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This example is fictional, but serves the purpose of describing the process of flipping a piece of real estate.
John Investor has about $50,000 that he would like to invest in flipping real estate. He also has about $50,000 in an equity line of credit on his primary residence that he can write checks from to pay contractors for the flip property.
He contacts a local real estate agent and tells him that he is looking for a property right around $100,000-$120,000 that may need $30,000 worth of upgrades, renovations, and repairs. He negotiates with the realtor to be his buyers agent for the flipping property purchase for free (the seller will pay the agents commission on this part of the transaction). But when John goes to sell his flipped property after the renovations are complete, he agrees to pay the agent a 6% commission on the total sale price. (where about half of that will go to the buyer’s agent that brings the new buyer).
With all of that in place, John Investor is ready to start real estate flipping in NC! The agent searches and finds 3 suitable properties.
Property one:
Built in 1954 in a neighborhood with similar houses on the edge of town with little or no improvements to the neighborhood yet. Asking price: $115,000
Property Two:
Built in 1975 in a neighborhood with similar homes, closer in to town, near a revitalized area of downtown that now has many bars and restaurants. Some improvements already made to many of the houses here. Asking Price: $122,000
Property Three:
Built in 1999 in a newer neighborhood with very similar homes. Close to many hotspots in the city. Asking price: $127,900
John ultimately decides on property two to begin his real estate flipping career, as the first property was a little far out, and no one else had made any improvements in that neighborhood. John did not want to be the first person flipping real estate there. He wants a neighborhood with quick demand so that he can flip the property and get out quick. He did not choose the third property because the real estate was relatively new and it would be tough to buy a newer home, flip that property and realize any noticeable profit with other newer homes in the same neighborhood. However, property two was perfect for John, it is an older home in a neighborhood that has many other h real estate flipping investors there. He would be able to unload the property quickly after the flip is complete.
After purchase, John compiles his list of repairs to properly flip this piece of real estate. He determines he will need to add new appliances in the kitchen, new toilets, new carpet, fresh paint, new cabinet hardware, and will combine two bedrooms to make one large master bedroom, which will require a new bathroom for the new master as well. All of his total projects adds up to $48,000.
John hires a trusted contractor to begin the work and less than 2 weeks later they are complete. There were some kinks in his first foray into real estate flipping. John completely forgot about new kitchen countertops which added $2,000. He also did not plan for extensive electrical issues which were discovered when trying to build the new master bedroom. This added another $1,500. The biggest expense, however, that John left off from his initial concept was the landscaping. This added another $4,500 to the project as he had to lay sod and build a small retaining wall in the backyard.
All in all, John’s first attempt at real estate flipping has put him out $56,000 worth of repairs. The price of the home they settled on was $118,000, so he has invested a total of $174,000. This is alot, but other people who have been flipping real estate in this neighborhood have sold similar homes for well over $220,000.
John decides he is complete, and that no more money needs to be put into this project to profitably sell it. He gets his real estate agent to list the property for sale in the MLS and to schedule an open house on Saturday.
Within a week, several offers have been made and John decides to accept an offer of $218,500. He pays his real estate agent $13,110 in commission (which is likely split with the buyers agent for bringing the buyer to the home) and is left with $31,390 in profit. He has to pay one month of interest on the money he borrowed to finance the project plus loan closing costs, and attorney fees, but he is roughly left with $30,000 profit.
When real estate flipping in NC, this will not always work out so nicely. The key to real estate flipping is research. Know exactly what you are getting into before you invest a dime.
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