Ralph R. Roberts - Flipping Houses For Dummies

Reminds you to pay your property taxes on time.

Evaluates your house flipping activity to determine whether you’re considered an investor or a self-employed dealer.

Makes sure you pay your quarterly estimated taxes if you’re considered a self-employed dealer.

Ensures that you pay your quarterly estimated taxes on your capital gains if you’re considered an investor.

Offers a sanity check to make sure your grand vision for the house doesn’t blow your budget.

Ask your family and friends for referrals to qualified accountants who have experience with real estate. If you already have an accountant who has little experience in real estate, ask whether they know of someone. Interview at least three candidates and ask about their experience in real estate.

My first two CPAs didn’t work out when I was first starting out. My third CPA came through a mutual friend of mine who was a CPA and CFO of a successful company. He had a friend with an independent CPA practice. The rest is history. I’ve been using this CPA ever since — for the past 30 years.

When the money starts rolling in, your first impulse may be to roll your profits into your next flip, but that’s not always the savviest approach. You may want to sock away some money in tax deferred accounts to save on taxes and protect your gains. A knowledgeable financial advisor can provide the advice you need to make the best use of your profits.

People who flip houses are often short-sighted. They focus three to six months into the future but can’t see 20 to 30 years down the road. A financial advisor trains their vision on your long-term financial future and can help you take appropriate action now to build wealth for your retirement years. For details about long-term financial planning, check out the latest edition of Personal Finance For Dummies, by Eric Tyson, MBA (Wiley).

When you sign on the dotted line to purchase a property, you own not only the property but also all the problems associated with it. Buy a property from someone who’s facing foreclosure, and you may just own a property that has one or more liens against it — legal claims against the property to secure a debt. (See Chapter 7for more information about foreclosures and Chapter 9for guidance on how to research a property.)

To avoid unforeseen problems associated with the title of a property you’re about to purchase, carefully research the title history, as explained in Chapter 9. Researching the title history ensures that

The property you think you’re buying is the property you’re actually buying.

The person selling the property is the person who owns it.

You’re aware of any liens against the property or taxes due.

Any rights, such as mineral rights, are transferred to you.

Your deed or title is in recordable form.

You’re aware of any restrictions on the property; for example, if you’re buying a home in a historical area, the renovations may have restrictions.

If you have any questions or concerns about a property’s title, consider consulting a title company in your area that has a reputation for smooth closings. Establishing a relationship with a reputable title company is good practice even if you don’t have concerns over a specific property’s title history. In exchange for your business (hiring them to handle your closings), a title company may be willing to do free title searches. A reputable title company can also expedite closings to ensure that you don’t miss out on good deals.

At the closing, be sure to obtain a copy of the final title insurance policy, which the seller typically pays for. This policy is your guarantee that the title is clear. If any hidden issues arise later, the title insurance company is accountable. Always get title insurance when buying a house, even if you have to pay for it yourself.

Speaking of insurance, you should always obtain a homeowner’s insurance policy for any property you purchase. In fact, consult an insurance agent before purchasing a property, to make sure the policy is in effect as soon as possible after you close on the property. I know of a case involving raccoons that slipped into the attic of a home and did about $15,000 worth of damage. Thankfully, the investor had the proper amount of insurance on the house and was covered for the damage.

Make sure you have an insurance agent on your team who can help you insure not only the properties you purchase but also anyone who does work for you and doesn’t carry contractor’s insurance. The added cost for insurance is well worth the price. If someone gets hurt on the job, that can cost you big-time.

Someone who buys a home typically borrows money from a lender and uses the property as collateral for the loan. The bank or another lending institution orders an appraisal of the property to make sure it’s worth enough to cover the loan in case the buyer defaults on the loan. The buyer typically pays for the appraisal as part of the closing costs.

As a flipper, you don’t need an appraisal unless you’re borrowing money from a lender who requires an appraisal to approve the loan. However, if you’re unsure of the value of a particular piece of property, an appraiser can help you confirm its potential profitability or perhaps present you with some figures that make you think twice about pitching an offer. You can ask the appraiser to provide you with two estimates: property value before repairs and renovations (as-is value) and property value after repairs and renovations (after-repair value). Such an appraisal may cost a little extra (anywhere from $350 to $475), but the additional information may help you make a better decision, especially when you’re just getting started.

If you’re in the market for an appraiser, ask your mortgage broker or loan officer for a referral.

To determine whether a property is worth buying, check out the recent sale prices of comparable properties in the same neighborhood and consult your real estate agent or another experienced investor for a second opinion. An appraisal may do you little good when you’re buying distressed properties at a deep discount.

Whether you’re buying or selling a home, beware of inflated appraisals. Some real estate scams rely on inflated appraisals to sucker mortgage companies into lending more than the home is worth. If the seller is willing to take $185,000 for the house but it appraises at $225,000, paying the seller $225,000 with the intent of receiving cash back from the seller is fraudulent. Nefarious appraisers may also jack up the value of a home to inflate the homeowner’s equity so that the owner can qualify for a loan. Don’t rely solely on an appraisal to determine the true value of a property. By specializing in properties in a certain price range and in specific neighborhoods, you can become an expert on property values in that niche.