Ralph R. Roberts - Flipping Houses For Dummies

Make sure all utilities (gas, water, electricity) are turned on before the scheduled inspection so that the inspector can check the furnace, plumbing, and electrical systems. In vacant homes, the previous owner or the bank may have turned off the utilities. Be at the property when the gas and water are turned on, just in case something’s leaking or a faucet is turned on.

When flipping a house, you can do as much of the fixing up as you’re qualified, comfortable, and willing to do. (See Chapter 14for details on distinguishing between do-it-yourself projects and hire-a-pro projects.) For those hire-a-pro projects, hire a contractor or subcontractor:

A contractor (or general contractor) is the boss. This person manages the budget and workflow, hires subcontractors, coordinates the work from start to finish, and hands you the bill.

Subcontractors perform specific tasks, such as wiring, plumbing, and installing ductwork. When you hire a subcontractor to do a specific job, you’re acting as the contractor yourself.

On isolated jobs — jobs that require only one subcontractor — you can often do the contracting yourself. For more extensive projects that require the coordination of multiple workers, a general contractor may be better suited. To me, a general contractor represents additional overhead I don’t need to pay for. By working closely with the subcontractors to coordinate the work, you should be able to handle the general contracting yourself, but if you have any doubts about your own abilities in managing the project, hire a qualified contractor. See Chapter 13for guidance on building and managing a rehab team.

If you decide to play the contractor role, obtain a permit before starting work on any project that requires a permit, such as installing a pool or building a room addition, deck, or garage. If you don’t obtain a required permit, authorities may show up and issue a stop work order. You may have to pay a fine. If you’ve already completed the project and the work doesn’t adhere to local building codes, you may need to redo or undo the work at your own expense. Ouch!

Chapter 4

IN THIS CHAPTER

Grasping the importance of buying with cash

Unlocking your own resources for cash

Getting a handle on leverage

Locating lenders and comparing their rates and terms

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1.

— WARREN BUFFETT

Flipping houses is an expensive hobby. You need money — investment capital — to finance the purchase of a house, perform renovations, pay the utilities and taxes, sell the home, and cover your living expenses while you’re hard at work. The good news is that it doesn’t all have to be your money. You can borrow against the equity in your home, persuade family and friends to front you some money, find eager investors who are willing to finance your venture in exchange for a cut of the proceeds, and maybe even finance the purchase of the house through the seller.

If you’re thinking that you can’t possibly get your mitts on enough cash to finance your house flipping venture, this is the chapter for you. Here you discover the myriad sources of house flipping investment capital.

Whether you’re buying a home to live in or to flip, cash is king. It enables you to pounce on a bargain and gives you leverage in negotiating the price you ultimately pay for a property. When you place an offer on a house, and other bids come in, the seller is more likely to accept your offer of thousands of dollars less when you have the cash on hand to quickly close the deal. Why? Because people bidding against you for the same property may need to make their offers contingent upon receiving financing (a loan). If the seller accepts the offer, those other “buyers” can tie up the property for months and then back out at the last minute because their financing fell through.

The seller must then place the house back on the market and start from scratch. Perhaps the deal on the house the seller planned to purchase will fall through as a result or they’ll end up having to make payments on two houses until the old one sells. They may even have to put off their plans to move, or they may be forced to move and leave the house behind, hoping their real estate agent finds a new buyer soon. Many sellers would prefer to accept a much lower cash offer with the assurance that the deal will close.

When I say you need to make a cash offer, I’m not advising you to carry around a duffle bag stuffed with $100 bills. A copy of one or more recent bank statements showing that you have the money in your account or a letter from your bank’s manager showing your liquidity — the amount of money you have on hand and can get your hands on very quickly — is sufficient. Tell your bank manager what you’re doing — bidding on real estate — and that person should be happy to provide such a letter. Don’t be afraid to disclose the amount of money you can access to finance the deal; refusal to do so can cause you to lose a valuable property. I know a couple who lost their dream home because they refused to verify the money until their offer was signed.

Ready cash also frees you to plan and begin rehabbing the property immediately rather than wait around for sluggish credit checks and loan approvals. You can have all your materials lined up ready to deliver the day after closing and have your contractors standing at the ready to start working.

Lining up financing can never be done too soon, and it’s something you should continue to work on. Always be on the lookout for additional sources of investment capital — cheaper money that’s more readily available.

The logical first place to look for cash is to yourself. You probably won’t find enough money to flip a house by emptying your pockets or your purse or looking beneath the cushions on your sofa, but you may have some money sitting in the bank gathering dust, equity in your home and in other possessions that you can unlock, or retirement savings you can put to use in creative ways without making it subject to income taxes and penalties.