Fix and Flip Strategies Every Broker Should Know

Fix and flip investing has proven to be a viable real estate strategy, especially in today’s high-interest, low-inventory market environment. Even with interest rates starting to fall, market conditions have made rental properties much more difficult to turn profitable, leading more and more investors to switch to home flipping. As a broker or lending partner, understanding the fix and flip strategy, and the techniques to utilize to maximize ROI are key to your success with current market conditions. Knowing the home flipping game inside and out helps you attract more customers, and build lasting relationships that maintain your deal pipeline.

In this piece, we’ll break down the key techniques you should know to maximize returns with home flipping, along with the biggest mistakes to avoid that kill profitable flips.

Key Takeaways:

• Fix-and-flip investing is thriving in today’s high-interest, low-inventory market, offering better ROI than rentals.
• Success depends on five key strategies: choosing the right property, securing flexible financing, building a reliable team, managing timelines/budgets, and planning an effective exit.
• Financing tip: Short-term options like hard money or bridge loans are better suited than traditional mortgages for flips.
• Common pitfalls to avoid: Overestimating ARV, ignoring market trends, underestimating repair costs, and lack of project involvement.
• Brokers play a critical role in guiding investors and offering tailored loan programs to stay competitive.

Understanding the Fix and Flip Market

The fix and flip market has undergone some fluctuations, but it still remains very profitable for many investors. Overall, the real estate market remains undersupplied, and home flipping allows investors to take older or neglected properties in high-demand areas and turn them into desirable homes. While lower interest rates have had a bigger effect on rental investment returns, they still help reduce holding costs for home flips, making them even more viable.

Brokers should take the time to understand the areas they lend in, and the key factors that can influence the profitability of home flips. Of course, location and property condition will play a major role, but you should also have a good grasp of market trends including population growth, property values, and the health of the job market.

Strategy #1: Identify the Right Property

The key to a great flip is finding the right property in the right area. You need the surrounding area to be desirable so that people will want to live there, but you also don’t want the property to be beyond reasonable repair and take too much of an investment to bring to market. Some red flags to avoid here are major structural issues (like cracks in the foundation), flood damage, and zoning restrictions that prevent renovations. Brokers can help investors analyze potential deals by finding comparable properties in the same area as the home in question. You can also utilize tools from data aggregators like ATTOM Data to help you gather up-to-date information about areas, neighborhoods, or specific properties.

Strategy #2: Secure the Right Financing

The next step will be finding the right financing program for the investment. A traditional mortgage loan might offer an appealing interest rate, but it won’t provide additional funding for renovations, and the 15 or 30-year term doesn’t make much sense for a 3-6 month project. Instead, look into short-term options like hard money or bridge loans from private lenders that operate in the real estate space. They offer more customizable loan terms, and are more willing to fund major renovation projects so long as they make good financial sense. They can also approve loans much faster than conventional lenders, which means investors can get to work faster, and this offers them an edge in competitive markets. Additionally, offering these loan programs helps position you as a flexible financing partner that’s able to fund a wide range of investment projects.

Strategy #3: Build a Reliable Team

By teaming up with the right professionals, your client will be sure to have a smoother and more profitable transaction. Encourage them to hire only trusted contractors, which means looking into their track record and asking them to see examples of past work. You should also get them in touch with a good tax professional, such as an accountant that specializes in real estate transactions. They will be able to maximize the tax savings on your client’s investment, and help them keep the most of their hard-earned returns.

Strategy #4: Managing Timelines and Budgets

First time home flippers tend to run into trouble managing their timelines and keeping their project under budget. Delays in home flips, which already have tight timelines, tend to lead to higher holding costs which can ruin potential returns. That’s why it’s crucial you stress the importance of creating a realistic timeline, and encourage clients to stay involved to keep things running smoothly. Cost overruns are also common, so it can be good to keep a buffer of ~10% in budget estimates to ensure a project will still be profitable, should they occur. You can also recommend project management software, which often includes budgeting tools, to help your clients stay on top of all the different aspects of the deal.

Strategy #5: Planning the Exit

Your clients won’t see their hard-earned returns until they’ve successfully executed on their exit strategy. In order to maximize ROI, it requires careful planning and adjusting the strategy to market conditions if necessary. Due diligence is key when it comes to pricing a property to sell quickly; take a close look at comparable properties and price the property competitively. A good listing will also be key here, one that highlights the property’s best features, and presents the home in a good light to attract more potential buyers.

If the property does not sell, and stays on the market for longer than is comfortable, it may be necessary to pivot to a rental strategy. This allows an investor to recoup some of their initial expenses, eliminate holding costs, and still gives them the option to sell the home once market conditions are more favorable.

Common Mistakes to Avoid

As a broker, you play an important role not only as a financing provider, but also in gently guiding your client’s strategy to ensure success. Here are some of the most common mistakes fix and flip investors tend to make, especially if they are new to the strategy:

• Overestimating after-repair value (ARV): It’s important to conduct due diligence before getting into any real estate project. With a home flip, that means taking a look at comparable properties in the same area as the project and getting an accurate estimate of what the ARV. That way, you can be more confident that the investment will be profitable and worth taking on.
• Ignoring market trends: Similarly, market trends can affect the sale price of a home in the few months it takes to renovate it and bring it to market. Consider: are more people moving in or out of the area? Will the job market remain strong? Are there any infrastructure developments that might change market dynamics?
• Underestimating repair costs: One of the biggest mistakes home flippers make is being overly optimistic with repair budgets. There is almost always an unexpected cost that tends to crop up, and for this reason, investors should keep a contingency fund of ~10% of the initial repair estimate.
• Not staying involved in the project: Delays can easily kill what should be a profitable fix and flip project. Keeping in contact with the general contractor is the best way to navigate around these delays, and it also allows the investor to catch any shoddy work that might otherwise go unnoticed.

RCN Capital

In order to maximize the returns on your clients’ investments, partner with a lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer fix and flip financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.