Ralph R. Roberts - Flipping Houses For Dummies

3 Purchase.Buying the property is probably the easiest step in the process, but you want to be sure to negotiate (or bid) a price that’s at least 20 percent less than the cost of buying, renovating, holding, and selling the property. You also need to negotiate other terms, including the closing date and the date on which the previous owners move out.

4 Rehab.Jot down a list of improvements you want to make to the property when you first see the house, and schedule the work before you close on the purchase. Ideally, you should start renovating the property the same day or the day after closing. Chapter 10walks you through the process of inspecting a property for the first time; Part 4is devoted to fixing up your fixer-upper.

5 Sell or lease.As soon as you know the closing date for purchasing the property, set the date on which you want to put the house back on the market or have it available for tenants. If you’re selling the house, also decide whether you want to sell it yourself or work with an agent. You don’t have to wait to market the house until renovations are complete — the activity that surrounds the house during renovations can be an excellent marketing tool. It gets the neighbors talking. See Chapter 20for various ways to realize a profit from your investment and chapters 21and 22for more about selling your rehabbed property.

Mark Workens, owner of Mortgage One ( http://mortgageone.com ) and a good friend of mine, offers some other FHA-related mortgage input that every house flipper should know. As you develop a flipping strategy, keep these rules in mind:

HUD/FHA 90-day rule: According to the Department of Housing and Urban Development’s (HUD’s) 90-day rule, you must own the home for longer than 90 days before you can transfer the title to a buyer who’s using a Federal Housing Authority (FHA) loan to finance the purchase. If you’re planning to sell to first-time buyers, this rule can reduce your pool of prospective buyers and you may need to hold the property for longer than you had planned. Owning the home for fewer than 90 days voids your eligibility for an FHA-insured mortgage.

HUD/FHA 91-to-180-day rule: If you resell a home between 91 and 180 days after you buy it and the resale price is 100 percent or more than what you paid for the property, a second appraisal is required if the buyer is using an FHA loan to finance the purchase. If the second appraisal is 5 percent or more higher than the first appraisal, the lesser of the two appraisals is used for FHA loan approval.

The 24-month history rule: Banks require title reports to determine chain of title dating back 24 months. If any more than one person has owned the property in that 24-month window, fraud might have played a factor. As an investor, always be careful about how many sales occurred in the past 24 months. Anything more than one and there might be a problem. Simply strolling into your county’s register of deeds and asking for all details recorded on a particular property within the past 24 months alleviates all doubts about the chain of title.

Keep in mind that most buyers (except cash buyers) require financing and that certain types of financing, such as FHA loans, come with rules that can eat into your profits. When I put my real estate on the market, I target cash and conventional loan offers first. If I’m not getting offers, I consider buyers with government financing. When a buyer is receiving an FHA loan, the government essentially sets the rules of engagement. For example, you’re prohibited from selling to an FHA buyer until you’ve owned the property for at least 90 days. Also, FHA may require a second appraisal that could lower the price the buyers agreed to pay.

For more information on FHA mortgage related questions, visit http://portal.hud.gov/hudportal/HUD .

Throughout this book, I provide tips, tricks, and warnings to enable you to maximize your profit and minimize your risks, but that doesn’t guarantee a successful flip every time. Flips sometimes flop, even for experienced investors. The following tips can help you avoid some of the more serious situations and recover your composure when something goes wrong:

If your flip flops because of a dip in the housing market, skip to Chapter 20to explore other ways to profit from your investment.

As soon as you see that a property is a money pit, cut your losses. Don’t throw good money after bad. You may need to sell the house now at a small loss instead of later at a bigger loss. On the other hand, you can go to plan C and rent out the property for 12 to 36 months until the market perks back up and you can comfortably sell the home at or above cost.

Keep in touch with your team, especially your financial backers and agent. Communication is paramount, especially when times are bad. Good team members can help you out of a jam and help you recover.

Don’t give up just because a single flip doesn’t turn out as well as you had expected. Failure is an excellent educator, and if you can work through it, it can be a true confidence builder. Flip three or four houses before throwing in the towel. Your plan, however, must include an exit strategy for all contingencies; otherwise, your flop will take you by total surprise and you won’t know what to do.

Chapter 3

IN THIS CHAPTER

Picking a real estate agent who can help you find flippable properties

Acquiring sound financial advice

Covering your back with a title company and an appraiser, attorney, and inspector

Hiring contractors and subcontractors to handle the heavy lifting

No one can whistle a symphony. It takes a whole orchestra to play it.

—H.E. LUCCOCK

Most people who talk themselves out of investing in real estate are defeated by a false assumption — that they have to do it alone. The truth is that you don’t have to do it alone. In fact, attempting to fly solo is one of the most common and serious blunders you can make when you’re getting started. Investors who excel at flipping houses are team builders, capable of selecting talented players, coordinating their efforts, and harnessing their skills.

By surrounding yourself with a team of experienced and talented people, all you really need to succeed is a smartphone, some people skills, and a long list of qualified individuals with diverse talents. You don’t know what a house is truly worth? Consult a qualified real estate agent. You’re not good with money? Hire an accountant. Can’t hammer a nail? Call a carpenter.

Sure, hiring these additional people costs extra, but as long as you can accurately estimate the total costs, calculate them into your budget, and still profit from the flip, you win. (See Chapter 11for details on calculating costs.)

I don’t have all the essential qualities to successfully flip houses. What I do have is the ability to admit that I lack certain qualities and a knack for finding people who complement my skills. In this chapter, I show you how to build your own house flipping dream team.