Seven Ways to Flip a Property

“Flipping” is the buzzword of the year in real estate - flipping books, flipping articles in the newspaper, and even flipping shows on TV! What is flipping, how does it work and how you can profit?

Flipping simply means buying a property and reselling it quickly, as opposed to holding on to a property long term as a rental. Flipping comes in several varieties, most of which are legal and profitable, some of which are not.

Flip Strategy #1: Buy, Fix and Flip

Let’s start with the most common form - the good, old “fix ‘n flip”. This process involves buying a property that needs work, fixing it up, then selling on the “retail” market, that is, to a person who will live in the property. This method is tried and true, and works very well. You can easily make $15 - $50k on one deal, depending on your market and how good you are at finding bargains.

The danger in fix and flips is either paying too much or underestimating repairs. Be very conservative in your fix-up costs and length of time it may take to resell. Also, make sure you include in your analysis the cost of paying a real estate agent to sell the property.

Flip Strategy #2: Buy, Refi & Lease/Option

Rather than sell the fixed up property for all cash, sell for terms. Once you have completed the rehab, refinance the property at its new appraised value. If you did the math correctly, you should have little or no money in the deal. Sell the property on a style=”FONT-SIZE: 10pt; COLOR: #005500″>lease with option to buy style=”FONT-SIZE: 10pt”>. The rent payment from your tenant/buyer should cover your mortgage payment (if not, consider an interest-only or adjustable rate loan that is fixed for 3 years). When your tenant exercises his option to purchase, you reap a larger profit, since you don’t have to pay a broker’s fee. If the tenant exercises his option after 12 months, you benefit from a lower capital gains tax rate.

Flip Strategy #3: Buy & Flip “As Is”

Don’t like to do fix-up work? Consider selling the property “as is” as a light fixer upper. If the local real estate market is hot, you should be able to sell the property in poor condition just a little below market. This is especially the case with houses in “transitioning” neighborhoods. Make sure, of course, that you acquire the property sufficiently cheap enough that you can sell it below market quickly and still profit.

Flip Strategy #4: Wholesale

Strategy #1, the fix and flip, is very popular, which means there are a lot of investors looking for rehabs. You can buy the property cheap and sell it for just a few thousand dollars more to another investor without doing any work. You won’t make nearly as much as the rehabber, but you will realize your profit quickly.

Flip Strategy #5: Pre-Construction

In very hot real estate markets, prices are appreciating as much as 2% per month. If you time things right, you can put a contract on a pre-construction house or condominium, then flip it to someone else when the development is complete. If it takes 12 months for the development to be complete, and the condo price is $500,000, you could make $100,000 or more in one year! Of course, the opposite is also true - you could end up losing money if the local economy tanks and you end up with a worthless condo that you can’t sell for more than you paid. Use this approach very carefully…

Flip Strategy #6: Scouting

The Scout is an information gatherer, so not technically a property flipper. He is the “bird dog” who finds potential deals and sells the information to other investors. Many people get started as a Scout for other investors because it does not take any cash or prior knowledge to look for distressed properties. The Scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee. The fee will vary depending on the price of the property and the profit potential. The Scout can expect to make five hundred to one thousand dollars each time he provides information that leads to a purchase by another investor.

Flip Strategy #7: Illegal Flipping

OK, I am not advocating this approach, because it is illegal. Illegal property-flipping schemes work as follows: unscrupulous investors buy cheap, run-down properties in mostly low-income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are federally insured, the government authorities have investigated this practice and arrested many of the parties involved. As a result, the public perceives is flipping to be illegal.

The fact is, “flipping” - as I described in the beginning of this article - is NOT illegal. Loan fraud in the process of flipping is what is illegal, so don’t confuse the two. The other six ways to flip are very legal, very ethical and very profitable!

Buying Real Estate Undervalued vs. Buying UNDER VALUE!

“Undervalued” vs.. “under value”… is there a difference?
People often speak of buying a property “undervalued”, as if they are discovering something nobody else figured out. Stocks, land, and real estate can all be purchased undervalued, but this is different from buying property UNDER value.


Here’s the difference…


Let’s say you think a company is ripe to expand within the next few years. You are speculating that the value of the company’s stock will increase, so you buy AT MARKET PRICE and hope you are right. You can also buy a property at MARKET PRICE and hope demand will increase and thus its value will go up. You can buy gold at today’s price and hope it will go up in price. However, in all cases you are speculating that the asset will increase in value and that it is CURRENTLY undervalued.


Compare this thinking to buying a property UNDER VALUE, that is below its CURRENT market value. If a house is worth $200,000 based on similar houses that have sold recently, the market value is $200,000. It may be an “up and coming” neighborhood with a good school district that most people have not yet discovered, so you can buy it for $200,000 based on the idea that the future value will be more, so it’s currently ”undervalued.”


Or, you can buy a property with a current market value of $200,000 and pay $150,000, in which case you are buying BELOW value, or with BUILT-IN value. Why is there built in value? Simple - you can sell it tomorrow for up to $200,000! If you buy real estate undervalued, you have to wait until everyone else realizes what you suspect to be true, that the property SHOULD be worth more.


Certainly, buying property that is undervalued can make you money in that you are speculating future demand will be higher and prices will increase for that asset. But, a safer, smarter approach is to buy under value because a particular seller has some motivation, such as a foreclosure, estate, or divorce. Instead of looking for “value plays”, look for value built-in, which can always be found when a particular seller has extreme motivation and needs to sell quickly.

What to Look for in an Apartment

Finding an apartment to rent is a very time consuming and important venture. It may seem like a daunting task at first, but if one takes the time to become educated on the apartment options, the experience will be a lot more enjoyable. Too many people fail to inspect apartments thoroughly, and have a clear idea of what they want. As a result, the apartment shopping experience can often be disheartening. Looking for certain key elements in an apartment can make yield higher satisfaction.


When looking for an apartment, it is always best to have an idea of what you want. Figuring out certain price ranges before you start looking at apartments will save you a lot of time. Also, take into account what type of apartment you would be interested in. How many bedrooms and indoor square footage an apartment has is very important to most people. Also, try to get at least some kind of idea of what kind of neighborhood you are looking for. When searching for an apartment, you want something that will fit your needs.


Also think about the location. Location is very important because of schools, jobs, and neighbors. Some apartments may seem very alluring, but are located in inconvenient places, or in bad neighborhoods. Some neighborhoods have excessive noise and high crime rates. Better apartments will be far removed from these unpleasant elements. Sadly, the more expensive apartments are usually the apartments in better locations. This is an unavoidable fact, and should therefore be taken into consideration when searching for an apartment. Don’t let prices scare you into renting an apartment in a bad neighborhood.


Consider the owner and manager of the apartments. Find out if they have good reputations. The best managers are there for their tenants, and are always willing to help. The best owners charge a fair rent and avoid raising rent. Some of the best owners will offer the best deals on appliances and services. When visiting an apartment, don’t be afraid to ask tenants what they think about the landlord and owner. If all of the reviews are positive, then you may have found the apartment for you.


Look for apartments that have similar neighbors. If you are a bachelor, then you might enjoy having neighbors who are single. If you have kids, then it is always a great idea to look for a family-oriented apartment complex. If you live near people with similar backgrounds, you are more likely to form friendships, endure fewer conflicts, and have a more fulfilling living experience.


Finally, consider the appearance of the apartment. Some apartments look lackluster and seem dirty and unappealing. A good owner will take pride in his or her apartment complex. The best apartment complexes have nice landscaping, paint jobs, trees, and many other appealing elements. Most people want to be proud of where they live. Looking for a well run, appealing apartment is always a great idea.


There are many qualities to look for in an apartment. Consider location, cost, and the reputation of the manager and owner. Don’t be fooled by cheap apartments, or special deals. Having a clear idea of what you are looking for, and how you will get it will make your apartment search not only more effective, but also more enjoyable.

Buy a House, Get Thrown in Jail?

Over the past two years, a dozen states have passed foreclosure “protection” laws, and many states are following suit. Even in states where there are no specific foreclosure protection laws in place, there’s plenty of power within the state Attorney General or County District Attorney’s office to prosecute a real estate investor.

Here’s some of the things you need to do to stay out of trouble:

GET ALL AGREEMENTS IN WRITING

Oral agreements are not good anymore, and they often lead to a dangerous “he said, she said”. If you get a deed from an owner across a kitchen table, it is a legal transfer, but you should document everything first with a contract and/or set of good, clear disclosures. These disclosures include the fact that the owner is losing his property, his equity, and his right to any proceeds from the home. Although giving a deed should make this obvious, some people truly think that they are entitled to something more because they are still living in the house. Also, some investors do offer vague promises to sellers for a right to re-purchase the house at a later time, which can be misconstrued. Always document every agreement you have with the seller in writing.

EXPLAIN THINGS IN PLAIN ENGLISH

Even though you have a good written disclosure, it’s no excuse for pushing papers under the seller’s nose to sign without reading. Explain everything clearly to the seller so he understands the implications of the deal. If you are afraid of telling the truth, don’t do the deal. The seller must go into the transaction with his eyes wide open. Imagine that the local news station was filming your deal and act accordingly.

DON’T OFFER THE SELLER A RIGHT TO REPURCHASE

Although you can offer the seller a lease-back with an option to re-purchase at a later time, this kind of arrangment rarely works out. Some state laws restrict this kind of agreement with a cap on the profit you can make on such a deal, which all but makes it impractical. Vis-a-vis these laws, a homeowner can claim such an arrangment was a “disguised” loan and get the property back by filign a lawsuit. Either way, it’s generally a bad idea to leave the seller in the property. Make a fair deal, give him some cash, and get him to move on with his life.

COMPLY WITH FORECLOSURE PROTECTION LAWS

Know your state foreclosure protection laws, known as “foreclosure consultant” laws. Generally speaking, these laws requires a written contract with state-required disclosures and a rescission period, anywhere from three to ten days. The rescission gives the seller the right to cancel the agreement. It is recommended you give a seller a 3 day rescission even if the law does not require it. If the deal ever blows up and you are in court, it will go a long way for your credibility.

Where to find the best commercial real estate

The profitability of any real estate investment depends a lot on your ability to locate the best commercial real estate deals available in the market. By investing in real estate deals that have the most potential, you can maximize your profits and lower your burden by investing in only a few deals per year. The best commercial real estate deals will give returns that are equivalent to three to four times the amount of your investments. If you invest in average deals, the returns will be relatively less and you will have to do more deals for getting the same returns. The amount of work and process involved are more or less the same for any real estate deal, so it is better to do less work and get a greater return.

You need to make sure that the resources used for locating the best real estate deals are accurate and reliable. For finding the best deals, you can approach reputed commercial brokers, as they are the ones who actually have the properties listed. After noting down your requirements, you can go to these brokers for getting information about the availability of properties that you intend to buy. You need to cast your net wide by calling local brokers, as well as brokers in other states that will be more than happy to call other brokers and find listings that best fit your criteria. When you approach a broker, make sure that you ask for pocket listings, or listings that are about to go on the market, but are not yet listed officially. This will help in finding the best deals and getting ahead of the competition.

The Internet can also be used for finding the best deals, as there are numerous sites dealing in the sale of a variety of properties ranging from raw land to large retail and apartment complexes. On these sites, you can get the required information about the property, as well as the broker. You can keep filtering out the information until you get to deals that suit your predetermined criteria.

Another place where you can find the best deals is probably an auction house that auctions different types of properties. Very often, you may get excellent deals that would otherwise have cost you a lot more if purchased from a commercial broker. It is necessary that you register with some of the most reputed auction houses in order to obtain e-mail notifications about properties that are put up for sale from time to time. This will give you enough time to contemplate on your investment decision before the actual bidding day. Some of these establishments also provide the option of purchasing a property at a specific price before it goes for auction. This makes it even more necessary to stay in contact with several auction houses, as you never know what opportunities might come along.

Apart from these, you can also use local resources such as newspapers, listings, and magazines for finding the best commercial real estate deals. One thing that you should always keep in mind is that the more contacts you have, the more are the chances of finding the better real estate deals. This means that rather than depending on a single source, you need to refer to as many resources as you possibly can.

Cutting Your Losses Early

When your primary plan of action doesn’t work, you need to have a backup strategy. This may involve switching gears from a retail sale to a rental or rent-to-own deal. It may also involve dropping your price, dropping your rent, or, if you are lucky enough to realize your mistake early, walking away from an earnest money deposit instead of closing on a bad deal.



If you already closed and your exit plan didn’t work out, sometimes the only option is to bail out and cut your losses. It takes a big person to look in the mirror and say, “I made a mistake.” Too many investors let their ego get in the way and hold on longer than they should and the bleeding never stops. If it’s a retail deal, then drop your price, even if it means losing money. If it’s a rental, drop your rent low enough to attract a solid tenant. If your monthly carrying cost is $1,000 on a unit, it makes sense to drop your rent by $80 a month rather than have a vacancy. In fact, if you’re offering the property on a lease with option to purchase, you may consider dropping the rent below market and taking a monthly loss to make it up on the backend, assuming there’s enough equity to justify the monthly loss.



For example, suppose you buy a house for $150,000 and it’s worth $200,000, but because of a poor financing choice, your monthly payment is $1,300 a month. Even if market rents are $1,100 a month, that doesn’t mean you must hold out for $1,300 a month. Too many investors think they need to hold out for the $1,300 monthly rent because their payment is $1,300. Wrong - the market will dictate what you collect for rent, not your monthly mortgage payment. If you have a high payment but sufficient equity, it makes more sense to rent it for $1,100 or even $1,000 to get a qualified tenant who can eventually buy it for $200,000 in two years. A loss of $300 for 24 months is only $6,800, which is justified when you make $50,000 profit on the backend. A word of caution, though: Never compromise your rental standards because it will cost you more in the long run for evictions and repairs.


Over the past few years, many novice investors got into preconstruction deals, anticipating a huge increase in prices by the time the development finished. Instead, the values had flattened or dropped. Rather than walk away from their deposits, many insisted on completing their purchases, hoping the market would come back. They are often wrong, and end up selling the property for less than they bought it for. If they stay in the game long term or have a viable alternative exit strategy (such as renting in the meantime), they may come out on top. But more often than not, the best course of action may be to cut your losses early.

Can Government Solve the Foreclosure Problem?

Foreclosures are up nationwide, and will continue to rise as prices continue to go flat in many markets. For some, the problem is painful. Ask New Century Financial Corporation, the nation’s second largest subprime lender, who recently filed for bankruptcy. Ask the guy down the block from you whose house is in foreclosure.

Some pundits think the rising foreclosures will bankrupt our economy, causing pain for people who lose their business or job as a ripple effect of all these foreclosures. Others think that the rise in foreclosures is a healthy adjustment to the end of a long real estate boom, and is nature’s way of taking care of a free-market economic cycle.

Who’s right? Time will tell, but it’s alarming to see politicians trying to fix this problem. Here are some of their solutions.

Give People Money

Tax the rich, give to the poor. The federal government now wants to fund programs to help people stay in their homes.

A new bill in the Senate proposes giving money to people who can’t pay their loans. We taxpayers are confused. If these people are in trouble because they never should have been given such a loan, why should taxpayer money be used to keep them in their homes that they could not otherwise afford?

Maybe someone in Washington has the answer to that question?

Regulate Foreclosure Investors

I have written extensively about the assault on foreclosure investors that have been initiated by consumer advocate groups, resulting in a tsunami of new “Foreclosure Protection” laws across the country.

While protecting innocent homeowners from unethical investors is a good idea, new legislation is not always the answer. Enforcement of existing consumer protection laws and prosecution under existing criminal laws is certainly a better option than creating new laws that limit the options of a seller in foreclosure. The best solution to a foreclosure epidemic is a free market that allows investors to gobble up inventory. By hamstringing investors with complicated, punitive regulations, it will only discourage transactions and result in more properties in lender inventory. More lender inventory forces them to sell at lower prices, which hurts the entire real estate market.

Stop the Foreclosure Process

The Government of the State of Massachusetts recently handed the State Banking Division the authority to put up to a two month delay on any lender foreclosure. All a homeowner has to do is file a complaint with that office.

It is not year clear on how many lenders this will affect, but certainly this move is troubling. If the government’s action is based on a consumer complaint, what kind of complaint deserves the kind of government involvement that stops a lender from collecting on its debt?

Certainly, any homeowner whose legal rights have been violated under state or federal law can stop or delay a foreclosure with a court order. Opponents, of course, will argue that since these people in foreclosure can’t afford lawyers, they won’t have the means to seek this remedy. Such is life, that people who are in debt can’t afford lawyers to protect their legal rights. Do people in $1,000,000 homes deserve the same protection as people in $100,000 homes? Do lenders and their shareholders have the right to foreclose and get their collateral back?

And, think about the next logical step… will the government stop allowing landlords to evict if the problem gets bad enough?

Stop the Lenders from Lending

Nobody can seriously deny that lenders got sloppy in how they lent mortgage money over the last 10 years. As a result, many people got into loans they couldn’t pay back, and we now see the consequences.

Conversely, with the exception of gross overreaching by mortgage brokers, it’s hard to deny that most people didn’t understand the risk involved in borrowing money they couldn’t pay back. If you buy a house with no money down and a negative amortizing loan, you are gambling that you will make more money in the future and/or the price of your home will increase. If you are wrong, you lose your home. That’s the gamble. It’s like Vegas, except for one thing – the house doesn’t win when the customer loses. Everybody loses, except the attorneys who get paid to foreclose.

Should the government stop lenders from offering “risky” loans? The answer, I believe, is emphatically “NO”. If lenders go too far, they suffer financially. Thus, the market will take care of itself, in that lenders who lose profits will tighten up loan regulations, and Wall Street will downgrade or reject portfolios of risky loans.

Before you get too excited by this last paragraph, I do believe that some regulation is appropriate to protect the consumers and shareholders from getting duped in the process. Additional disclosures to both homeowners and Wall Street investors are appropriate considering the large number of defaulting subprime loans. However, if people want to borrow money under risky terms and lenders want to lend under a high risk of loss, why should the government stop them? Pawn shops, check-cashing stores and used car lots all operate on a high-level of risk.

Step Up Enforcement of Existing Laws

Instead of stopping the business, I believe the government should throw money at enforcement. Prosecute the bad people and leave the options open for people who want to do business under their own terms. There are enough existing laws that give the state and federal prosecutors plenty of room to go after bad operators, and many of them already have.

The government can put bandaids on it, but only the market can solve it the foreclosure problem. When demand exceeds supply in a given market, prices will go back up, and people will have enough equity to sell their homes. Somehow, I don’t imagine people will learn their lesson and, thus will continue the same cycle in the future. But, most Americans believe it is not the government’s job to stop people from willingly doing stupid things.

When it comes to your financial decisions, be responsible, read the fine print, and remember… “buyer beware”.