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Do You Know the Rules for Flipping in 2010?

It’s been a relatively tough real estate market for rehabbers/flippers for some time now, and with the home-buyer tax credit getting ready to expire at the end of this week, it’s likely only going to get tougher.

That said, for smart rehabbers who know how to buy right, rehab right, and sell right, there is still plenty of opportunity to make money in this market. My business is proof of this — over our past 10 rehab projects, our average DOM (days-on-market) before our first offer was under 10, and our average sale price was 97% of our list price. Given that the average DOM in my area is over 100 and average sales price somewhere around 85% of original list price, that’s not too shabby.

Do I have a secret? Nope. Just common sense and the will-power to stick to doing what I know is right and not doing what I know will be harmful to my business.

With the new homeowner tax credit getting ready to expire, and with the relatively large number of buyers that have been shopping the past few months likely to go away, I thought now would be a good time to recap an article that I wrote last year, “The 8 Rules of Flipping in 2009.”

I’ve updated a couple of these rules for 2010, but for the most part, the rules are the same. If you’re a house flipper (or plan to be in the near future), here are some tips that you’ll hopefully find very useful.

1. Best Condition & Best Price: It used to be that — to be successful — a house flipper needed to focus on having either the nicest house on the block or the lowest priced house on the block. With the number of houses on the market currently outnumbering the number of potential buyers by a very large margin, house flippers must now focus on having the house that is BOTH in the best condition AND the lowest priced among comparable homes.

   I’m sure a lot of people who are considering this are thinking, “How can I offer the nicest house at the lowest price and still make money?” It’s a great question, and the answer is simple –- only consider fantastic deals when you’re buying. As the old adage goes, you make money when you buy. This is especially true in today’s market; if you can’t buy low enough to put the house in great condition and still sell below market, you shouldn’t be buying.The nice thing is, now is a great time to pick up these deals. Between the glut of foreclosures that are likely to hit the market soon, the banks willing to take a loss by doing short sales, and the sellers who missed the tax credit boat and are desperate to get out from under there properties, motivated investors should have no problems finding great deals that will work as successful rehab projects.

2. Know Your Buyers: I was at a Real Estate Investment group meeting last year, when an investor who focused on rental properties asked me, “How do you expect to flip any properties? I had a friend who was buying properties worth $300K and trying to sell them for under $200K, and couldn’t sell a single one!”

   I’ll tell you what I told him –- in my current local market, there are very few buyers who are looking for properties over $150K. Sure, there are some here and there, but for the most part, today’s buyers are first-time home buyers looking for move-in-ready properties in the $90-130K range. Why is that? It’s because these are the only buyers who are able to both qualify a loan and come up with a down-payment. (they are getting FHA loans that only require 3.5% down).So, it’s no surprise that this guy’s friend wasn’t able to sell his $300K houses for $200K — there just aren’t enough buyers at that price-point, regardless of how good the deals are.

   Knowing your buyer base will allow you to appropriately focus your rehab and resale efforts – if the available buyers are looking for move-in-ready houses in the $90-130K range, you should be offering move-in-ready houses in the $90-130K range, nothing more and nothing less. I’m not saying the buyer base in your market is the same as it is in mine, just that you need to figure out what you buyer base is, AND FOCUS ON SELLING HOUSES TO THEM.

3. Multiple Exit Strategies: Wanting to flip a house is great. Finding a house that can be successfully flipped is even better. But, in today’s market, any deal you consider should have multiple possible exit strategies — not just the possibility of a flip. And not just multiple potential exit strategies, but multiple strategies that you are convinced will work, if necessary.

   For example, I like to have at least 3 of the following 5 possible exit strategies before I consider a deal:

   • Wholesale to Another Investor
   • Minor (or No) Rehab and Rent
   • Minor Rehab and Sale to Investor
   • Minor Rehab and Flip to Occupant
   • Major Rehab and Flip to Occupant

   If you can’t find at least two different exit strategies for a property, don’t buy it. Because in this market, there’s just too much chance that your first strategy won’t pan out, and if that happens, you want to have alternatives.

4. Know Your Comps: With the market changing on a daily basis, this is no time to trust something as important as comps to unreliable sources. That means you shouldn’t be using tax appraisals (those guys don’t even go inside the house to get their estimates), you shouldn’t be using websites like Trulia and Zillow (they may be right on, but they may also be very high or very low), and you shouldn’t be trusting your real estate agent unless they actually give you the data to verify for yourself.

   The only real way to find comps is to pull actual MLS (or tax record) data, and sort through it yourself. You’re looking for similar properties (pretty much same style, same # of beds and baths, same lot size, same condition) that have sold in the past 3 months within the same subdivision (or .5 mile radius). Don’t go back 6 or 12 months (the market has changed since then), don’t look at properties that are nothing like your own, and don’t look even 2 miles away (market conditions can vary drastically over even short distances).Your agent should be able to pull all the comp data you need, but it’s YOUR responsibility to make sure the data used is applicable. Too many agents will give you data that supports a high ARV, just to get you to buy the property. Trust the data, but only if you sort through it yourself. And if you can’t find any data for your area, ask yourself why that is? Is it “out of the way?” Is it a bad neighborhood where buyers don’t want to buy if they have an alternative (and these days they do)? Or is it such a desirable neighborhood that nothing has even been listed for sale in the past year (this is a good thing)? Even lack of data is an important piece of data when it comes to comps.

5. Location, Location, Location: While this has always been a key maxim in real estate investing, the difference between then and now is that today, you need properties that will get a lot of potential buyer traffic through them. This means buying in the front of subdivisions, buying on well-traveled (but not too busy) roads, and buying in areas near shopping and other amenities that draw crowds.

   Many buyers these days are finding houses because they drive past them and see signs; they may not have even been on the market previously to buy, but they stop into yours and they fall in love. If you buy in locations that will only get foot-traffic if an agent brings them in, you’ll get a lot fewer potential buyers through the house, and today, it’s all a numbers game. You need to get lots of buyers to at least look at your property, and just listing on the MLS and waiting for agents to bring potential buyers though isn’t going to accomplish that goal.

6. Staging: I’m a huge proponent of house staging. And I firmly believe that while staging may not get you a whole lot more money for your property in today’s market, it will certainly increase your likelihood of getting offers if your house is priced correctly. While buyers aren’t likely to increase their spending limit in this market (they don’t have to), they will most certainly be drawn to houses that they can imagine themselves living in.

   Staging accomplishes this by allowing your buyers to make an emotional connection with your property — by allowing them to associate it with a home, not just a house. A house without any furniture is just a faceless property…a nicely decorated home provides a feeling of warmth, comfort and security. And not only does staging create an emotional connection, but it allows those buyers who aren’t very imaginative (read: MOST BUYERS) to get a better feel for how the house will look once they move in. In fact, if a house is staged well, it will give your potential buyers ideas for how to make their next home (this one!) even better than their last.

7. Know The Rules: House flipping is a lot more complicated than it appears on TV. There are lots of rules, regulations and roadblocks that — if not heeded — will hinder your ability to make money in this business.

   For example, many rehabbers don’t realize that once they purchase a property, while they can sell now sell their property to an FHA buyer within 90 days, it requires jumping through hoops and finding a mortgage broker who can get that kind of deal done. I can’t tell you how many people I’ve met who had a plan to buy a property, slap on some paint and carpet, and resell to a retail buyer in just a couple weeks, and then got caught by all the extra FHA regulation that surrounds a quick flip. So, instead of selling in a couple weeks, they end up having to hold onto the property for three months, increasing their holding costs (and tying up their cash) while they wait for the opportunity to sell to their FHA buyer. And in some cases, the buyer didn’t want to wait around and the deals fell through.

   To be successful, you must know the rules — this includes buying rules, selling rules, lending rules, construction/permit rules, etc.

8. Build A Strong Team: The difference between a successful real estate investor and an unsuccessful one is the team she surrounds herself with. A real estate investor is only as good as his CPA, attorney, real estate agent, inspectors, contractors, title company, etc. When it comes to pulling off all the other rules I listed, you need a strong team to be successful; if you don’t have that strong team, you can bet your competition does.

   A weak team will cost you time, money and headaches that you can’t afford. All it takes is for your agent to negotiate poorly, your attorney to miss a contract loophole, your inspector to miss a structural problem or your contractor to screw up to turn a profitable flip into a big loser. A couple of those can quickly end an otherwise successful real estate career.

Article Author: J Scott

J has written 12 articles for us.
Visit J’s Website: http://www.123flip.com

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What in the World are Holding Costs and How to Calculate Them

I hope my readers don’t mind that I point them to the Bigger Pockets blog a lot, but they just have some great articles and I couldn’t put it any better myself.  Why reinvent the wheel right?

If you have ever wondered how to calculate the costs associated with fixing and flipping a property then this article is a must read.  I have usually used a percentage method when figuring these costs that J. Scott puts in his article, but I do like his approach.  In a competitive rehab environment you have to know what the numbers are because they can make or break your deal.  I think this formula is a great way to be competitive and accurate with your numbers.

Click here to check out the article.

What Is The Most You Should Pay To Rehab an Investment Property?

What Is The Most You Should Pay To Rehab an Investment Property?

I found this article at the Bigger Pockets blog and it is a great look into determining the maximum purchase price to pay for a property that you plan to rehab.  I have used the 70% model that J. Scott talks about in his post and have found that to be effective, nevertheless I see the market changing and I think this formula is a great way to adapt.

Check out the article by clicking here.

Picture Perfect Real Estate Success

When most people think of home staging they think that it begins and ends inside the home, and that the primary use of staging a home is for open houses. That couldn’t be further than the truth. Home staging is crucial at the very beginning of the home selling process – when it comes to taking the sales photos of the property.

The power of a properly taken real estate photograph is huge, especially if your property is for sale by owner. A properly presented picture can entice prospective buyers to visit your home to learn more. You may think that anyone with a digital camera can prepare your sales photos, but unless you have an eye for home staging or proper presentation, you may want to leave it to the professionals.

Obviously when you take a picture of a room, it should be clean and tidy. Arranging furniture to showcase the room’s highlights is important. Don’t take photos on rainy days or at night because it is best to have as much natural light coming into the rooms as possible, otherwise the house may appear dreary and dark.

An excellent tip to flip a property fast is to take a few steps back when you’re taking the photo. Rooms that appear larger in photos will attract buyers much faster than small, crowded rooms. Using a wide angled lens is another easy tip that allows the room to look much larger in a photograph.

Properly presented photos are an invaluable sales tool that you can use on your brochures, website, listings and any handouts that you give potential buyers after viewings. For more real estate tips and information on home staging classes check out Karen Schaefer’s APSD Home Stager Certification Program.

By Karen Schaefer, Founder of  APSD – The Association of Property Scene Designers. To learn more about staging, marketing and selling houses as a Professional Certified APSD Home Stager click here.

The EPA & Your Next Paint Job

The EPA & Your Next Paint Job….

This information comes directly from the EPA’s website.

“Common renovation activities like sanding, cutting, and demolition can create hazardous lead dust and chips by disturbing lead-based paint, which can be harmful to adults and children.

To protect against this risk, on April 22, 2008, EPA issued a rule requiring the use of lead-safe practices and other actions aimed at preventing lead poisoning. Under the rule, beginning in April 2010, contractors performing renovation, repair and painting projects that disturb lead-based paint in homes, child care facilities, and schools built before 1978 must be certified and must follow specific work practices to prevent lead contamination.”

This information hits particularly close to home as a fix and flipper and that my husband is also a painting contractor here in the Denver Area.  He will be completing this certification this month and I will update you on he thoughts and comments regarding the certification.

For more information from the EPA please click here.

How To Finance Your Fix & Flips?

How To Finance Your Fix & Flips?  There are a couple of ways to finance a properties, but in this post I just want to share the methods I have used.

The first and second houses that I flipped were partnerships and we obtained loans through Merchants Mortgage and dealt with Kim Hubbard.  I have to say these were great loans.  Our partners brought strengths to the table we didn’t have, but we both had some reserves and good credit that made the transaction pretty easy.  Kim and her team were great to work with.  They helped us along the way and treated us very well. We put down 10% and the loan included fix up costs as well.  After getting all the paper work done for the actual loan, we closed on our investment property and from there we had inspections from a Merchants Mortgage representatives that would certify the fix up work was done and then we would receive our reimbursement checks within a day or two.

From then on my husband and I started using hard money lenders because we were able to keep more of the profit for ourselves.  Our partners had mainly brought stable W2 income to the loans we had with Merchants Mortgage and when I learned more about how hard money lenders worked, having partners didn’t seem necessary anymore.  The main difference was that it was not our income and credit being scrutinized it was the property and its value “as is” and what it would be worth once fixed up.

The lenders we have worked with have been awesome and there are a few I haven’t worked with, but have heard great things about.  If you would like their contact information please email me at celeste@thinkhomewise.com.

The bottom line is that if you have a great deal the  money will find you.  If it means getting the deal done by getting a partner, a loan from Merchants Mortgage or a hard money lender then do what you have to do, but just do it!  Taking action is the only way to gain experience.

Get Your Real Estate License as an Investor?

The decision to get your real estate license as an investor is very personal.  Check out this great article by clicking here and then read my response below.

For me the choice is no…for now.  Let me explain.  I am a mother of a 4 year old with another one on the way so my life needs no more studying or paperwork at this point in time.  I do think that in the future I will revisit the issue and spend the time, money and effort to become a real estate agent mainly for the control and financial gain.

I find that right now I have a great agent who gets full commission on the purchase of my properties and then re-lists them for a lower commission once they have been renovated.  I feel that with my staging techniques, the great quality of fix up we do and pricing the house right that we present a pretty easy sell for our real estate agent.  I don’t expect open houses for a discounted commission as those take a lot of time and some preparation and other than that I take an active role in keeping the house in top condition while it’s on the market.

My agents have also given me such great information from the MLS that I don’t feel I am missing out on too much by not accessing it myself.

Again, for the article at Bigger Pockets click here.

The Economic and other Forces Impacting Your Real Estate Business

It seems that everywhere you look now days the news stories, regardless of their source, provide nothing but conflicting points of view regarding the economy and where it is heading.

Prices are up, sales are down.  We’re at the bottom… no it’s going to double-dip.   Credit is available… no it’s not!

As a real estate investor, I am sure you will agree,  trying to figure out how to position yourself, your capital and your business has never been more challenging.

Hopefully this article will help to shed some light on the current landscape and the forces that are sure to impact you and your profits.

The Obvious

Current Unemployment – the unemployment numbers are not going to go down any time soon.  There just is not enough overall economic activity to lure businesses into hiring more employees.  You can anticipate the unemployment rate to hover around 10% through most of this year.

Foreclosures – the number of foreclosures are not going to drop significantly until the unemployment rate start to decrease.  Coupled with high unemployment is the high number of loans that are due to reset, many of which are upside down. Foreclosures are going to continue at their high rate for many, many months.

Housing Prices – are starting to stabilize in many markets.  Don’t be fooled however.  It is hard to accept that high unemployment coupled with the high number of foreclosures, could move housing prices higher.  The pressure put on the prices of existing inventory are just too great for prices to consistently move higher.

Fannie and Freddie – Fannie Mae and Freddie Mac are still struggling.  With that being said, the Treasury has indicated that they will cover whatever shortfalls or losses are experienced by these two organizations.  Given this support, they remain viable players in the market, but the number of loans issued have been greatly eclipsed by the Federal Housing Administration.

Federal Housing Administration – FHA has become the big player in today’s mortgage market.  There total loan portfolio has increased from a low in 2006 of 4%, to over 30% of all outstanding mortgages.  Their biggest problem is that many of their loans are heading into default.  As result they have increased their underwriting requirements, effectively forcing many buyers out of the market.

The Not So Obvious

10 Year Treasury Bonds – as most of you know mortgage interest rates are tied to the 10 Year Treasury Bond Yield.  The current yield is around 3.36% and the 30year fixed mortgage rate is just over 5%.  The uncertainty here is when, not if, the 10 Year yield will start to increase due to the Government having to sell a never ending supply of bonds to cover budget deficits.  Expect bonds and mortgage rates to head up.

Mortgage Backed Securities – If you don’t know what they are, you should.  This BiggerPockets article, Fed Leaving Door Open to Extend Mortgage Backed Security Purchases, by Ryan Hinricher, discusses whether the Government will continue their program of buying mortgage securities after the program is set to expire at the end of March.  Overall the Government has purchased well over a Trillion dollars in mortgages, a role many investors played until the sub-prime meltdown occurred.  Assuming the Government stops this program, and they most likely will, you can expect mortgage rates to increase by at least 1%.

Local, State and Federal Governments – with the exception of maybe North Dakota and Alaska, every state in the US is in dire straits.  Revenues have been dropping faster then costs can be cut, and the only solution seems to be higher taxes.  I am sure that you are aware that any increase in taxes will only delay full recovery, and individuals and businesses will have to make adjustments to cover that increased expense. Oh, and you can expect increased taxes.

While I can’t predict with absolute certainty that any one or all of the above will play out as discussed, the reality is that you have be prepared to adjust or the market will steal your profits.

Now that you are armed with a basic knowledge of the landscape ahead of us, you should be able to intelligently position yourself to both protect and grow your businesses.

What I learned from Robert Kiyosaki…

As I thought about my next blog post, I started reflecting on some of my biggest lessons learned or in other words if I could go back and do it again this is what I would change:  Don’t pay for real estate coaching from anybody but a local expert.

My introduction to real estate in general was working as a mortgage broker for 4 years.  I mainly did refinances and purchases for well qualified borrowers at Wells Fargo so I never gave a second thought to being a real estate investor.  My time as a mortgage broker has helped me in my investing career because I understand the roles of a title company, friends at those companies as well as understanding real estate contracts and a few other things.  So anyways back to the story…

After having my son, I realized I needed to do something for myself so my husband and I attended a free Robert Kiyosaki presentation and chose to pay $495 for a 3 day presentation where we would learn “everything” we needed to know to become real estate investors.  Well, needless to say at the end of the 3 day seminar I knew I could do real estate investing, but I also knew I needed more training.  Robert Kiyosaki and the Wealth Intelligence Academy to the rescue!  For another $8,00- -$50,000 you could get more training.  After much debate I chose a $14,000 package that gave me access to 4 classes, online or if I wanted to go in person I could travel to different cities across the USA and attend the same classes in person.

The first class was mandatory and held locally within a few weeks.  It gave us a broad overview of the different real estate strategies out there so we could decide which avenue we might go down first.  Honestly, the best information I received at that seminar was to find my local real estate investment club.  How convenient that that information was not shared at the 3 day seminar.  I now realize that I should have used the internet to do more research, but at the time I was using the internet for my email and online shopping, not really for doing research, so I was not familiar with the University of Google like I am today.

To shorten a really long story, after one online class I realized I had made a huge mistake and basically started attending the CAREI meetings locally here in Denver and never looked back.

It was a pretty expensive lesson to learn, so the bottom line is that there are plenty of good real estate investors locally that readily share their knowledge with others through real estate investment clubs and meetings.

Check out my review of the real estate investment clubs here in the Denver area.

What have been some of your biggest learning lessons in real estate?  Comment below, I would love to hear from you!

Denver Real Estate Investor Clubs

Denver Real Estate Investor Clubs

I have not been to every Real Estate Investor Club in Denver, but in my time investing the ones I list below are reputable clubs.  I have added my opinion to each club and it is only that and opinion.  Please comment if you have something to add to the discussion.

Now presenting in no particular order…. (Can’t you just hear the drum roll?)

Denver COPIA
Rob Swanson
http://denvercopia.com/
Meets the 2nd Tuesday of each month at the Doubletree Hotel in Westminster, CO.
8773 Yates Dr
Westminster, CO 80031
(303) 427-4000
Annual cost or pay at the door
I really like Rob Swanson.  He is the real deal.  I have always felt I have gotten good, relevant content from him and even though I have not personally purchased any of his programs, everyone I know has loved them.  I didn’t find Rob until about 18 months into my real estate investing career and boy do I wish I had found him sooner.  In hindsight I would have much rather paid for Rob’s coaching program over the one I did with CAREI (not to be confused with the boot camps CAREI offers because they are packed full of info).  I have become friends with many investors that I have met at COPIA and so the networking is awesome.

Colorado Association of Real Estate Investors (CAREI)
Contact Person:    Angela Gurule
Meeting at Red Lion to the Lone Tree Marriott Hotel
on the 4th Wednesday, 7:00 p.m.
Phone Number:    303-398-7035
www.carei.com
info@carei.com
Annual Membership or pay at door
This was the first investment club I joined and I don’t regret it.  I have met a lot of great people through networking at CAREI events.  In the beginning I attended the wholesale boot camp and that was the catalyst to my real estate career.  Over time I have found that the more I learn the less relevant this club is to my business development.  Some meetings are great, relevant and right to the point and others are sales pitches to buy other “Guru’s” products.  That’s not always a bad thing, don’t get me wrong, but considering my 45 minute drive to get to the event and time away from my family I have just started to pass on the meetings.  That being said I would still at least pay at the door for the first meeting to see if you like it and go from there.

Happy Canyon Group
John Fisher
www.happycanyongroup.com
Office:    303-338-8000
Saturday Morning Meeting 7am-9am – FREE

This is a great, FREE, relaxed meeting that I love going too when I can make it.  John is just a really good guy.  I enjoy the format and discussion style of his meetings.  It is a casual environment where experience investors come to eat breakfast and discuss real estate in the Denver area.  The networking is great and I always have a great time see old friends and making new ones.   On a side note I have heard great things about his coaching program, but have not been involved with it personally.

Investors Realty Resource of Colorado (IRR)
Brad Podhajsky
Meet at Atrium Conferencing Center
6400 S. Fiddlers Green Circle
1st Tuesday, 6 p.m.
303-805-5570
www.irrofcolorado.com
info@irrofcolorado.com
I have never attended this club personally due to distance from my house and scheduling conflicts.  The reason they are on the list is because I have only heard good things about the guys who run it and I have personally purchased a wholesale deal through them and it went flawless.  I have heard that they have a great coaching program and other boot camps as well.

Investor Advantage
Greg Parham
Meet at Dave & Buster’s
I25 & Colorado Boulevard
2nd Wednesday, 12:00 p.m.
303-989-0900
www.investoradvantage.net

greg@canyontitle.com

Annual membership of pay per meeting.

Greg is a lawyer and his title company Vista Title has merged with Canyon Title.  I have done transaction with his title company and they have been good to work with because they really understand real estate investors.  I have been to the lunch meetings Greg offers and have found good relevant content each time I go.

Mastermind Investor Group
Paul Pedri
Meet at    Doubletree Hotel-Quebec
3203 Quebec St.
1st Thursday, 6:30 p.m.
303-487-0461
www.mastermindinvestors.net
eproperties@comcast.net
I have never attended this group, but have heard good things about it.