Flipping Houses For Dummies. Ralph R. Roberts
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tearing down old homes and building new ones in their place.
Flip contracts (or do it all on paper)
Flipping contracts (sometimes called wholesaling) consists of locating a distressed property, contracting with the homeowner to buy the property, and then selling the contract to an investor who wants to flip the property. In essence, you earn a finder’s fee by serving as an investor’s bird dog, and you don’t even have to lift a hammer.
Here’s how it works: You pay the homeowner a deposit, typically $1,000 or 5 percent to 10 percent of the estimated purchase price. In return, you receive a purchase contract giving you the right to sell the property to an investor. You then find an investor who’s willing to purchase the property and pay you a fee in excess of the amount you have tied up in the property.
Cook up your own strategy
Successful investors, whether they invest in real estate or stocks, devise unique strategies based on their personalities, their abilities, and the resources they have at their disposal. If you like to help people and you’re good at dealing with uncomfortable situations, for example, you may want to focus on foreclosures or divorces. If you’re good at primping a house but not so good at rehabbing, consider focusing on homes that require only a little makeup.
You can even mix-and-match strategies to develop a custom strategy. You may, for example, choose to buy a quick flip in a hot market or buy only duplexes, move into one half, and rent out the other half while renovating the half you’re living in. The variations are limited only by your imagination.
Drawing Up a Detailed Plan in Advance
Every day that you own a property, holding costs chip away at your profit, unless of course the property is a rental. Holding costs are the daily expenses — interest payments, property taxes, utility bills, homeowner association fees, and maintenance costs. The trick to reducing these costs is to flip the property as quickly as possible, and that means planning well in advance. Make sure that your plan covers all five stages of the flipping process:
1 Secure cash or financing.With financing (or, preferably, cash in hand), you can move on the deal much more quickly than other buyers and negotiate from a position of power if other prospective buyers have no cash. See Chapter 4 for more about financing your flips, and see Chapter 11 to determine how much you can pay for a property to earn a decent profit from it.
2 Search and research.The fun, exciting step in the process of flipping houses is searching for and finding diamonds in the rough. To limit your exposure to risk, however, you need to follow up your search with research, particularly if you’re buying a home in foreclosure. See the chapters in Part 2 for more about finding properties to flip, and see Chapter 9 for guidance on how to research distressed properties.
3 Purchase.Buying the property is probably the easiest step in the process, but you want to be sure to negotiate (or bid) a price that’s at least 20 percent less than the cost of buying, renovating, holding, and selling the property. You also need to negotiate other terms, including the closing date and the date on which the previous owners move out.
4 Rehab.Jot down a list of improvements you want to make to the property when you first see the house, and schedule the work before you close on the purchase. Ideally, you should start renovating the property the same day or the day after closing. Chapter 10 walks you through the process of inspecting a property for the first time; Part 4 is devoted to fixing up your fixer-upper.
5 Sell or lease.As soon as you know the closing date for purchasing the property, set the date on which you want to put the house back on the market or have it available for tenants. If you’re selling the house, also decide whether you want to sell it yourself or work with an agent. You don’t have to wait to market the house until renovations are complete — the activity that surrounds the house during renovations can be an excellent marketing tool. It gets the neighbors talking. See Chapter 20 for various ways to realize a profit from your investment and chapters 21 and 22 for more about selling your rehabbed property.
Mark Workens, owner of Mortgage One (http://mortgageone.com) and a good friend of mine, offers some other FHA-related mortgage input that every house flipper should know. As you develop a flipping strategy, keep these rules in mind:
HUD/FHA 90-day rule: According to the Department of Housing and Urban Development’s (HUD’s) 90-day rule, you must own the home for longer than 90 days before you can transfer the title to a buyer who’s using a Federal Housing Authority (FHA) loan to finance the purchase. If you’re planning to sell to first-time buyers, this rule can reduce your pool of prospective buyers and you may need to hold the property for longer than you had planned. Owning the home for fewer than 90 days voids your eligibility for an FHA-insured mortgage.
HUD/FHA 91-to-180-day rule: If you resell a home between 91 and 180 days after you buy it and the resale price is 100 percent or more than what you paid for the property, a second appraisal is required if the buyer is using an FHA loan to finance the purchase. If the second appraisal is 5 percent or more higher than the first appraisal, the lesser of the two appraisals is used for FHA loan approval.
The 24-month history rule: Banks require title reports to determine chain of title dating back 24 months. If any more than one person has owned the property in that 24-month window, fraud might have played a factor. As an investor, always be careful about how many sales occurred in the past 24 months. Anything more than one and there might be a problem. Simply strolling into your county’s