina.) Finding a good, honest, and smart hard money lender is vital to your process!

Set the Stage

Perhaps my biggest piece of advice is to package the home well. Packaging sells! According to this article from Forbes.com, a staged home on average will sell for 17% higher than a home that hasn’t been staged, and will sell 95% faster as well.

The old-timer mindset was that an empty home seems bigger. But these days, buyers want to imagine themselves living in the home. They want to know if the room is big enough for a king-sized bed. They want to know where they would put their TV in the living room and if a sectional would work or not. They want to know what size rug they should start shopping for if they make an offer. You know? We are a very visual culture and we need to see it to believe it. Staging achieves exactly that. It provides this extra level of assurance that this feels like the buyer could make this their home because they see themselves living in it.

(I would add to this—don’t neglect good photography as well! Stage the home, and make sure the photographs show it off!)

When it came time to put the Root Beer House on the market, I partnered with Article on the staging to show you all what a huge difference it makes! And I don’t mind telling you this because we’re friends, but once it was staged, I realized it looked WAY too cute, and decided the day before the listing went live to raise the price by $20,000. I’m pretty sure my agent thought I had lost it. But ya’ll, I sold this house in a week for just under asking price ($5,000 under asking, so $15,000 higher than I had planned to sell it!). It ended up setting the new price per square foot record in the neighborhood. It is always worth the investment to stage a home! Let’s say I had decided to spend about $5,000 on furniture for staging—I would have DOUBLED my investment. I could not have sold this home unstaged for as much as I did. Here’s a little bit about why I chose the furniture pieces I did!

The layout of this home was just a little awkward as you just immediately walk into the living room, so I wanted to show that the space could have a versatile use, and things could move around depending on if you’re hosting a party, etc. I chose a neutral gray sofa (the Anton Sofa in Winter Gray) because this one is a real crowd-pleaser. It’s comfy and inviting! I also brought this ottoman to bring in some warm tones, and we loved it so much we kept it in our own home because it’s so multi-functional. 

For the bedroom, I chose the Culla Spindle bed in walnut with the matching Culla side table to show how much space you really have in here! This is where Article saved me a lot of time. Everything was delivered and assembled right in place by their delivery teams. I can’t tell you how much of a lifesaver that was, as we were frantically trying to do the finishing touches on the home to get it on the market! Our buyer ended up loving the bed so much she kept it for herself and I can’t blame her. It’s perfect and such high quality—it’s solid wood and it was so heavy I was very glad I didn’t have to move it, to be honest! I chose this fiery punch of a chair (the Spin Chair in Sunset Orange) for the corner to bring some life and color into the room, because I am a lost soul without something orange in my dang houses. It’s important to show what the extra corners can be used for, and setting up little vignettes here and there is always kinda fun.

As I sat down trying to decide on what to even share in this post, there is so much, I could surely write a couple of volumes on flipping houses. There is so much info about flipping within the Internet world and there’s already plenty of good advice about important topics I didn’t cover like budgeting, finding contractors for work you won’t do yourself, and building a team of people you trust to work together with. There really is so much info out there, so take advantage of all those free resources and learn as much as you can! 

I hope this was helpful to anyone wishing to set out on their own in the world of flips. Good luck to you all!! Feel free to ask questions in the comments and I’ll try to answer as many as I can, and don’t be a stranger on Instagram (@parohome). Thank you Emma, Elsie, and the gang for having me back even though I abandoned you for sunshine and tacos. No hard feelings, yeah?! 😉 -Sarah Rhodes

Room Details // Master chandelier and fireplace sconces from Sazerac Stitches, Kitchen cabinetry by Lignum Cabinets and Woodworking, Wall art from Juniper Print Shop, Living room rug from Allmodern, Exterior house numbers by Dropcap Studio.

Credits // Author, Photography and Design by Paro Home.

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