Chapter 1

Brushing Up on the Basics

IN THIS CHAPTER

Understanding the concept of flipping houses and appreciating its challenges

Flipping the right way — legally and ethically

Developing a winning strategy and the right connections

Marketing and staging a house to maximize your profit

Progress always involves risk. You can’t steal second base and keep your foot on first.

—FRED WILCOX

Flipping sounds easy. You can flip a pancake. You can flip a coin. Without too much effort, you can even flip out. Flipping a house, though, requires a level of knowledge, expertise, and sticktoitism unrivaled by any of these mindless tasks. It requires access to cash, and lots of it. It demands time, energy, vision, attention to detail, and the ability and desire to network with everyone — from buyers and sellers to real estate professionals, contractors, and lenders.

In this chapter, I offer a broad overview of what flipping houses is all about. I introduce the overall strategy of flipping houses — buy low, renovate, and sell a property at fair market value to earn a fair market profit. I also reveal the difference between flipping the right way — legally and ethically — and flipping the wrong way — ripping off buyers, sellers, and lenders for a quick wad of cash.

Grasping the Concept of Flipping

In investment circles, the secret to success is cliché: Buy low, sell high. This same principle applies to flipping houses. To succeed, you buy a house substantially below market value, repair and renovate the property, and then turn around and sell it at market value — for a profit that makes it worth your time and effort. That three-step process — buy, fix, sell — certainly sounds easy enough, but each step carries with it a host of unique challenges, as I point out in the following sections.

Spotting distressed properties

Homeowners don’t exactly line up around the block waiting to sell their homes for less than they’re worth. As a house flipper, your job is to hunt for the homes in your area that are dontwanners, as in “The owners don’t want ’er.” These orphan homes usually appear bedraggled: The yard looks like a weedy wasteland, the gutters are hanging off like false eyelashes the morning after a party, the paint is peeling, and the interior is trashed. These properties are often referred to as distressed, and their appearance indicates that their owners are distressed as well — their dream home has become a nightmare.

When homeowners need to shed the burden of a home they can no longer afford or simply no longer want, they may not have the time or resources to repair and renovate it, place it on the market, and wait for months or even a year for a buyer to make a reasonable offer. In such cases, they’re often willing to sell at a greatly reduced price to a serious buyer who has the financial resources to close the deal. How do you discover opportunities like this? In Part 2, I point out several techniques for discovering distressed properties and their distressed owners.

Doing your homework

Flipping houses is a risky venture, but you can minimize risk and maximize profit by doing your homework:

• Research the property. If you’re buying a property in foreclosure, probate, bankruptcy, or a similar situation, research the property carefully to make sure you know what you’re buying. Research includes a visit to the property and to the register of deeds office to research the title and other key documents. See Chapter 9 for details.
• 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.

Making a few minor (or major) alterations

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.

Reselling your rehabbed property

“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 5 for 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.

Flipping Legally and Ethically

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.

Flipping illegally

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 legally: Buy, fix, sell

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...