Ralph R. Roberts - Flipping Houses For Dummies

Estimate costs of repairs and renovations. Knowing how much you likely need to spend to make the property market-ready is the key to knowing how much you can afford to pay for the property and still earn a profit. In Chapter 10, I explain how to inspect a property with an eye for repairs and renovations and estimate the rehab costs.

Calculate the maximum purchase price. Before you make an offer on a property, you need to calculate the most you can pay for it to earn the desired profit after costs, including closing costs, renovation expenses, holding costs (interest, insurance, property taxes, utilities, and maintenance), and agent commissions. In Chapter 11, I walk you through the calculations.

Negotiate the price and terms in your favor. The maximum amount you can afford to pay for a property probably isn’t the amount you want to pay — you want to pay as little as possible. In Chapter 12, I help you discover various strategies and techniques to negotiate a better price and terms.

When you buy a house at a bargain basement price, it usually requires some tender loving care to make it marketable. In some cases, a thorough cleaning, a fresh coat of paint (inside and out), and new carpeting do the trick. In a matter of days or a couple of weeks, and with a small investment, you can often boost the value of a home just by making it look and smell brand-new again.

Not all homes are created equal. Other houses require more extensive renovations. You may be able to convert unused attic or porch space into a bedroom; knock out a wall or two to combine the kitchen, dining room, and living room into a great room; install new windows; or even build a second story. In today’s technology-centric world, you can measure the house and build a 3D rendering of your property on a computer. Some companies, like landscapers or cabinet wholesalers, are also willing to help you maximize your home’s square footage by plugging measurements into a system that generates multiple floor plan options that make the best use of your space. In Part 4, I explain how to assemble and manage a rehab team to do everything from quick-flip cosmetic jobs to extensive renovations and provide plenty of tips to stay on budget.

Avoid the temptation to over-improve a property. You may be able to convert a $100,000 house into a $1 million mansion, but a buyer who wants a $1 million mansion will buy a house in a neighborhood with million-dollar homes.

“You make your money when you buy” is a guiding principle in the realm of real estate investing. But you realize your profit only after selling the house. Assuming that you purchase the property at the right price, avoid overspending on repairs and renovations, and flip in a relatively stable market, you should have no trouble selling the house at a profit by pricing it at or near market value. (See Part 5for details.)

To sell the house quickly at a fair price, set a price that’s competitive with the prices of comparable houses in the same neighborhood. If the asking price is too high, holding costs will chip away at your profit over time.

In September 2001, the US Department of Housing and Urban Development (HUD) released FR (Final Rule)-4615 Prohibition of Property Flipping, which made “flipping” illegal.

So why am I writing a book that promotes this illegal activity? Because I’m writing about legal flipping, not illegal flipping. The word flip has a double meaning, as the following sections reveal.

Criminal minds have invented countless ways to milk the real estate industry, and one way is to flip houses. This sinister type of house flipping typically relies on some form of fraud — lying or misrepresenting information. In some cases, the con artists team up with crooked appraisers who artificially inflate home values and then sell overpriced homes to ill-informed buyers.

Another way con artists scam the system via flipping is to build a team of buyers, none of whom intends to own the property for any length of time. They buy homes from one another, increasing the price with each sale. False appraisals or crooked appraisers make the price hikes look legitimate, and corrupt loan officers often expedite the loan approval process. As the value of the property increases on paper, the amount of equity in the property increases. The final buyer takes out a whopping loan to pay the previous owner and then defaults on the loan. The team splits the proceeds, sticking the lender with the bill and leaving a legacy of foreclosures and vacancies.

The dark side of flipping destroys credit ratings, raises interest rates, and ruins neighborhoods. Over the long haul, it threatens to squash the American dream of homeownership. It’s unethical, immoral, and illegal. And it’s not what this book is about.

Flipping the right way is a perfectly legitimate strategy for making money in real estate. You buy a property below market value, fix it up, and sell it for more than you invested in it. Do it well and you can earn a handsome profit. Make a serious blunder and you suffer a loss. This fix-it-and-flip-it approach has a positive effect on the real estate market: It increases property values, improves neighborhoods, and provides quality housing for those who need it. It’s the American way — capitalism at work.

Throughout this book, I encourage you to flip the right way, and I caution you to avoid the gray areas that can get you into trouble. Flipping the right way enables you to legitimately profit from the system without having to tiptoe through legal minefields. It ensures that you establish the solid reputation you need to flip profitably for however long you want. Dotting your i ’s and crossing your t ’s will put you on the right path.

Although anyone can profit from flipping houses, it’s not quite as easy as it looks on HGTV. Buying a house that’s brimming with profit potential for far less than you know you can sell it for is a huge challenge in itself, but after you take possession of the property, the real fun begins. The contractor disappears after collecting your deposit. The landscapers hack through a buried cable. You find out that the septic system needs to be replaced. And the neighborhood association rejects every single one of your planned improvements.

To successfully deal with the unexpected twists and turns you’re sure to encounter, you need to have the right stuff, including being able to

Carve out extra time and motivate yourself: Flipping houses requires considerable time and energy for house shopping, lining up financing, scheduling and overseeing repairs and renovations, and more. If you already feel overwhelmed and overworked, maybe this flipping thing isn’t for you.