Is a Contractor’s License Required to Flip Houses?
Do you need a Real Estate or Contractors Licence to Flip Houses? No you don’t need one. Real estate investing is a complex industry with many practical and legal challenges. If you want to run a successful real estate business flipping homes then you may want to get a real estate contractor license for your own benefit but again, it is not required. If you want to get involved with investing then you will need to have a broad range of skills, including marketing, market research, financial management, knowledge of the housing industry, and more.
Today, if you want to compete in real estate you need to know the whole business, not just property. Some investors now run companies and outsource a lot of the day to day management tasks to third parties. Others have built up their own skills and run micro-businesses where they do all the work themselves.
One area where many real estate investors become confused is that of licensing. You don’t need a real estate contractor license to sell a property, but if you want to run a business on a bigger scale then you should consider obtaining the license. The question you need to answer is exactly what your long term business plans are.
Do I Need a Real Estate License to Flip Houses?
No, You don’t need one but there are reasons why you would want one. If you simply have an old house that you have done up and want to sell then you are not legally required to have a license to do so. If you are a landlord who occasionally sells off properties and refreshes their portfolio, then you can do that without a license too.
In situations such as those mentioned above, it would most likely be a waste of time and money to invest in a license when it is not obligatory to have one. However, those who want to flip properties more frequently would likely find that there are enough benefits to make it worth the investment. The buying and selling fees alone would make getting the license worth it if you are doing more than a few flips per year. Another benefit is that you can go look at any house that is on the market at your own leisure without having to set up an appt with your agent. This could allow you to get to properties quicker than other buyers and could be the difference between you getting a deal or not.
Why Get a Contractors License?
The main reason to get a license is to allow you to do certain building jobs yourself. When you are licensed, you can take on more of the tasks associated with renovating a property, instead of having to outsource that labor.
For a business owner / Flipper that is time rich but financially less well off, doing jobs on your own can be beneficial because it saves money on the renovation. Why pay the overheads associated with bringing in a professional for a job that you know how to do and that you can do quite cheaply.
For someone who is on the borderline between being an occasional flipper and running a fully-fledged business, having the license allows you to shave some dollars off the renovation of each property and makes for a good investment.
Hobbyist flippers who are interested in doing the hands-on work, and who are flipping more for fun than for cash flow may also find that getting a contractor’s license is worthwhile for the satisfaction factor, and for giving you a bigger final payout (although at the expense of the work taking longer).
Why Not Get a Contractors License?
If you are someone who wants to turn flipping property into a full-scale business, then you may find that it is not worthwhile getting a contractors license, because the time that you spend on each renovation job is time that takes away from the business. While the profit per house is greater when you do the manual jobs yourself you should note that it takes longer to get the jobs done, and that means less cash flow over time.
As an investor you may be better off spending your time on other activities such as finding new properties to invest in, finding sales leads, and researching the best areas to focus your efforts on.
Time is Money
That old saying “time is money” is repeated so much because it is true. As an investor, you are the brains of the outfit. You need to spend your time building the company. You cannot invest in the company if you are wasting time doing a tradesman’s job instead of being a leader.
Using a contractor means spending money, but if spending 1/3rd of your profit per house enables you to flip twice as many houses then you are getting a return on your investment and will make more money in the long run.
What Does it Take to Become a Licensed Contractor?
Becoming a licensed contractor takes both money and time, a lot of time. If you are starting as an entirely untrained person then it will take you about five years to get your license.
Why does it take so long to become a licensed contractor?
Getting your license takes several years because you will need to complete an apprenticeship in whatever trade it is you want to be licensed to perform. That apprenticeship can take three years to complete.
Once you have completed that apprenticeship, you will need to choose your class and specialty, and then inform the state that you would like to be licensed within that class. You can add a specialty on to your license as well, however, most real estate investors who are focused on flipping would choose to simply become licensed as a general contractor. This allows you to do most day to day jobs, but there will be a limit to the total value of the projects that you can work on.
In some states, workers can take on large jobs without a license. For example, Alabama requires that a general contractor has a license if the total cost of the job, including labor, is equal to or more than $10,000 for a residential property. In California, however, licenses are required for jobs that exceed $500, which means that there is very little that can be done without a license.
Licensed contractors need to register a company in the state that they wish to operate in. Each state has their own licensing requirements, and when you become a licensed contractor that means you can operate in the state that gave you the license.
Background Checks and Examinations
Contractors must pass a test in each state that they would like to operate in. The test will vary depending on the class of license that you apply for. You cannot operate your business as a licensed contractor until you have passed the test.
In addition to passing a practical test you will also be expected to pass a criminal background check.
Assuming you meet all of the above requirements, you can apply for a license, pay the fee, and become licensed to provide contracting services in that state. The process is expensive, and it will take time to complete.
Remember that licensed contractors are limited to being able to operate in the state that awarded the license. This may not be an issue if you do not plan to invest in properties elsewhere, however, if you are based near the border of a state or you have plans to grow your business you may find that doing all of the work on properties yourself is too restrictive.
How Much Does it Cost to Become a General Contractor?
The cost to become a general contractor varies from state to state. for example, as of 2019, in California, there is a $330 exam and application fee, an initial licensing fee of $200, several exams, and a contractor bond or cash deposit of $15,000 required, with additional bond requirements in some situations.
In Nevada, there is a $300 application fee, an exam fee of $140, a $600 licensing fee, and a $200 administrative fee for submitting your cash bond. If you plan on working on residential properties then you will be required to put a sum of money (between $200 and $1000) into a Residential Recovery Fund.
Every state has its own requirements. Some states have much greater bond requirements than others. No matter what state you are qualified in you will need to re-certify at least once every two years, and this will require additional fees. Many states use fingerprinting services, and there will be fees for that as well.
While even the most expensive licensing processes are a drop in the ocean compared to the cost of buying a property to flip, they are still substantial. They may be worth it if you want to add an extra set of skills to your portfolio or if you are just going to flip one or two properties at a time.
Making the Decision
As you can see, becoming a licensed contractor is not something that you can do on a whim. While a contractor’s license is not required to flip houses, there is some value to having one. If you have the time to do the work on the property yourself and you enjoy doing it, then the potential cost savings from renovating one property on your own could more than cover the cost of the license.
However, if you opt to pour your money into getting a license this will limit you to working on one property at a time. If you have the room in your budget to hire contractors instead then you can renovate more than one property at a time, flipping more properties each year.
Outsourcing the work frees up your time to focus on growing the business. In some industries, the people who do day to day work are called “Non-productive” employees because their work, while important, does not impact on the bottom line.
In real estate, buying and selling is what generates money. Those are the parts of the business that you should be focusing on if you want to grow. You can hire other people to do contract work.
Your First Few Properties
There are exceptions to the above advice. If you have some trade skills already and you simply want to make them official – perhaps you got into property because you worked for a contracting company but you never acquired the license yourself – then making the leap to becoming a licensed contractor could serve you well for your first property or two.
Starting a real estate business is hard work, and banks like to see a positive track record before they start loaning out bigger sums of money.
Given the right set of circumstances, doing the “hard work” yourself for the first property or two could give you some profit to reinvest, and could also build up your relationship with the bank so that in the future you can apply for more loans, a bigger loan, or even a portfolio loan.
To Summarize:
- Becoming a licensed contractor is not a legal requirement for house flipping
- It can take up to five years to become a licensed contractor, depending on your background
- The examination and license fees can vary from state to state
- Some states require a substantial bond payment on top of the licensing fees
- You need to recertify annually or bi-annually
- Even with those fees, obtaining a license can be cost-effective for people who flip houses as a hobby
- If you wish to scale your real estate business then outsourcing is likely a better long-term choice
As you can see, there is no one right or wrong answer. Be realistic about your long term goals and business plans. Don’t fall into the trap of trying to do everything yourself to “save money”, but try not to over-reach too early either.
Be realistic about your own skills and your budget, and look at each property dispassionately. Remember that flipping property is not like buying a home to live in. You should be motivated by the wants of the market and the hard facts relating to the condition of the property.
Start small and avoid taking risks with your initial investments. You can try more adventurous projects once you have a financial buffer. Flipping properties as a career is vastly different to doing it for some side money and for the fun, and the most successful flippers are the ones who understand that and choose their builds accordingly.
