Buying real estate and selling it again fast, and ideally for a profit, is called “flipping”. This type of real estate investing is completely legal and ethical. Negative press over flipping real estate probably comes from media coverage of real estate fraud situations, where people have intentionally overpriced the market value of a home, fraudulently completed documents, or worked with others to take advantage of a buyer. None of this happens in an honest flip.
Finding a property that is a good flip requires a few ambitious steps on your part. You’ll be looking, most likely, for an under priced home in need of repair. Or you will be looking for a seller that wants to sell fast, thus getting you a lower price.
One way to find property leads is to talk to friends, family, business associates, real estate agents, or bankers. Go out to the neighborhood you’re considering and look for “For Sale by Owner” signs, or ring doorbells to see if anyone in the area is considering selling.
Check the public land records and look for “fire sales”. This usually means that the owner of the property is having difficulty making mortgage payments. If you contact them and they agree to sell, you’re helping them out of their difficult financial situation. And you’re getting a property that may make a profit. If done respectfully, there’s nothing unethical about this transaction.
To be a successful real estate flipper, you will need to hone or develop many skills. You will need to have an eye for the diamond in the rough. You should be able to accurately size up buyers. It is best if you are handy and can take care of basic home repairs. It is very important that you are detail oriented and a multi-tasking project manager. Flipping involves many details, and it’s important to be on schedule with the project to avoid costly delays. Lastly, you will need to have superior interpersonal skills.
Plan to retain the services of a professional accountant, unless you are sufficient at these skills. Also find a good lawyer who can provide you with legal counsel.
Finding Financing – Creative Ideas
For many years, the way to finance real estate was to make a 20% down payment, and get a loan for the remaining 80%. Of course you could make a higher down payment, but 20% was typically the minimum. Luckily, this standard has changed.
There are now several finance options available to the real estate investor. One popular way to finance your purchase is to have a second mortgage. The buyer makes a 5% down payment, and borrows the remaining 15%, usually at a higher interest rate, on a different loan.
Even though it’s nice to invest less on a property, the higher interest rate isn’t the only drawback. Usually, if the buyer does not meet the 20% minimum, they are required to get costly private mortgage insurance (PMI).
You are able to remove PMI when the loan-to-value (LTV) ratio reaches 80%. This is achieved by paying down the second mortgage and appreciation of the property value. This does not happen often because the property is usually sold or the buyer refinances before PMI can be removed.
For creative investors, other financing sources exist. Manufacturers of homes in planned developments are often willing to provide financing to early buyers.
Another risky and rather complicated way of financing a property is called ‘sub2’ which stands for ‘subject-to’. This type of deal is when the seller gives you the deed to the property, the loan stays in place, but the buyer never legally takes over the loan, just the payments. There are many different versions of this kind of transaction. Because of the complexity and risk, this method of funding an investment is not recommended for beginners.
You can also consider forming a limited partnership to finance your real estate investment. There are many different arrangements on this method. Some types involve each person in the partnership contributing in a portion of the cost, usually 50% each. However, sometimes the profit is distributed relative to the original amount invested. Another arrangement is that one half of the partnership contributes the capital, and the other half provides the needed services, such as repairs on a home that needs to be fixed. There are many different variations of this method.
Government loans are available to low income investors, or buyers who have served in the military. These programs are usually only available for primary residences.
Did you ever think about buying a home on a credit card? This is another method of financing your real estate purchase, although it’s usually not recommended. Obviously, the interest rates on most credit cards are substantially higher than loan rates. Another drawback is that lenders determine your creditworthiness based on your outstanding debt, and if you use credit card cash advances to cover the 5-20% down payment that you need, you’ll probably get turned down for a loan. This is also true for money borrowed from friends or family, unless you can show that the money is truly a gift.
The Lender’s Perspective on Loaning Money
Lenders are in the business of lending people money because they make carefully calculated decisions based on your risk. They have two expectations;
that you will repay them and that they will make a profit. To judge if you are capable of meeting those two criteria, lenders look closely at your current financial position and your historical financial situation.
When judging your financial past, lenders will look at:
When lenders are looking at your ability to make a profit, they’ll want to know about your total expenses related to the property. How much will it cost you to take care of the property? What will your insurance rates, taxes, and cost of repairs be? The lender wants to see that you can cover your costs associated with home ownership, as well as their interest charges.
Lenders often want short repayment periods, while it usually more beneficial for the buyer to have longer periods. Longer repayment periods mean that you can avoid origination fees, additional appraisal fees, and other costs. When it comes to loans for investment property, a 20 year fixed rate loan is considered a long loan. Normally this includes a balloon payment five to ten years into the loan.
If your lender tries to push you into a shorter repayment period, you can set up an arrangement that you re-price after five years, instead of having to pay a large amount of cash in one lump sum. A common alternative is the prevailing prime interest rate plus 1%.
Keep in mind that most things in real estate investing are negotiable, and that your lender can be your partner in real estate investing. Developing a positive long-term working relationship with your lender can only help you.
Even in a strong market with the new technology available to give up-to-the- minute assessments of properties, an investor can lose large amounts of money in a short period of time. For the best chance to successful obtain your perfect investment property, consider these suggestions:
The Importance of the Home Inspection
The condition of real estate is different in every situation. To protect yourself when making such a substantial investment, it is important to have a thorough inspection by a trained professional. Make your offer to purchase property contingent on a satisfactory home inspection, and you will avoid investing in a money pit.
What exactly is considered “satisfactory”? Any home containing wood should have a pest inspection, where the inspector looks for evidence of damage caused by termites, mice, carpenter ants or other pests. This inspection is separate from that done by the home inspector.
Your home inspector should focus on every mechanical and structural aspect of the property. They will look for substantial cracks in the foundation, levelness of the structure, and moisture in the basement. Water penetration is evident when there is mold, mildew or efflorescence - a white powder that shows where water has penetrated. High tech inspectors use lasers to see if the things are level and specialized radon gas meters to determine if there is a radon gas issue.
The structure of the home is closely inspected. Homes rest on top of a foundation. Floors have been installed on top of this foundation, and it needs to be inspected to ensure that proper materials have been used. Next, the walls might have improper framing or possible damage from water. Electrical and plumbing systems lie within the walls, and where possible, these interior systems are inspected for wear, out-of-code construction, and damage. Pipes are inspected for leaks or chemical concerns such as lead or rust. Some home inspectors test the water pressure and flow rate of the house.
The home’s electrical system is completely inspected. The inspector looks for uncovered switches or outlets, incorrect wiring, insufficient grounding, faulty circuit breakers, or unsatisfactory GFCI trips.
Once in the attic, the inspector should check for water damage and air leaks. The framing is looked at to ensure that it is strong. The underside of the roof is inspected for a good seal where vent pipes go through the roof.
On the roof, the inspector examines it for holes, loose shingles or tile, poor flashing, or any other concern that might cause the roof to not hold up against the elements.
Heating and air-conditioning systems are inspected for adequate flow, duct leaks, and filter condition. Outdoor faucets are tested to be sure they work and don’t leak or have inadequate water flow.
All appliances included with the sale of the house are examined. The hot water heater, stove, wood stoves and any other built-in units are check for proper function and standards compliance.
All of this information is compiled in the comprehensive inspection report that is available to the individual or company that paid for the inspection. Inspections benefit the buyer because they can use issues with the property as bargaining chips during negotiations. The home inspection is also beneficial to the seller because they then get an honest assessment of the condition of their property and can make improvements to some items before putting their home up for sale.
The home inspection is one area where a few hundred dollars spent often saves thousands of dollars during the purchase process.
Minimize your Risk with Insurance
In 2005, the median home price rose almost 15% over the previous year, and even more in some real estate markets. The minimum required FICO (credit score) was lowered, some of the documentation requirements were reduced, and the allowance for debt was increased to 45% of income. It is estimated that 30% of all new mortgages are interest-only mortgages. Almost 35% of home loans are Adjustable Rate Mortgages (ARMs). Starting in June 2004, the Federal Reserve has raised interest rates 11 times.
These stats indicate that there has been incredible growth in the real estate market over recent years. As the home prices have risen, so has the associate risk involved with buying and selling property. Thankfully, every type of risk now has an appropriate insurance. Of them all, the two most popular are title and liability insurance.
Title insurance ensures the coverage of any potential financial loss that is a result of an error in the processing and researching of a property title. Any lapses that might happen during the title search process, prior to closing, are covered. The title company will search a public record database to make sure that the property is able to be sold, meaning it’s free of encumbrances. Public records are not always completely accurate, and errors can occur.
Liability insurance covers injuries that happen on, or because of, the property. If someone slips and falls on your property, your liability insurance would provide coverage. The more coverage you have, the more expensive it becomes.
Hazard insurance is available for less likely risks such as hurricanes, flooding, or earthquakes.
You can also get coverage for accidents created by humans. This includes chemical spills, electrical malfunctions, vandalism, theft, etc.
It’s best to shop around for favorable rates, and pay close attention to your deductible amount, and any limitations on the policy.
Fixing the Property Reaps Financial Rewards
The best way to increase the likelihood that you’d get top dollar for your property is to fix it up. You do not have to be a trainer plumber or carpenter to make your home more attractive to buyers. With just a few tools and some hard work you can give your property a well-maintained appearance.
It’s a good idea to go through the house and make minor repairs before showing it, or putting it on the market. A home inspection will likely be done before the final deal, so if you take the time up front to make the minor repairs, you’ll be able to avoid some of the potential buyer’s bargaining chips in negotiating a deal. Fix the leaky bathroom faucet and fix broken windows.
Take care of your property’s curb appeal. Maintain the landscaping by trimming the lawn and shrubs, and planting some flowers. The outside of the home is what will draw in prospective buyers, or keep them driving.
Ask your neighbors to clean up their yard; offer to take their trash and junk away for them, ask them to move kid’s toys, or offer to mow the lawns next to your property. You could even consider giving a small cash incentive after the successful sale of the home.
Your home should be super clean before you show it. It’s usually too expensive to replace all the carpeting in a home, but getting it cleaned is affordable. Place your furniture in ways that mask worn spots. Put down new welcome mats and replace worn area rugs. Wash all the windows until they sparkle. Repair worn conduit, and replace air filters on air-conditioning and heating for a fresh look. Give the walls a fresh coat of paint.
Be sure the work looks professionally done, so that people can see the quality of your property. A well-maintained home usually garners a higher sales price than a home that has been neglected.
Selling it Yourself, or Use an Agent?
Selling your home yourself, also called FSBO or For Sale by Owner, is a realistic option thanks to the internet. People sell their own property without an agent because they avoid costly real estate agent commissions. This commission is typically about 6% of the property sale price. Agents work hard for their commissions, and provide valuable insight into the market and sales process.
They usually have valuable experience selling other properties in the area. If you sell it yourself, you stand to save thousands of dollars, but you are taking on all the work that the real estate agent does. Is selling your property FSBO right for you? Think about these points when making this decision:
Making the decision to do it yourself can be rewarding and save a lot of money, but a half-hearted attempted will most likely be unsuccessful.
Marketing Plan Development and Execution
Like it or not, you usually need to spend time marketing your property in order for it to sell. What is marketing? Marketing is the creation of a strategy used to sell an item. Research, promotion, advertising and sales are all part of marketing.
Research your local market, and the prices at which comparables sell. You’ll need to have your finger on the pulse of the market during the entire sales process, which can take months. This is important because you may be in negotiations over a long period of time, and knowing the up-to-the-minute standing of your property will help you make educated negotiation decisions.
Advertising is needed to pull together a large group of interested buyers. By having many parties that want to purchase your property you may be able to create a bidding war which will drive up the sale price. How should you advertise? Use all of your advertising resources, like the newspaper, word-of- mouth, flyers, targeted mailings, special trade booklets, and the internet.
The internet is one of the most effective ways to market. There are many real estate investment websites that allow you to post your property with pictures. A comprehensive marketing campaign includes these online marketing tools. Find a site with good traffic and include flattering photos of the interior and exterior of your property. You can consider adding a virtual tour.
If It’s Not Selling Quickly Enough
Real estate markets go through cycles. Depending where in the cycle you are, you may find it easy, or difficult, to sell your investment property. If the market has hit a plateau or gone down, you might have to wait for buyers. This will tie up money and make you have to wait to make a profit, which can be frustrating.
There are a few strategies you can use to get yourself out of this type of situation.
If you’ve tried these tips and the property has still not sold, try taking it off the market for awhile, and then list it again after re-checking your pricing. When houses sit on the market too long, potential buyers assume there must be something wrong. Extensively advertise your property. Making the extra effort to get your house sold will only help you make a profit.
When negotiating, arm yourself with information and knowledge and you will be well equipped to broker a fair deal. Find out as much as you can about real estate law, the current market, and the other person’s situation. If you are buying the house find out why they are selling. Are they in foreclosure? Has something happened personally that makes them eager to get rid of the property at any reasonable price? Find out how long the place has been on the market, the number of other offers, if any, and at what amount. Is there outstanding debt on the home, and if so how much? Are they up-to-date with their payments?
Most sellers won’t just give out this information. Try to determine their status by giving up a bit of your own information first. Be careful about what you say because the seller might be able to use it when negotiating with you later.
When you are engaged with the other party in negotiating a contract, you’re trying to come to a mutual agreement on the price of the property and terms. Consider the area comps, true condition of the property from the inspection report, and seller’s situation. Before getting involved in any negotiation have your financing in place by being pre-approved. Before signing any written offers or contracts, seek legal counsel.