Where to find houses to flip

Key takeaways

Finding the right property is the most important step in flipping, and many profitable deals are found through distressed owners, wholesalers, court records and foreclosure databases rather than traditional listings.
The 70% rule helps investors avoid overpaying by capping the purchase price at 70% of a home’s after-repair value minus renovation costs, building in a margin for profit and risk.
Direct sourcing strategies — such as contacting failed sellers, out-of-state owners, heirs, landlords and banks — can uncover discounted deals, but investors must understand state laws around marketing, foreclosure and owner contact to avoid legal trouble.

Flipping a property is a risky business that takes a lot of research and vetting at each step. The first — finding a property to flip — can make or break your investment.

To make money, an investor must choose a project with a sales price low enough to make a profit after completing renovations. Picking the wrong property could mean losing money.

Many flippers use a formula known as the 70% rule to evaluate how much money they could make from flipping a property. The rule is to multiply the after-rehab value of the property by 70%. Then subtract the cost of renovating the property. The result is the maximum amount you should offer. The formula isn’t perfect, but builds enough profit margin into a deal to make it worthwhile.

Fortunately, there are places to look — besides the multiple listing service, which lists for-sale homes in a given market — where properties are easier to find.

"The most intelligent investors are building relationships with agents, attorneys, title companies and wholesalers to maintain consistent inventory," said James Hawk, the founder and CEO of SellHouseCash.com. "If you’re solely reliant on the [multiple listing service], it will be difficult to build momentum in a flipping business."

Approach owners who were unsuccessful in selling their homes

Many homes were once listed but taken down by their owners because they didn't sell. You can find out who owns the property using a state property tax database, such as the State Department of Assessments and Taxation in Maryland.

Such sites list the owner’s name and address as a matter of public record. Send the owner a letter introducing yourself and ask them if they are interested in selling. You can personalize a letter with your own handwriting or even photos of yourself.

Pro tip: Look for out-of-state owners. They are more likely to have little or no personal attachment to the property. If it’s an investment that isn’t performing, they may want to get rid of it quickly to avoid property taxes and code violations.

Look for abandoned homes

You can drive around a neighborhood to find vacant properties. This is a great way to get started in flipping if you don’t have much money to spend on a search. There are signs of abandonment:

Notices taped to doors — these are often property violations or tax notices from the local government
Overgrown shrubs, yard and trees — if no one’s living there, no one’s keeping the property maintained
Newspapers left on a driveway — no one’s home to pick them up
Mail spilling out of a mailbox
Anything boarded up
Homes that look dilapidated or in need of repairs

Write down addresses. Then go to a state property tax database, look up the owners and contact them.

Using a birddog or wholesaler

Don’t have time to drive around? There are individuals whom you can hire to do this for you. They’re called birddogs because they hunt down properties and for a fee will notify investors.

Investors only pay birddogs if they buy the property, said Rich Kaul, the owner of 702 Cash Buyers in Las Vegas, Nevada. The payment typically is a flat fee from $500 to $2,000, he said.

You also can contact a wholesaler — an investor who has put a property under contract and will sell it to another investor for an upcharge. The fees they charge can range from $5,000 to $15,000, said Kaul. For larger properties, the fee can be more than $20,000.

They contract a property at one price and then assign that contract to an investor at a higher price, with the difference being their profit.

"Ultimately, the end investor has to evaluate whether the deal still makes financial sense after the wholesale fee is accounted for," said Kaul. "A well-structured wholesale deal should leave enough margin for the investor to cover renovation costs, holding expenses [mortgage, utilities, maintenance, taxes and insurance], and market risk while still achieving a reasonable return."

You can find wholesalers and birddogs by joining and networking at a local real estate investment club.

Most "We Buy Houses" companies are actually wholesalers, said Hawk. They negotiate directly with homeowners, get a contract and market it for a fee, he said. A quick Google search will find them. There are also pay per lead companies that operate “We Buy Houses” sites nationwide, he said.

Search court records for recent filings that may involve real estate

Divorce is a bad outcome. The parties may need to sell their property quickly. Contacting the attorneys who represent them could provide opportunities to buy homes.

Landlords who take their tenants to court are another source you can find at a courthouse. They might be tired of putting up with problem tenants and may be willing to part with a property at a discount.

Courts sometimes preside over estates and distribute property according to wills. The heirs of property owners may live across the country or do not want a property that is left to them. Contacting the attorney handling the case could be a win-win situation.

Search foreclosure databases for possible properties

Mortgage lenders take properties when homeowners default on a loan. These properties are often referred to as real-estate owned, or REO. They usually want to sell, at a discount if necessary.

The U.S. Department of Housing and Urban Development maintains a database of REO properties that it and other federal agencies sell to investors. Type in your state or city on the site to find listings in your area.

Investors can find properties in pre-foreclosure through public records and professional relationships, said Kaul. When a homeowner falls behind, lenders will file a formal notice called a Notice of Default or lis pendens at the county level. It announces that there is a pending lawsuit filed on the property which affects its ownership. This serves as a warning to potential homebuyers that there is a pending legal issue with the home.

If a home is heading to foreclosure but hasn't yet been repossessed by a lender, you may be tempted to contact the homeowner directly and try to negotiate a sale. But state laws vary on how you can contact a homeowner who faces foreclosure, Hawk said. Legislation came to be after the 2008 financial crash, when local and state governments began cracking down on flippers who took advantage of people who needed to sell.

Investors must verify the laws in their market before using this strategy, he said. It's best to wait until the bank has repossessed the home and lists it for sale or auctions it off.

More on this topic: