How I Found a House to Flip
I recently endeavored to invest in real estate. For years, I waited. I wished and wondered and watched listings. I knew I could do it - flip a house, that is. Sure, we've been through some rough times in the real estate market since 2008 or before. Foreclosures, short sales, upside down homeowners, and bank-owned properties have characterized the last several years. In some places in the USA, the market is still depressed. In other places, a modest comeback has begun. I live in one of those comeback areas.
Now what exactly does "flipping a house" mean? It means you buy a distressed property, fix a few things here and there, and sell it again in fairly short order. The goal is get back the money you put into the house and to make a nice profit. But what is a distressed property? It means that the house is currently for sale for less than what it could actually be worth. There can be a number of reasons for this. Homeowners who have fallen on hard times and cannot make their mortgage payments will either try to negotiate with the banks to allow them to sell the house for less than they owe on it (short sale) or they will try to ride it out until the bank forecloses and evicts them. Banks who have foreclosed many times will end up holding the deed (ownership) to the house. At this point, it behooves them from a tax standpoint to get rid of the house as quickly as possible. They will put a low price on the house, hoping to dump it fast. Often, the homeowners will have left some work to be done, some damage, or something to clean up. Even if the house is relatively clean, the longer the house sits empty, the more likely it is that things will decay and go wrong. All of these scenarios spell opportunity for an investor.
When I bought my flip house, it had been sitting empty for over 2 years, was bank owned, and needed a lot of work. This was a huge project for my first, so I ended up bringing in a family member as a partner. I needed her for both moral support and financial support, and I knew that she and I would agree on the big items. That's important, if you choose to have a partner.
This house had a good roof, and very solid, straight framing, but needed a bit of work. It's about 100 years old. Some of the floorboards were rotten, a couple of toilets needed to be replaced, and here's the biggie - it needed an all new electrical wiring and system. We did all new paint inside and out, too. A little daunting for a first project!
The steps that follow will show you how I chose and bought the property. If you are interested in doing this, please consult a good local attorney and accountant. You will also need a real estate agent who is experienced in dealing with distressed properties.
This is not legal advice, accounting advice, or any other kind of professional advice, but just a broad skim of the surface as to how I chose a property. If you would like to learn more about real estate investing as a hobby or career, try learning from Robert Kiyosaki's courses and books on the topic.
Time required: Varies. No less than a month.
- A distressed piece of real property (see intro for definition)
- Cash (amount varies per project)
- A great realtor who is experienced with bank-owned properties, short sales, and foreclosures.
- A good contractor
- A good accountant
- A good attorney
1. FIND THE RIGHT REALTOR: Finding the right property isn't easy. It's not likely to be the first one you see. I looked for a few years before I found something I liked well enough to bid. I made bids on two HUD-owned properties and was outbid! The first thing you will need is to find a realtor you like, who you can trust, who deals with distressed properties every day. There are REO realtors who almost don't do anything but deal with these properties. Find one!
2. LOOK AROUND: In order not to drive your realtor crazy, do a little online research. Your realtor may only show you his or her own listings, but there are plenty more out there. Get plugged into a Robert Kiyosaki course on real estate investing, and you can take advantage of his computer program that helps you find properties. If you don't want to go that route, surf the web. There are a few reliable websites where you can watch for foreclosures and other properties. Email the ones that look good to your realtor and say you want to see them. You can also take a drive and just keep your eyes peeled for FSBO signs and vacant houses with notices taped in the windows.
3. DO THE MATH: Size them up. How much is the asking price, how much work needs to be done, and how much could you sell the house for and remain competitive? You may even want to take your contractor through the house and get an estimate before you make an offer. Do the math. Selling price you think you could get - your offer - repairs - expenses of maintaining the property until it sells (like paying the mortgage, attorney's fees and electric bill, etc) = HOW MUCH LEFT? Is it worth it? Also included in this step would be securing the funds to complete the project. If you don't have the cash and resources to carry it through to completion, talk to a bank and figure out whether you can get a loan for what you need. Robert Kiyosaki is a fan of using what he calls "hard money lenders." These are people who can make short term loans when the bank can't or won't.
4. SIZE UP THE MARKET: This is actually an extension of Step 3. Part of the consideration of whether it's worth it is how desirable the location is. Look at how fast the other houses in the area have sold. Your agent can help you with that information.
5. GET A TIMELINE. When you ask your contractor for estimate, as how long he can get in, do the job, and get out. Then add some time to it, like a month for instance. Again, this is part of your Step 3 assessment. You might be able to get a $200,000 house for $100,000 and only do $50,000 worth of work to it, but you think it might take you two years to sell it because of where it is, then flipping may not be for you. But if all the pieces fit, then make an offer!