The
premise is simple in theory. Buy low, and then resell the property to
an end buyer: either another investor, or an owner occupant for more
than you paid.
Buy Low Sell High. "Flipping" Properties for Profit This is the
technique that most people are familiar with. It is the buy low - sell
high strategy. It has a lot of names. Some people refer to this as
"Flipping " or "Wholesaling and Retailing", " Fixer-uppers", "Junkers."
,and "Ugly houses." The premise is simple in theory. Buy low, and then
resell the property to an end buyer: either another investor, or an
owner occupant for more than you paid (after adding back in all your
costs to own the property). The properties may or may not need work to
resell. There are several tracks that you can run on with this
strategy. Finding the type of deals that work for you, in your given
situation, is critical. What I mean by that is you better not be doing
a major fixer-upper that needs a ton of work if you need to turn it in
30 days to a retail homebuyer, unless you know what you are doing. In
the beginning, stick to properties that may need only some paint and
carpet, and a little yard work. Legging into projects in the beginning
is critical to your success as a new investor. It takes time to
assemble all the players on your team. Take furnace guys, for instance.
I recently had to replace a furnace, and my normal subcontractor had
just retired, so I needed a new guy. I had my main contractor call, and
get a few bids. They ranged from $1,200- $1,600 for that particular
unit installed. I knew I should only pay a third that much, so I kept
calling around and found a guy that did a lot of new construction. Once
he realized it wasnt a one-time job, and that he would get my
maintenance calls as well, a bid came in for $600. Right where I wanted
it. These types of relationships take a little time to find, and
develop. They dont take years, but you dont want to go into a project
paying retail for everything. Know what materials should cost.
Another great source for materials is your local Home Depot, or other
discount lumberyard. Go down to the store. Shake a few hands. Get
catalogs of everything they sell in the store. Spend a little time with
the catalog so you know what things cost, and how to call things by
their correct name. Youll earn the respect of your contractors when
they think you know what you are talking about. You can also set up an
account for materials.
What you want to do is to create a template of the type of repairs you
do, and the materials you want to use. Remodeling does not have
to cost a ton of money. You dont need imported Italian tile to make a
bathroom floor look good. By begeing educated to material costs etc.
when your contractor says you need to replace a sink or toilet, you
know exactly what your materials should cost. You should be able to do
a geplete bathroom - tub shower, toilet, vanity, sink, flooring etc.
for $500 in materials plus some labor.
Blend Color Schemes Choose a color pallet so that your paint, carpet,
cabinets etc. all blend in the same color tones. Many new investors
underestimate how important this can be. A potential buyer can walk
into a room, and it may have a cool-tone carpet with a warm-tone paint
color. When this happened something In a subtle way, something
just doesnt feel right, and you lose the sale. If you have no idea
what I am talking about then get Informed dont underestimate the
importance of this Youll earn the respect of your contractors when
they think you know what you are talking about. Talk to a
professional decorator. It is real obvious, when you get the hang of
it. You can see the builders that are blind to this gepared to the
builders that coordinate color schemes. It doesnt cost any more, and
will actually make you money when you factor in how much faster you
will sell your house. For the guys reading this talk to your wife or
girlfriend she will know exactly what I am talking about.
Junk Doesnt Sell.
Just remember that when you are doing remodeling, junk doesnt sell.
People like to buy pretty cute houses. I always replace carpet and
paint at the very minimum. Its cheap and it gives you a lot of bang
for your buck. Carpet with pad installed should not run you more then
$10-$12 a yard.
Questions to Ask Yourself Before You Buy.
The first thing you should do is ask yourself: Who am I going to sell
this property to?. Hopefully, you have answered that question BEFORE
you wrote the offer, or at least by the time you got it accepted. Are
you going to wholesale it to another investor, or are you going to
retail it to a retail buyer? Do I wholesale for quick cash? The answer
to this first question will tell you what track you will need to run
on. For instance, if you are planning to wholesale the property, is
their enough profit margin in the deal so an investor can make 15-25%
profit? If there isnt, you may not find any buyers. You need to
consider the profit margin for the current market you are in. In a
hotter market, you may be able to offer it for closer to its retail
value, and still sell it verses a really slow market. A 25% profit may
not be enough. This will fluctuate by area. When wholesaling property,
less is more. The first thing I do is a trash out. I have made close to
$30,000 on a deal just by hauling out the trash. It consistently makes
$10,000 or more on an entry-level house. Of all the things people do to
improve a property, the first impression counts the most. Haul out all
the trash and do a clean up on the yard. It is money well spent. After
I geplete this, I then re-determine what I want to do with the
property. Wholesaling is by far the easiest to do.
To attract wholesale Buyers you may want to run some ads like:
FIXER UPPER Cash!
30K under market.
123 Cherry Lane
Phone 123-456-7890
Or
STEAL MY HOUSE
Fixer, First 50K takes it.
123 Cherry Lane
Phone 123-456-7890
I wholesale property when I want to turn it fast for a quick $2-$10K
profit. Most wholesale buyers are cash buyers who are looking for
properties they can fix up and retail. I know a lot of investors who
specialize in this. They may assign their purchase contracts for a fee,
and move on to the next deal without ever doing any work. This is a
great strategy if you are good at finding deals. Be weary of investors
that have to go through the conventional financing process. You could
end up eating up all your profit in carrying costs. Is it better to use
retailing for maximum profit? Retailing for the maximum value is by far
the most popular strategy. Even though it offers the greatest profit
potential, it also carries with it the greatest risk for new investors.
I have seen, time and time again. New investors often spend way too
much money doing foolish improvements on a property that really doesnt
net them any more cash at the closing table.
What Improvements Matter Most? This is a good question, and I submit to
you the answer is different for different markets. What you want is, to
do the things that will cost the least, and yield the most. Rule #1 is
to realize that you are doing this to make money and not necessarily
live in it yourself. If it aint broke, dont fix it. What I mean is
dont spend time remodeling the inside of an out-building if its
painted the wrong color, and needs a workbench. The condition of an
out-building will have little if any value. So what do you do? New
Investors often spend way too much money doing foolish improvements on
a property that really doesnt net them any more cash at the closing
table.
My suggestions follow :
When someone pulls up to the house, they have to want to gee in. You
can have a palace inside, but you have to get them to want to gee in
and see it. People judge a property on its attractiveness by its curb
appeal. Do NOT underestimate the power of this. If you are on a limited
budget, make it look good outside first. Fix-Up for the Woman in the
House The next thing to remember is that "The women buy the house". I
know this may sound sexist, but its true. If the wife hates the
bathroom because the tub is discolored and the toilet seat is cracked,
you wont be selling it to that couple anytime soon (Even if the
husband loves the outbuilding). Always put new toilets in for obvious
reasons. After the property is free of all trash, yucky carpets etc.,
and the outside looks good, then make sure all the mechanicals are
working properly. Replace or upgrade if necessary.
Focus on the outside curb appeal first:
a. Trash out the yard; Power wash the structure
b. Trim all shrubs; Green up the lawns.
c. Paint the exterior trim and basecoat.
d. Replace screens and do other cosmetic fixes.
e. Repair the roof.
f. Add house lettering, new light fixtures and a mailbox.
g. Install a decorative front door
h. Plant new shrubs, flowers, fresh bark, etc. (Within reason)
For the final details check all of the following:
A. Plumbing
B. Electrical
C. Heating / AC (Dont forget to check the water heater. They often go
out if the water was shut off, and the power was still on.)
D. Kitchens and Bathrooms
1) Make sure they are clean and sanitary.
2) Replace Toilets
3) Replace tubs if necessary and install a door enclosure.
4) Replace fixtures, etc.
5) Paint and change flooring or counter tops.
E. Repaint interior where needed.
F. Update fixtures.
G. New floor coverings, or clean the existing ones.
H. Change electrical switch plates, outlets, heat vents, mini blinds.
The little details make a big difference, and dont cost much. This is
by no means a geplete list, but this can help you get started on your
repairs. Repairs like this do not have to take a lot of effort on
your side. When I make offers on properties for all cash "flip deals",
this is how I go about it. I usually make All Cash, or All Cash and a
Seller carry back. All Cash Offers 3 day Inspection Contingency Once
I have tied a property up to purchase, I always have a 3-day inspection
period. I typically make cash offers that close quickly, using private
money. Sellers love these kinds of offers, and I have no contingencies
to close except for a 3-day inspection. It is within these 3 days that
I determine if I even want to buy the property.
I cannot emphasize this enough! Kitchens and bathrooms make or break a
sale every time. If appliances are old and out-dated, replace them. If
cabinets are not clean, scrub and paint them. I have seen people not do
things because of cost. The house sit for months. The extra interest
cost alone would have more than paid for the improvements.
Take the Time to Investigate the property. A lot of times I dont even
look at a property to buy until I get an accepted offer. This saves
time, so I am not looking at properties I dont want to buy. Sometimes
I make 40 offers, that get 8 counter offers, and of those 8, I counter
back, and get maybe 2 or 3 accepted. That way, I only have to look at
those 2 or 3 properties. Make Multiple Offers
I then determine what the after-repaired value will be. I try to be
realistic here. It is easy to put in some blue sky, especially when you
need a deal. But you need to remember: you make your money when you
buy. If you buy a property right, you can always resell it for a
profit. You Make Your Money When You Buy! Many investors dont realize
this. They think they make it when they sell, and will pay too much for
a property just because they want a deal. Figure Your Costs It is
important to take a few minutes, and gepute realistic repair and
improvement costs, along with your profit potential. I urge you to be
realistic, and pad your costs by a few thousand dollars. Also, make
sure you factor in your holding time, and buying and selling costs,
along with any money cost you might have in doing the deal. Write it
down. Dont guess, and dont estimate in your head.
However, as you get better at buying properties, you will be able to
walk through a property and estimate repairs within a few thousand
dollars, in a matter of minutes. If you have a big enough profit built
into the deal, it wont matter if you are off a bit, or you have some
unexpected expenses. Always Know Your Exit(s) Before Your Entrance
Violate this rule, and you will pay for it. What I mean is that, if
your only exit strategy is to "Retail" for all cash, and you only have
a $10,000 profit built-in, I can almost guarantee it that you will not
be in this business too long. One of the hardest things to do over and
over is to have to retail property for all cash, because you failed to
structure other exit strategies. Its not to say it cant be done. Many
investors do extremely well with this Allot of times I dont even look
at a property to buy until I get an accepted offer. This saves time.
Make Offers Get a Good Deal Make a Realistic List Have a lot of Options
technique. They have taken time to develop, or implement systems for
getting properties bought, remodeled and sold in a timely fashion.
Build in "Terms" on Exit Strategies When you build some flexibility
into a deal, like paying the Buyers closing costs, or carrying a second
mortgage for 10-20%, and you can still make a decent profit, you wont
get caught sitting on property you cant sell. The more flexible you
are on "terms", the more options there are that will be available to
you. The easier it will be to sell. You wont want to take back seconds
etc. on every deal, because you will be giving away hard-earned profit
for no reason. If you have done your job, and made the property nice,
you will have people gepeting to buy them The approach you take
wholesaling, and retailing will be determined by the volume of deals
you are doing, the amount of equity you have and whether you are doing
real estate investing full, or part-time. One of the biggest deciding
factors on your exit strategy will be the type of financing you agreed
to in the purchase. Do you have to pay off your underlying loan fast (6
months or less)? Or do you have long term financing? Do you make
payments, or is interest accruing until the property is resold? Can you
"Wrap it", "Lease-option it", "Seller finance", or "Carry a contract"?
All of these are options and tools available to you as a creative
investor. Knowing and learning when and how to apply these strategies,
and others will make you a ton of money over time. Lots of Options Make
Quick Sales
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