In years past, “Flipping” was a negative term used by government agencies to designate a mortgage fraud situation in which there was massive collusion between front men, appraisers on the take, title companies, and other players, all committed to defrauding a lender and impair profits made. Over time, these little players went to jail. Over the years, this term is still used in some legal circles to denote a fraudulent practice. Now, like many words in American culture, the word has now morphed and is used in the vernacular to denote a legitimate effort to buy cheap, fix and remodel, and sell for a profit without any of the negative aspects of previous usage. Many who carry out the legitimate practices of the term acquire some sensitivity when dealing with lenders and call the process Buy-Fix-Sell to get away from the formal negative connotations of the term and in some way harm their loan process. In any case, good or bad, it is now known in the trade as “Flipping”.
With major cable systems now featuring shows showcasing changes in the house, it all seems so glamorous and easy. In a bull market, some of the key elements were put into play to protect investors’ downside risk. In the most recent bull market with multiple listings, the feeding frenzy was blinding. In that kind of red-hot buying and selling climate, many savvy investors headed to the sideline to wait for the inevitable swing of the pendulum in the other direction. Lenders who looked at foreclosure inventories didn’t care much about moving REO properties, since the market would make them disappear. Like the dot.com stocks of the 90s, the last man who owns loses. The last person to participate in a bull market witnesses any perceived gains vaporize and perhaps turn property upside down.
There are rules to successfully “flip” properties. If the rules are violated, the investor loses. Real estate is such a forgiving medium; however, it can take years to come back, even if you can afford to wait to make a serious mistake. If an investor will adhere to a set of principles in good times or bad, he will establish a foundation of principles to avoid major mishaps. Are you problem free? No, it is not and never will be. It simply minimizes downside risk. As with any investment, there must be a balance in a real estate portfolio with buy-fix and hold and rent as a strategy. Another portfolio management strategy is to buy on a deed contract and resell in a wrap around while raising the price $10,000 to $15,000 above the purchase price plus repair and maintenance costs. If an investor can negotiate, for example, an interest rate of 7.5% and resell at a rate of 9.5% or higher, the above principal of getting 2% on debt and 9.5% on debt applies. about the new money. These work great for long-term returns, however, people move all the time and cash out may be imminent. In wraparound situations, fixed costs tend to be limited and more restricted. Structured terms properties tend to be very attractive to buyers with credit difficulties. Buyers will need good sources of income but, for some reason, have had a bad credit run. It may not be bad enough to lose the patient on the operating table, but good enough to survive and make another payment.
The above is just to warn you not to focus on “changes” alone. If an investment situation is excellent. Just don’t overlook a bunch of potential profit opportunities with the idea that I’m “just flipping” while the next property makes a huge wound in an investor’s cash position. These things happen. Being positioned with monthly cash flow properties with equity provides good flexibility when something goes wrong.
In a weak market, when the market has changed and the cheese has moved, “changes” may be more feasible. It is much more difficult in a euphoric and rising market. When this weaker market happens, foreclosures increase and banks are now wringing their hands trying to move their REO
Portfolio as directed by banking regulations so that an investor can have a listener ready for offers. When the market’s average selling time has gone from less than 30 days to 120 days or more, change is underway. To successfully “trade” a property, an investor starts with a probable fixed value and then works backwards to arrive at an offer price. In fact, many investors take the probable fixed sales price and reduce it by 5% to 10% to ensure a quick sale when the house is rolled out and put on the market. It is here that an investor should focus on a standard house without radical architecture and uniqueness. No log homes, domes, or small square foot homes will work in this endeavor for maximum returns. Rather, a subdivision with three bedrooms, two bathrooms and a two-car garage will cover the bet.
A thorough home inspection will pinpoint the needs of the property. Initially, this must be done by the investor for cost purposes. A total operating cost is tabulated to determine the repair cost amount. Then, with a little arithmetic, the final sale price minus repair costs, maintenance costs, selling costs minus the desired profit of $20,000 or more, will leave a resulting number that will indicate the maximum acquisition price. Any trader would not go in at this price, but instead offer perhaps $10,000 below “THAT” number, leaving some room for trading. The investor is looking for structurally sound properties with good roof life, no foundation settlements or cracks, with good stable ground conditions. Anything less than that requires a high level of experience and even then it is risky business.
The key to all of this effort is working with a real estate agent who is looking for potential properties and is willing to initiate lots of low offers and isn’t afraid to tarnish their reputation. Bottom feeder deals are soon recognized, however for a good volume of deals there will be some interested sellers who need to move house. Ideally, the property should be unoccupied, in a safe deposit box so you can see it and have some sort of pressure on it. Repossession, property with an out-of-town heir, divorce, bankruptcy, illness, or some other type of motivation is necessary. Typically the property will have a very worn look in need of painting, landscaping with bathroom and kitchen upgrades required and a new floor covering. Tall growing weeds or bad odor and/or discarded property are positive buying signs that warrant further investigation.
In practice, many offers are needed to buy a property. All the more reason for an investor to diversify and take a shot when it makes sense and not until it makes sense. Purchase prices can be further tempered by the notion of paying up to 6% of the sale price in the form of closing costs and prepayments to further separate the property’s appeal from surrounding competitive homes. For all this to happen, the seller has to take a hit in the pocket for it to happen, otherwise the investor is the one who takes the hit by overpaying. The giant investors in the industry have left all this before in material graves. It is nothing new or a radical advance. It’s just that now the market has brought this “change” back to the fore.
Just to review, when the deal makes sense, for a quick sale, stay below the market for a target selling price, reduce that price per acquisition, repair costs, hold costs, cost of sale, buyer help , the profit ($10,000-$20,000 plus) for a maximum bid price. Deal only with motivated sellers. Listing agents can be interviewed to see if there is an atmosphere for a lower offer without violating the listing agent’s fiduciary responsibilities simply by canvassing the seller and without wasting too much time. If the seller insists on a written offer, give them an offer. The key is to make lots of offers to motivated sellers. Six months ago a buyer couldn’t get an ear. Now sellers listen carefully to ANY offer. Again, “flip” is a simple tool, a real estate investor should not be just a means to acquire wealth, just one of the ways. In all cases, after offer acceptance, a thorough top-to-bottom home inspection must be performed with a termite inspection, all within the inspection period allowed to accept the offer OR renegotiate the price based on what was found. This is one of the methods to hedge an investor’s bet. Some areas of the county are more conducive to this practice than other areas. If the deal doesn’t hit the numbers, move on.
“Flip” someone?
come on rogers
http://www.sellerhelpbuyer.com
http://www.brokencredit.com
