Chapter 1 – Up close and personal with the “flipper”
When you hear about flipping houses for a profit you think of instant money and speedy repairs. Is this the reality of house flipping or are the TV shows cutting out the reality bites?
The concept of flipping a house is rather simple: you buy a property at a small price, fix it and then sell for a profit. It sounds good, but if you expect to make hundreds of thousands of flipping houses, you need to get a reality check!
Flipping is not an easy job and the profits are not that well rounded. On top of it, like any “on the edge” business, if you mess it up you might get into bankruptcy. Other times even though you do all the right things, you still manage to sink along the properties due to house market crashes or other unexpected situations that make the selling for a profit part of the flipping impossible.
When you get into this business, you must know a lot more than the basic concept, if you plan to stick around for some time, investing in the house market. There are many things to learn, but before you start buying and selling, you have to know five major facts of the trade.
Flipping is not gambling, but it does come with a high risk. As opposed to gambling, flipping risks increase due to your own actions. To make a successful flip you need to buy at the right price, the right house, and then make the right repairs before you sell. The mix of the right purchase price and the right repairs is hard to get. When you look at a property you need to “see” if it has the potential to gain enough value, as there are many properties out there that don't have what it takes to become flipping candidates; is you see, there is nothing you can do to increase their value.
Bad candidates include houses in neighbourhoods with a high crime rate or remote locations where there are no job opportunities. These houses usually need a miracle to happen under the shape of a huge infrastructure investment of a huge factory to become flippable, so be realistic and evaluate your odds of being successful.
Whether you buy and flip in Chicago or San Diego, you need to focus on the house when you make the repairs and remember that any flip beyond $20-$30,000 is the exception, not the norm as TV shows and “make quick money” guides depict them. Yes, you will encounter highly profitable flips, which can round up your budget with astonishing sums, but it is always better to go safe with smaller amounts. Professional flippers have around 10 flips in one year, each one around $30,000, which bring an accumulated profit.
Many beginners dive into the business of flipping a property believing they will fix it and then sell it in couple of weeks. The reality is these things take time! The actual repairs might last for a couple of months and then, when it is all ready you will need to wait one, even two more months before you find a buyer and one more month to seal the deal.
The average flipping time is about six months, which is far from the TV image of “overnight” miracle. And this is when things go on well, as planned. Problem is most houses hide a lot of “dirty secrets”, like bug infestation or else, which eats up even more time, so be prepared to wait for selling the house and cashing in the check.
Flipping works on every market, if you know how to do it
Couple of years ago there was a house market boom, which allowed many skilled entrepreneurs to flip houses for a profit, but after the market crashed, few of them managed to stay on top of their things. And even without a crash, you might wake up one day and discover your hot market going cold due to an unexpected reason. Every item that goes up, must go down and house prices stick to this rule. Always!
However, there are always properties that hold their value regardless the market’s ups and downs. These are the real deals that are hard to find, but they exist everywhere, in any market. If you have what it takes to find such a deal, you might sell for a profit, even when the market is cold as ice. This is pretty much like fashion: there are trends coming and going, but some items are timeless. The same goes for houses, so make your pick carefully!
Know what you want to do with the house
A traditional flip has three steps: buy, fix and sell. However, there are multiple types of flips and you need to know what you want to do with the property before you actually buy it. After you fix the house you can rent it or sell it, but you need to remember that each day you keep the house you lose money on interest, utilities and taxes. To make sure you don't stick with the house for a long time to come, you need to evaluate your chances to monetize it after the rehab before you make the initial purchase offer. Many flippers think they can add a lot of value to a house, when the reality is there is no value to increase from the first place. This often results in long time on the market and when a house stays on the market for a long time, its value decreases. Also, if you are insecure about what to do with the property and you oscillate between multiple options, you may find yourself being forced to sell it for a lesser amount.
We are being taught to think positive in order to attract positive outcome, but when you want to flip a house you need to consider the worst case scenario. No one wants to think about bad things, but you need to, if you want to have a plan when things go wrong. Otherwise, you will be completely unprepared to deal with problems. And most of the times, if you want more time to solve a problem, it might get worse. For example, if you discover the roof is leaking and you are unprepared to deal with it, you may jeopardise the entire fix, as the water infiltrations leads to floods and mould. Be ready to solve every problem on the way and learn to cut losses when bad things happen.
When you want to enter the flipping business you need to have a plan for every bad or good thing that may come across your way, in order to succeed and make a profit out of the flip. As I mentioned earlier, there are multiple types of flippers and flips, and you need to know them when you go out there, searching for a house. Some properties are great sellers, while others are just great renters. Read on to know what you can do with a fixed property to be able to assess the potential of a house when you first set your eyes on it.
In the world of house flipping there are multiple ways to deal with the classic three step process. In this book we will focus only on the legal ways to flip a house; there are also a lot of illegal flippers out there who work their way on the market before being caught by the long arm of the law. And they are always caught!
Flipping type 1: Buy, fix, flip
The classic form of a flipping implies buying a house, repairing it and then selling to a person who is going to live in the house. However, there are multiple ways to deal with this and the other most common type of flipping.
The newest type of flip is fixing the house with the buyer at hand. This means you buy the house, find a buyer for the house and then fix it as per the buyer's requirements. The model is emerging in Baltimore and you must know where it has the potential to work and where it doesn't work.
For example, this model of flipping would never work in New York This model has its own benefits. The first one being your profit is secured, as the prospective buyer is going to buy the house when it is ready. It also saves you the hassle of guessing what sort of finishing touches would appeal to most buyers. However, if he changes his mind and you don't have any signed contract with him, you may end up with a highly customised home that is hard to sell. This method works great in neighbourhoods where you can buy a row of similar houses, fix one up and use it as a model for what you can do. Show the model to potential buyers and then sell the other houses in the row with customised fixes, saving the buyer a lot of hassle and offering him a custom home in a neighbourhood of identical houses, possibly with different purposes.
Flipping type 2: Buy and resell as is
This one is a little trickier. You need to have an eye for houses that you might sell as they are slightly below the market price.
This type of flipping goes on like this: you buy the property off a hot market, and then sell it in poor condition, as it is, below the market price, still making a profit. This is a delicate business which only works in transitioning markets with a certain type of houses. The profits in this case are not that great, but you can make some money out of multiple transactions of this type.
This model has a second version: buy the property and sell it as it is to a flipper. You will make a smaller profit than a fixer, but you can make the money quicker than with the classic model of flipping.
Flipping type 3: Buy, refinance and lease with option to buy
This method of flipping can save you money as it can help you find someone to pay for the monthly house taxes quicker. The principle is simple: buy a property, fix it up and then sell for terms. When you finish the repairs, refinance the property at its new value; if you've done your calculations right, you won’t need to put in more money. The next step is renting the house with an option to buy after twelve months or more.
The rent payments will cover the mortgage rates and when you feel the need to sell the property you will not have to pay a broker's fee. If the tenant buys the house after one year you can also benefit from lower capital gains tax rate.
Flipping type 4: Pre-construction flippers This is another method which only works in hot markets, where the price of a property increases almost every month. If you buy a property when it is in pre-construction phase, when its price is significantly lower, then sell it when it is ready, you can end up with a round sum in your pocket, without having to do any repairs on your own.
But this method is a real gamble: if the market sinks before the building is ready, you might lose a lot of money and even end up with a property whose maintenance costs are higher than your budget.
Pseudo-Flipping: Scouting for a flipper
There are markets where flipping is a hot business and if you want to make a profit without actually becoming a flipper, become a scout. This means you are going to find the properties for the actual flippers and sell them for a tip. They will pay you for the research, as they will be saving a lot of time and time is money. Moreover, by roaming around flippers you can learn their business and prepare yourself for the moment when you can turn to this job as well.