Flipping Houses For Dummies E-Book

Ralph R. Roberts

• Herausgeber: John Wiley & Sons
• Kategorie: Ratgeber
• Sprache: Englisch
• Veröffentlichungsjahr: 2017

Seitenzahl: 604

Beschreibung

Buy it, fix it, flip it! Are you a wanna-be flipper looking to get the property, get the job done, and get out--all while maximizing your profit? Not just another house-flipping book, this hands-on guide shows you how to roll up your sleeves and find the perfect property, secure a mortgage, negotiate with condo associations, increase curb appeal, and much more. Flipping a house is more than just buying, updating, and selling. To be successful, you have to be a bit fearless, highly organized, and, at times, creative. This new edition of Flipping Houses For Dummies gives you practical guidance on the risks and rewards of flipping properties; helps you determine whether you have the time, energy, cash, and other resources to be successful; and then conveys the expert knowledge you need to succeed in a very competitive market. * Find, fix, and sell houses for profit * Score bank-owned and foreclosed properties * Identify the best improvements for maximum ROI * Get quick makeover solutions If you're ready for hard work and big profits, start flipping!

Leseprobe

Flipping Houses For Dummies®, 3rd Edition

Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com

Copyright © 2017 by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Library of Congress Control Number: 2017934019

ISBN 978-1-119-36307-1 (pbk); ISBN 978-1-119-36311-8 (ebk); ISBN 978-1-119-36310-1 (ebk)

Flipping Houses For Dummies®

To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Flipping Houses For Dummies Cheat Sheet” in the Search box.

Table of Contents

Cover

Introduction

About This Book

Foolish Assumptions

Icons Used in This Book

Beyond the Book

Where to Go from Here

Part 1: Getting Started with House Flipping

Chapter 1: Brushing Up on the Basics

Grasping the Concept of Flipping

Flipping Legally and Ethically

Determining Whether You Have What It Takes to Flip

Devising a Reliable Flipping Strategy

Building an All-Star Team

Finding and Buying a Flippable House

Rehabbing Your Fixer-Upper

Profiting from Your Venture

Chapter 2: Do You Have What It Takes to Flip?

Tabulating Your Time Budget

Shaking Your Piggy Bank

Taking Your Personality Pulse

Gathering the Essential Tools of the Trade

Chapter 3: Devising an Effective Flipping Strategy

Surveying Different Strategies

Drawing Up a Detailed Plan in Advance

Plan B: Surviving a Flip That Flops

Chapter 4: Building Your Dream Team

Teaming Up with a House Hunter — a Quality Real Estate Agent

Recruiting Moneymen (and Women)

Consulting a Title Company and an Insurance Agent to Cover Your Back

Locating a Valuable Appraiser

Adding a Real Estate Lawyer to the Roster

Lining Up a Home Inspector

Hiring Contractors and Subcontractors

Chapter 5: Securing the Funds to Fuel Your Flips

Recognizing the Importance of Being a Cash Buyer

Tapping Your Own Resources for Cash

Leveraging the Power of Other People’s Money

Using Conventional Financing (for Longer-Term Real Estate Deals)

Part 2: House Hunting with an Eye for Flipping

Chapter 6: Scoping Out a Fertile Neighborhood

Pinpointing House Flipping Hot Spots

Sizing Up the Local Real Estate Market

Comparing Neighborhoods

Considering Other Neighborhood Factors

Chapter 7: Hunting for Houses in Your Target Area

Focusing Your Search on Affordability

Digging Through Property Listings, Ads, and Publications

Mining Special Markets for Dontwanners

Chapter 8: Closing In on Foreclosure Properties

Getting Up to Speed on the Foreclosure Process

Brushing Up on Local Rules and Regulations

Picking Your Point of Entry into the Foreclosure Process

Purchasing Foreclosure Properties Step by Step

Advertising to Generate More Leads

Chapter 9: Scoping Out Properties in Special Markets

Acquiring Properties in Probate

Scooping Up Bargains in Bankruptcy

Finding Government-Owned Properties

Buying Properties at Tax Sales

Part 3: Evaluating Properties and Crunching Numbers

Chapter 10: Researching Distressed Properties

Creating a Property Dossier

Checking Out the Property

Following the Paper Trail

Chapter 11: Inspecting the Property and Estimating Rehab Costs

Packing for Your Inspection Mission

Finding the Perfect Candidate for a Quick Makeover

Assessing Potential Curbside Appeal

Taking a Big Whiff, Inside and Out

Inspecting the House for Big-Ticket Items

Discovering Some Promising Features

Arriving at a Ballpark Figure for Repair and Renovation Costs

Chapter 12: Calculating Your Profit and Maximum Purchase Price

Doing the Math to Ensure a Profitable Flip

Estimating a Realistic Resale Value

Accounting for Expenses

Chapter 13: The Art of Haggling: Negotiating a Price and Terms

Planting the Seeds for Successful Negotiation

Making an Offer They Can Refuse (But Will Consider)

Tending to the Details: Inspections, Appraisals, and Walk-Throughs

Closing the Deal

Part 4: Fixing Up Your Fixer-Upper

Chapter 14: Prioritizing and Planning Your Renovations

Developing an Eye for Home Improvements

Prioritizing Your Projects

Delegating Duties

Drawing Up a Tentative Budget

Coming Up with a Game Plan

Chapter 15: Giving Your Property a Quick Makeover

Sprucing Up the Yard

Freshening the Façade

Touching Up the Interior

Chapter 16: Perking Up the Curb Appeal

Revitalizing the Landscape

Tidying Up the Driveway and Walkways

Making Entryways More Inviting

Refreshing the Outside Shell of the House

Glamming Up the Garage

Chapter 17: Dazzling the Crowds with Updated Kitchens and Baths

Giving Kitchen Cabinets, Countertops, and Sinks a Facelift

Modernizing Kitchen Appliances

Updating the Bathrooms

Chapter 18: Tackling Moderate Makeovers

Installing Replacement Windows

Replacing Drab, Weathered Doors

Putting on Your Own Floor Show

Chapter 19: Reconfiguring Spaces and Other Structural Overhauls

Attending to Essential Structure and Infrastructure Repairs

Fiddling with the Floor Plan … or Not

Identifying Load-Bearing Walls

Maximizing the Use of Existing Space

Building New Rooms from Scratch

Adding a Deck or Patio

Part 5: Cashing In: Realizing Your Profit

Chapter 20: Considering Your Options: Cash or Cash Flow?

Setting a Goal: Cash or Cash Flow

Cashing Out: Selling the Property

Exploring Cash-Flow Possibilities

Chapter 21: Marketing Your Home

Harnessing the Power of a Real Estate Agent to Market and Sell Your House

Setting an Attractive Asking Price

Staging a Successful Showing

Offering to Help Secure Attractive Financing

Becoming a Real Estate Marketing Maven

Chapter 22: Negotiating the Sale to Maximize Your Profit

Comparing Seemingly Similar Offers

Mastering the Art of Counteroffers

Shuffling Papers and Other Legal Stuff at Closing

Chapter 23: Trudging through Some Taxing Issues

Estimating the Tax Man’s Take from Your Flipping Profits

Maximizing Tax Savings from the Sale of Your Principal Residence

Slashing Your Capital Gains through Careful Deductions

Deferring Taxes: Rolling Your Gains into Your Next Purchase

Selling Your Home at a Loss (Ouch!)

Paying Income Tax: When Flipping Houses Becomes Your Occupation

Part 6: The Part of Tens

Chapter 24: Ten Ways to Find Dontwanners

Cruising the Neighborhood

Teaming Up with a Great Real Estate Agent

Checking Classified Ads and Online Listings

Skimming Foreclosure Notices

Monitoring Tax Sales

Scoping Out Bank-Owned Properties

Probing Probate Properties

Digging Up Houses in Bankruptcy

Sifting through the Government’s Stash

Networking and Advertising for Leads

Chapter 25: Ten Signs of a Great House Flipping Opportunity

The Location Is an Obvious Hot Spot

Nobody’s Home

The “For Sale By Owner” Ad Is Shrinking

The Seller Is Highly Motivated to Be Freed from the Burden of Ownership

The House Is Ugly Outside

The House Is Ugly Inside

The Decor Is Outdated

The House Has Character

The House Has Undeveloped Living Space

The Property Backs Up to Nothing

Chapter 26: Ten House Flipping Blunders

Falling for a Scam

Speculating on the Housing Market

Waffling on an Obviously Good Deal

Backing Yourself into a Contractual Corner

Failing to Inspect the Property before Closing on It

Assuming the Title Is Clear

Underestimating the Cost of Repairs and Renovations

Doing Shoddy Work to Save Money

Over-Improving a Property

Forgetting to Pay the Taxes

About the Authors

Advertisement Page

Connect with Dummies

End User License Agreement

Guide

Cover

Table of Contents

Begin Reading

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Introduction

Maybe you know somebody who buys and sells houses and makes as much money on a single transaction as you make in a year. Or perhaps you caught an episode of one of those house flipping TV shows that demonstrate just how easy it is to buy a house for $250,000, fix it up for another $75,000, and sell it for a half million bucks in a matter of days. Now, you want in on the action. You want your slice of that capitalistic cannoli.

But where do you start? You can’t imagine where you’d be able to get your mitts on the cash you’d need to finance a flip. You have no idea where to start looking for undervalued properties, and even if you could find a suitable house to flip, your expertise in the field of home repairs is limited to plunging the toilet. Surely you’re not qualified to invest in the complicated world of real estate.

Well, it’s time to stop all the negative self-talk and start reading Flipping Houses For Dummies. I started out with $900 that my grandmother gave me in the early 1970s. From the ripe old age of 19 to the present day, I’ve flipped one house after another and earned millions of dollars along the way. It wasn’t easy. Some of my flips flopped. I didn’t profit from every transaction. I did, however, have a plan in place and the sticktoitism (pronounced stick-to-it-ism) to successfully execute it. By following through, I was able to succeed, and so can you. (By the way, sticktoitism describes the determination and dogged perseverance required to build wealth in real estate. I could use stick-to-itiveness, which actually appears in the dictionary, but I like my word better.)

About This Book

Unlike other books, TV shows, and late-night-TV gurus, this book doesn’t promise an easy, risk-free way to score quick cash by flipping houses. Instead, it takes an honest look at the practice of flipping houses.

In this book, I reveal what I’ve learned in more than 40 years of flipping houses and working with buyers, sellers, and other real estate investors and professionals. I show you how to do everything from building a team and securing the cash you need to finance your venture to finding undervalued homes and negotiating the price and terms that improve your chances of selling at a profit. I guide you through making renovation decisions that promise to deliver the most bang for your buck, and I show you how to spruce up a home to draw in more potential buyers.

I don’t want to see you get in over your head or blow your entire life savings on a failed real estate investment, so throughout this book I provide plenty of time- and money-saving tips, cautions to help you avoid catastrophe, and pointers to keep your projects within budget and on schedule. I steer you clear of risky, unethical, and illegal ventures and encourage you to wade out slowly and remain well within your comfort zone. After you successfully flip a few easy properties, you quickly become aware of when you’re ready to take on bigger projects, and by that time, you no longer need my advice.

My goal is to help you decide whether house flipping is for you, and, if it is, I provide you with the knowledge and insight you need to succeed. Flipping houses can be one of the most rewarding and profitable ways to invest your time and money. This book shows you how to do it right, minimize risks, and maximize your potential profit.

Although I encourage you to read every single word of this book from start to finish, you’re welcome to skip around to acquire your knowledge on a need-to-know basis and to completely skip the sidebars (in shaded boxes). Although the sidebars may be too fascinating to ignore, they’re not essential.

One brief note: Within this book, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending as though the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy — just tap the web address to be taken directly to the web page.

Foolish Assumptions

If you’re reading this book, I assume you’re a homeowner. I wouldn’t buy a car from a car salesman who didn’t drive, and I wouldn’t buy a house from someone who rents an apartment. When you own your own place, you pick up some street smarts about the value of a home, its emotional effect on people, its value as an investment, and the work required to properly maintain it. If you’re not a homeowner, sell this book and put the proceeds toward a down payment on a house. Come back in a couple of years. I’ll be waiting for you.

Other foolish assumptions I’ve made include the following:

You’re of sound mind and body.

You can be a little kooky and out of shape, but if you can’t make rational decisions or talk coherently on the phone, house flipping may not be for you.

You’re interested in residential, not commercial, property.

Assuming you’re new to this house flipping thing, focus on the type of property you would buy as a homeowner. Later, when you’re more experienced, you can venture into the world of commercial real estate.

You’re prepared to learn from your mistakes (and mine).

I can’t guarantee that you’ll profit from your first flip, but I can guarantee that you’ll make mistakes. Consider them an essential part of your education. This book was made possible by all the mistakes I’ve made. Without those mistakes, I’d have little wisdom to impart. The more you take away from the mistakes I made, the fewer mistakes you have to make yourself.

You want to flip properties legitimately.

Con artists often flip properties to scam buyers and lenders. I’m not a con artist, and I denounce illegal, unethical flipping. By flipping legitimately, you stand to earn much more than a low-life con artist ever will, and you keep your reputation and integrity intact.

Icons Used in This Book

Throughout this book, icons in the margins highlight different types of information that call out for your attention. Here are the icons you’ll see and a brief description of each.

I want you to remember everything you read in this book, but if you can’t quite do that, then remember the important points flagged with this icon.

Tips provide insider insight. When you’re looking for a better, faster way to do something, check out these tips.

“Whoa!” When you’re buying and fixing up a house, it’s easy to get a little carried away and blow your entire budget on garden gnomes. Before you get too carried away or engage in any riskier-than-average house flipping endeavor, read the text marked with this icon for advice on when and how to proceed with caution.

Beyond the Book

In addition to the abundance of information and guidance on flipping houses that I provide in this book, you also get access to even more help and information online. Go to www.dummies.com and search for “Flipping Houses For Dummies Cheat Sheet” for a free cheat sheet that accompanies this book. It includes a checklist for revamping a quick-flip property, offers tips for financing flips — and more.

Where to Go from Here

Think of this book as an all-you-can-eat buffet. You can grab a plate, start at the beginning, and read one chapter right after another, or you can dip into any chapter and pile your plate high with the information it contains.

If you’re looking for a quick overview of house flipping, check out Chapter 1. Before you even start house hunting, check out Chapter 4 to discover how to build a strong support network and Chapter 5 to find out how to finance your flip — you need cash and plenty of it to flip a house. Chapter 12 helps you determine how much you can afford to pay for a property to increase your odds of walking away with a profit. And the chapters in Part 3 are indispensable in helping you track down potentially profitable properties and negotiate the purchase. Wherever you choose to start, you’ll find plenty of useful information and guidance.

Part 1

Getting Started with House Flipping

IN THIS PART …

Get up to speed in a hurry on the process of flipping houses.

Flip houses the right way and avoid fraudulent flipping schemes.

Find out whether you have what it takes to flip houses in terms of time, money, and mindset.

Explore a variety of house flipping strategies ranging from buy-fix-and-sell to buy-hold-and-lease.

Build a dream team of real estate professionals, lenders, and contractors to expedite your flips and cover your back.

Get your mitts on some cash to finance your flips by using your own and other people’s money (OPM).

Chapter 1

Brushing Up on the Basics

IN THIS CHAPTER

Understanding the concept and challenges of flipping

Flipping the right way — legally and ethically

Developing a winning strategy and the right connections

Marketing and staging a house to maximize your profit

Flipping sounds easy. You can flip a pancake. You can flip a coin. Without too much effort, you can even flip out. Flipping a house, though, requires a level of knowledge, expertise, and sticktoitism unrivaled by any of these mindless tasks. It requires access to cash, and lots of it. It demands time, energy, vision, attention to detail, and the ability and desire to network with everyone — from buyers and sellers to real estate professionals, contractors, and lenders.

In this chapter, I offer a broad overview of what flipping houses is all about. I introduce the overall strategy of flipping houses — buy low, renovate, and sell a property at fair market value to earn a fair market profit. I also reveal the difference between flipping the right way — legally and ethically — and flipping the wrong way — ripping off buyers, sellers, and lenders for a quick wad of cash.

Grasping the Concept of Flipping

In investment circles, the secret to success is cliché: buy low, sell high. This same principle applies to flipping houses. To succeed, you buy a house at 20 percent to 50 percent below market value, repair and renovate the property, and then turn around and sell it at market value. That three-step process — buy, fix, and sell — certainly sounds easy enough, but each step carries with it a host of unique challenges, as I point out in the following sections.

Spotting distressed property

Homeowners don’t exactly line up around the block waiting to sell their homes for less than they’re worth. As a house flipper, your job is to hunt for the homes in your area that are dontwanners, as in “the owners don’t want ’er.” These orphan homes usually appear bedraggled. The yard looks like a weedy wasteland, the gutters are hanging off like old false eyelashes, the paint’s peeling, and the interior is completely trashed. These properties are often referred to as distressed, and their appearance indicates that their owners are distressed as well. Their dream home has become a nightmare.

When homeowners need to shed the burden of home ownership, they may not have the time and resources to repair and renovate it, place it on the market, and wait for months or even a year for a buyer to make a reasonable offer. In such cases, they’re often willing to sell at a greatly reduced price to a serious buyer who has the financial resources to close the deal. How do you discover opportunities like this? In Part 2, I point out several techniques for discovering distressed properties and their distressed owners.

Doing your homework

Flipping houses is a risky venture, but you can minimize risk and maximize profit by doing your homework:

Research the property.

If you’re buying a property in foreclosure, probate, bankruptcy, or a similar situation, research the property carefully to make sure you know what you’re buying. Research includes a visit to the property and to the Register of Deeds office to research the title and other key documents. See

Chapter 10

for details.

Estimate costs of repairs and renovations.

Knowing how much you’re probably going to need to spend to make the property market-ready is key to knowing how much you can afford to pay for the property and still earn a profit. In

Chapter 11

, I explain how to inspect a property with an eye for repairs and renovations and estimate your rehab costs.

Calculate your maximum purchase price.

Before you make an offer on a property, you need to calculate the most you can pay for it to earn the desired profit

after

costs, including closing costs, renovation expenses, holding costs, and agent commissions. In

Chapter 12

, I walk you through the calculations.

Negotiate the price and terms in your favor.

The maximum you

can afford

to pay for a property is probably not what you

want

to pay; you want to pay as little as possible. In

Chapter 13

, you discover various strategies and techniques to negotiate a better price and terms.

Making a few minor (or major) alterations

When you buy a house at a bargain-basement price, it usually requires some tender loving care to make it marketable. In some cases, a thorough cleaning, a fresh coat of paint (inside and out), and new carpeting do the trick. In a matter of days or a couple of weeks, and with a small investment, you can often boost the value of a home just by making it look brand-new again.

Other houses require more extensive renovations. You may be able to convert unused attic or porch space into a bedroom; knock out a wall or two to combine the kitchen, dining room, and living room into a great room; install new windows; or even build a second story. The chapters in Part 4 cover everything from quick-flip cosmetic jobs to extensive renovations and provide plenty of tips to stay on budget.

Avoid the temptation to over-improve a house. You may be able to convert a $100,000 house into a $1 million mansion, but if a buyer wants a $1 million mansion, she’ll buy a house in a neighborhood with $1 million homes.

Reselling your rehabbed property

The old adage of house flipping is that “You make your money when you buy.” But you realize your profit only after selling the house. Assuming you purchase the property at the right price, avoid overspending on repairs and renovations, and flip in a relatively stable market, you should have no trouble selling the house at a profit simply by selling it at or near market value. (See Part 5 for details.)

To sell the house quickly at a fair price, set a price that’s competitive with the prices of comparable houses in the same neighborhood. If your asking price is too high, holding costs (interest, insurance, utilities, maintenance, and so on) will chip away at your profit over time.

Flipping Legally and Ethically

In real estate circles, the word flip is often construed as just another four-letter word. Utter the “F word” at a real estate conference or seminar, and you’re likely to spend your lunch break at a cozy table for one. The reason for this cold shoulder from the real estate community is that way back in September 2001, the U.S. Department of Housing and Urban Development (HUD) released FR (Final Rule)-4615 Prohibition of Property Flipping, which made “flipping” illegal.

So, why am I writing a book that promotes this illegal activity? Because the word flip has a double meaning, as the following sections reveal.

Flipping illegally

Criminal minds have invented countless ways of milking the real estate industry, and one way is to flip houses. This sinister type of house flipping typically relies on some form of fraud — lying or misrepresenting information. In some cases, the con artists hook up with crooked appraisers who artificially inflate home values and then sell overpriced homes to ill-informed buyers.

Another way con artists scam the system through flipping is to build a team of buyers, none of whom intends to own the property for any length of time. They buy homes from one another, increasing the price with each sale. False appraisals or crooked appraisers make the price hikes look legitimate, and corrupt loan officers often expedite the loan-approval process. As the value of the property increases on paper, the amount of equity in the property increases. The final buyer takes out a whopping loan to pay the previous owner and then defaults on the loan. The team splits the proceeds, sticking the lender with the bill and leaving a legacy of foreclosures and vacancies.

The dark side of flipping destroys credit ratings, raises interest rates, and ruins neighborhoods. Over the long haul, it threatens to squash the American dream of homeownership. It’s unethical, immoral, and illegal. And it’s not what this book is about.

Flipping legally: Buy, fix, and sell

Flipping the right way is a perfectly legitimate strategy for making money in real estate. You buy a property below market value, fix it up, and sell it for more than you invested in it. Do it well and you can earn a handsome profit. Make a serious blunder and you suffer a loss. This fix-it-and-flip-it approach has a positive effect on the real estate market. It increases property values, improves neighborhoods, and provides quality housing for those who need it. It’s the American way — capitalism at work.

Throughout this book, I encourage you to flip the right way, and I caution you to avoid the gray areas that can get you into trouble. Flipping the right way enables you to legitimately profit from the system without having to tiptoe through legal minefields. It ensures that you establish the solid reputation you need to flip profitably for however long you want.

Determining Whether You Have What It Takes to Flip

Although anyone can profit from flipping houses, it’s not quite as easy as it looks on TV. Buying a house that’s brimming with potential for 20 percent to 50 percent less than you know you can sell it for is a huge challenge in itself, but after you take possession of the property, the real fun begins. Your contractor disappears after collecting your deposit. The landscapers hack through a buried cable. You find out that the septic system needs to be replaced. And the neighborhood association rejects every single one of your planned improvements.

To successfully deal with the unexpected twists and turns you’re sure to encounter, you need to have the right stuff, including the following:

Time and energy:

Flipping houses requires considerable time and energy for house shopping, lining up financing, scheduling and overseeing repairs and renovations, and more. If you already feel overwhelmed and overworked, maybe this flipping thing isn’t for you.

Focus:

Distractions can quickly derail a flip, so you’d better be able to focus in the midst of chaos, especially if you have a full-time job, a spouse, children, and other interests. Without focus, you won’t have the attention to detail required for success.

Ability to follow instructions:

You don’t need to know everything about flipping houses to get started, but you do need to know how to follow instructions, including those I provide in this book.

Ability to perform basic math:

Basic math skills are essential when you’re comparing financing options and crunching numbers to gauge how much profit you can wring out of a house. If you’re not good with math, you at least need to know how to use a calculator.

Organizational skills:

When you’re renovating a property, you need to be able to coordinate contractors and material so the work gets done as efficiently as possible. Remember, time is money.

People skills:

Being able to work with people and resolve any differences is key in many aspects of flipping, including convincing people to loan you money, negotiating lower prices for property, and managing contractors and work crews.

Sticktoitism:

Flipping houses involves failure and disappointment. Those who succeed don’t give up.

See Chapter 2 for additional guidance in deciding whether you have what it takes to flip houses.

Devising a Reliable Flipping Strategy

No two flippers have the same strategy. Some choose to live in the house they flip, while others find that too stressful. Some flip the house they live in every two or three years to take advantage of a lucrative federal tax exclusion (see Chapter 23), while others flip a house once every month or two for quick profits. Many investors focus on a niche market, such as foreclosure properties, HUD properties, or For Sale By Owner (FSBO) homes.

The strategy you ultimately settle on is yours to invent. What’s important is that you have a strategy and the system and resources ready to execute it. Before your first flip, you should have these essentials in place:

Cash or financing not only to purchase the house but also to cover holding costs and the cost of repairs and renovations

A plan for repairing and renovating the property (such as buying low, applying makeup, and selling high, or living in your flip while you renovate it)

A realistic estimate of the costs of repairs and renovations and the monthly expenses for holding the property

A schedule for completing the project

Reliable contractors who can begin working on the property immediately

A date on which you plan to put the house back on the market

Plan your flip at least as carefully as you would plan a two-week vacation. Chapters 3 to 5 help you lay the foundation for a successful flip.

Building an All-Star Team

When you’re gambling with more than $100,000 of your own or someone else’s money, learning by trial and error can be catastrophic. A safer way to develop the skills and foresight needed to reduce costly mistakes is to learn from others. Develop your own house flipping team and rely on the following professionals to guide and educate you:

Real estate agent

Financier/lender

Accountant

Title company

Appraiser

Home inspector

Real estate lawyer

Contractors

In Chapter 4, I describe the role that each of these valuable individuals plays on your team, and I provide some criteria for selecting the best of the bunch.

Hiring a pro may increase your costs but can save you a considerable amount of money in terms of time, doing the job properly, and avoiding costly mistakes. Just be sure to calculate the cost into your investment when determining how much to pay for the property.

Finding and Buying a Flippable House

The most critical stage of flipping a house is finding and buying the right house to flip. Buy a lousy house in a lousy neighborhood for more than it’s worth, and you’ve already lost the game. Finding a house that’s dripping with potential for 20 percent to 50 percent less than you can sell it for is quite a challenge, but as a flipper, that’s the fun part. Flipping is an adventure, a treasure hunt, and a poker game all rolled into one. Finding and buying a property is a four-step process:

Scope out a fertile neighborhood — often an area with homes that are at least 20 years old.

See Chapter 6 for details.

Zoom in on a dontwanner — a distressed property that the owner obviously doesn’t want or can’t afford to keep.

A distressed house usually has a distressed owner. See Chapters 7 to 9 for various ways of finding distressed properties.

Research the property carefully and calculate the most you can pay for it and still earn a decent profit.

You should be fairly certain that you’ll earn at least 20 percent for your trouble. See Part 3 for more about researching and evaluating properties and calculating a maximum purchase price.

Haggle with the seller to purchase the house at a price that virtually ensures that you’ll profit from the flip, as I explain in Chapter13.

In some cases, you won’t be haggling with sellers but bidding at an auction; see Chapters 8 and 9 for details on finding and buying properties in foreclosure and other special markets.

Rehabbing Your Fixer-Upper

Buying a house to flip is like buying a beat-up antique at a garage sale. You got the house for a bargain because it needs work that the seller hasn’t the time, money, or desire to do. By cleaning up the joint, fixing whatever’s broken, and doing a few renovations, you can bring the property up to market standards and sell it for its full market value. In the following sections, I walk you through the types of repairs and renovations you can make.

Planning repairs and renovations

Repairs and renovations require careful planning and execution to keep them on schedule and within budget. Before you begin, prioritize your repairs and renovations so you know what’s most important; I give you all the tools and tips you need in Chapter 14. Invest your time and money in the repairs and renovations that promise the most bang for your buck, and then if you need to trim costs, you can skimp on the less-important stuff.

Schedule the work so that it proceeds logically. If you install new tile and carpeting before painting the walls and ceiling, you risk ruining the new tile and carpeting. A good rule of thumb is to work on the infrastructure first — the foundation, electricity, plumbing, heating, and air conditioning. Then, work from the top down, finishing with the floors. Likewise, depending on the location, you may need to schedule curb-appeal renovations in the spring, summer, or fall.

Applying makeup

The ideal house for a first-time flipper is one that requires only cosmetic work — what I call makeup. Cosmetic work, covered in Chapter 15, includes the following low-cost repairs and renovations:

A fresh coat of paint throughout the house

New siding, fresh paint, gutter replacements, and other external tweaks

New wall-to-wall carpeting in any rooms that need it

New light fixtures

New outlet and light-switch covers

A thorough cleaning inside and out

Window washing

Storm window and door repair or replacement

Lawn mowing, weeding, and trimming trees and shrubs

Cosmetic repairs don’t add as much real value to a house as, say, a new kitchen may add, but they attract buyers. Often a house is undervalued simply because it’s unkempt.

Tidying up the exterior

Curb appeal is everything when you’re trying to sell a house. If prospective buyers pull up in front of a house that looks disheveled, they’re likely to pull away before you have time to open the front door. To sell your house for top dollar, it has to make a good first impression. It must have curb appeal — a fresh, well-manicured appearance that draws people into the home.

Chapter 16 shows you how to landscape and prepare the exterior of the house to make it draw passersby inside for a closer look.

Focusing on kitchens and bathrooms

Depending on their condition, kitchens and bathrooms sell houses or sink deals. A spacious kitchen with plenty of counter space and all the essential amenities — a clean range, refrigerator, microwave oven, and dishwasher — creates an impression that the kitchen is a great place to prepare meals and hang out with friends and family members. A sparkling-clean, well-lit bathroom with plenty of storage space creates a sense of comfort and cleanliness that permeates the house.

Although you should never over-improve a property, renovations that bring the kitchen and bath up to market standards always pay for themselves by adding real value to the property and making it more attractive to buyers. See Chapter 17 for the full scoop on renovating kitchens and bathrooms.

Making moderate changes

Somewhere between painting a room and building a room addition are moderate changes that you can make to a house to improve its value and draw more buyers. These improvements include installing replacement windows, replacing the screen doors or entry doors, and refinishing wood floors or installing tile or vinyl flooring. Chapter 18 lays out your options.

According to the National Association of Realtors’ 2013 Cost versus Value Report, you get the most bang for your buck on renovations by replacing the front door.

Tackling structural enhancements

Some houses are begging for a few major overhauls. Maybe the house has an unfinished attic that’s perfect for an additional bedroom or a beautifully landscaped backyard that has no easy access and no deck or patio. In some cases, you may discover a dinky house surrounded by mansions. By raising the roof and building a second story, you can double the living space and boost the house into a higher bracket. Chapter 19 takes on some of these major renovations, which may inspire your own creative visions.

Profiting from Your Venture

Although this book focuses on the buy-fix-sell approach to flipping houses, you can profit from a flip in numerous ways, including the following:

Sell the property.

Sell to an investor who’s better equipped and more motivated to flip the property (you’re essentially earning a finder’s fee, also known as the

bird-dog fee

).

Refinance to cash out the equity in the property, usually to help finance repairs and renovations or to use the money for other investment properties.

Sell the property on a lease option, essentially collecting rent with the hope that your tenants will eventually purchase the property.

Lease the property — become a landlord!

Sell the property on a contract, acting as a bank and collecting the interest.

See Chapter 20 for details on the various approaches to profit from a flip. In Chapters 21 and 22, I explain how to market and sell your home for top dollar. And in Chapter 23, I explain certain tax considerations that may help you keep more of your profit by paying less of it to your rich Uncle Sam.

Your options for profiting from a house flip basically fall into two categories depending on your goals: cash or cash flow. In other words, do you want to receive your money all at once by selling the property? Or do you want to keep the property and use it to generate a steady cash flow (by leasing the property or selling it on contract, for example)?

Chapter 2

Do You Have What It Takes to Flip?

IN THIS CHAPTER

Squeezing a house flip into your already hectic schedule

Taking inventory of your financial readiness

Checking your gut for the daring and determination to succeed

Putting together the tools you need

Anyone can do it.

If I had a nickel for every time I heard someone say that about flipping houses, I could retire on my own private island in the Pacific. When a real estate investment guru says, “Anyone can do it,” what she really means is, “Anyone like me can do it.”

I prefer presenting house flipping in a more realistic light by saying, “Anyone who has sufficient desire, energy, and sticktoitism can do it.” By following the advice in this book, you can acquire the necessary knowledge, gather investment capital, and find plenty of properties to flip, but if you don’t have sufficient gusto and grit, your flips will most assuredly flop.

This chapter leads you on a journey of self-examination to determine whether you have the right stuff to flip real estate — time, energy, a strong financial position (with your own or other people’s money — OPM), organizational expertise, people skills, tenacity, decisiveness, imagination, endurance, a healthy sense of humor, and a good support system.

Tabulating Your Time Budget

Most casual house flippers are weekend warriors. They hold down a day job of 40 or so hours a week and then work nights, weekends, holidays, and vacations on flipping houses. They typically invest anywhere from 20 to 40 hours a week, depending on how dilapidated the houses are, how ambitious they are to turn a profit, and how much of the work they want or need to do themselves.

Full-time flippers, who have enough cash on hand to finance their flips and cover their living expenses, typically invest 40 to 80 hours a week.

Although you may be able to delegate most of the work that goes into flipping a house, several tasks demand your uninterrupted time and focus:

House hunting

Networking to develop relationships that expand opportunities and flip houses in less time and for less money

Negotiating and closing the deal

Securing financing for purchases and renovations

Budgeting and other accounting tasks

Planning, executing, and supervising rehab projects

Marketing and selling the property

The amount of time required for these tasks varies greatly depending on how you choose to have them done. For example, if you hire an agent to help you find houses to flip, you may spend only a few hours checking out prospects, but if you choose to cruise the neighborhood for distressed properties, you may spend several days or even weeks finding a good prospect.

In the following sections, I explain the advantages and disadvantages of part-time flipping, tell you when you can safely start flipping full time, and list the tasks that you should (and shouldn’t) delegate to save time.

For the time-strapped: Part-time flipping

When you’re just starting out, consider keeping your day job and moonlighting as a house flipper until you establish yourself. Your day job provides steady income and security, which enables you to qualify for traditional financing at lower interest rates. Your paycheck helps you cover the mortgage payments, finance renovations, pay quarterly income-tax payments, and stay afloat when the housing market cools. Your full-time job also (hopefully) provides you with health and dental insurance, retirement planning, and other benefits you don’t get from flipping houses.

However, part-time flipping has a few drawbacks:

Flipping part time dilutes your focus. You may be in the middle of a complex renovation project late Sunday night and then have to show up for work bright and early Monday morning.

Working overtime on flipping projects can sap the time and energy you have for your family and your day job. Keep in mind that part-time flipping is like having a second job.

When you work a full-time job, you’re less available for fielding calls and dealing with problems that arise.

To compensate for some of the drawbacks, consider the following solutions for integrating part-time flipping into your life:

Work the second or third shift and focus on flipping during the day.

Schedule vacations around your rehab schedule.

Ask your spouse for help with paperwork and fielding phone calls while you’re at work — a perfect job for the work-at-home parent.

Become a weekend warrior, performing cleanup, yard work, and other chores on your days off. If you’re married with children, make the project a family affair.

Partner with a trustworthy friend or relative who has more free time or a more flexible schedule.

All the time in the world: Full-time flipping

Full-time flipping requires a big time commitment and a cash reserve to back it up. You need enough cash on hand not only to fuel your flip but also to cover several months of living expenses. Most flippers choose to become full-time flippers only after they successfully flip several properties, have a proven system in place, and have the financial resources to live without another source of income for at least one full year.

Consider flipping full time only if you have the following:

Five years’ experience successfully flipping houses on a part-time basis

At least one year’s income in reserves

Health, dental, disability, and life insurance and sufficient funds to cover the premiums

A blanket insurance policy that covers liability

A line of credit that enables you to do two projects at the same time

A solid business plan; check out

Business Plans For Dummies

by Paul Tiffany and Steven D. Peterson (Wiley)

A team of experienced advisors with varied backgrounds — financial, legal, construction, and so on (see

Chapter 4

)

Without these essentials, along with a strong work ethic, determination, sufficient cash reserves, a well-defined goal, and a solid plan to achieve that goal, failure is almost guaranteed.

Delegating time-consuming tasks

You can get more done in less time by delegating tasks. But be careful when choosing tasks to delegate. You can safely farm out any of the following jobs:

Job

Delegate to

Mowing lawn or shoveling snow

Day laborer or trusted kid

Heating, plumbing, gas, and electrical repairs

Licensed and insured contractors

Listing or selling home

Qualified and trusted real estate agent

Setting appointments to look at houses for sale

Real estate agent, family member, or friend

Cosmetic repairs, such as painting and carpeting

Qualified painters and carpet installers

Minor repairs and small projects, such as repairing a leaky faucet

Local handyman or woman

Marketing the rehabbed home, including distribution of signs and flyers

Real estate agent, family member, or friend

Showing the rehabbed home to prospective buyers

Real estate agent, family member, or friend

Think of tasks in terms of time and money. If you earn $25 an hour, hire someone to do the $10-an-hour jobs, and do the $50-an-hour jobs yourself.

Some tasks are far too important to delegate, unless you trust the person nearly as much as yourself. Avoid outsourcing any of the following jobs:

Securing financing for purchases and renovations.

Anything that requires the handling of money, including making payments. You can hire an accountant to manage the record-keeping.

Meeting city inspectors.

Accompanying home inspectors.

Managing your files and data systems.

Visiting properties prior to purchase. (Never buy a property you haven’t inspected yourself, or as I like to say, “Your eyes or no buys.”)

Negotiating and closing the deal. (Your agent can advise you and present your offers for you, but call the shots yourself.)

Planning and supervising rehab projects. (You can hire out the work, but visit the worksite regularly to ensure quality and control costs.)

Shaking Your Piggy Bank

You don’t need a lot of your own money to finance your first flip. You can beg, borrow, or partner up with an investor (see Chapter 5 for details on these options). Before setting out to flip your first property, however, tally the costs and your financial health, have a solid plan for obtaining financing, and know your debt tolerance, as I explain in the following sections.

Figuring out how much money you need

When you flip a house, plan on netting at least a 20 percent profit.

How much money you need to finance a flip depends on the grand total of all the costs for purchasing the property, fixing it up, holding it (taxes, utilities, and so forth), and selling it. You never know the actual costs until you resell the property, but you can do some ballpark estimates to determine how much money you need. See Chapter 11 for details on how to estimate the costs of repairs and renovations. In Chapter 12, I lead you through the process of estimating your total costs and the maximum amount you can afford to pay for a property in order to earn a 20 percent profit.

THE NOMADIC FLIPPER

I currently live in house number 23, where my family has lived since 1990. I moved 19 times before getting married. Before moving into a house, I’d fix up the bathroom, kitchen, and one bedroom. Then I’d live there for a few months to a year, fixing up the rest of the house. When the house was in pretty good shape, I’d either convert it into a rental or sell it for quick cash. I drew up a mini business plan for each property. Each plan was contingent on the current economic climate, my cash-flow needs, and the estimated long-term appreciation of the property.

Not all my deals were blockbusters, but from 1976 to 1990, I amassed property and cash worth millions of dollars. You can do the same, but don’t expect it to happen overnight. Draw up a successful long-term plan, start slow, and stick to it.

Finding cash to fuel your flip

Coming up with a cool hundred grand, two hundred grand, or three hundred grand to flip a house may seem a little out of reach at first, but several financing options are available, including the following:

Flip the house you live in.

Borrow against the equity in your current home.

Borrow from relatives or friends.

Partner with someone who has money to invest but lacks the time, expertise, or motivation to flip properties.

Borrow

hard money

— a loan from a private investor that typically costs money upfront, requires lump-sum payments on specific dates, and carries a higher-than-standard interest rate.

Chapter 5 explores these and other financing options in greater depth.

Taking stock of your financial health

To borrow money at a reasonable interest rate, you have a better chance if you can prove that you have money (or at least some valuable stuff), are currently making money, have a great plan, and generally pay your bills on time. Having a strong financial position is a big plus because it gives you access to cheaper loans, but it isn’t essential.

To take stock of your financial position, formulate a financial statement that includes the following figures:

Everything you own — cash, investments, house, car, boats, coins, jewelry, retirement accounts, and so on

Everything you owe — mortgage, second mortgage, auto loan, student loans, credit-card balances, back taxes, and so on

Your net worth (the value of what you own minus what you owe)

Gross monthly income

Total monthly bills

Treat your financial statement like a report card and update it every six months to grade your progress. An A+ financial statement gives you the power to borrow money at lower interest rates. See Chapter 5 for more information about figuring out your financial health and using that information to secure funds for flipping. This is true for credit reports, too. The higher your score, the more access you have to other funds.

CYA: Cover Your Assets. Don’t overreach and put your current financial health at risk. To protect your assets, don’t finance a house flip with your retirement money … at least until you’ve flipped several properties successfully and are confident that you know what you’re doing. If you’re married, put real estate investments in your name or your spouse’s name, not both, so only one of you is legally liable in the event of a lawsuit involving the property. Establish a home-equity line of credit for financial emergencies and use it only for emergencies.

Honestly evaluating your debt tolerance

Flipping properties requires a moderate tolerance for debt, especially early in your career. You have to owe money for extended periods of time before you reap a profit from that debt. Some people just can’t handle debt. What about you? You may be debt intolerant if you

Pay cash for a vehicle even when you’re offered 0 percent financing.

Pick up the tab every time you eat out so you won’t owe somebody lunch.

Prepay your utility bills several months in advance.

Own only one credit card and use it only for emergencies.

Debt can be good or bad. Debt used to finance investments that have a higher rate of return than the interest you pay on the debt is good debt. Bad debt is any debt racked up on spending sprees for stuff that’s worth less now than when you bought it. When flipping houses, loans and their costs can be fairly steep, but if you account for those costs in your budget and still turn a profit of 20 percent or more, the loan and related costs are worth it. (See Chapter 5 for the lowdown on good versus bad debt.)

Taking Your Personality Pulse

Not everyone has what it takes to flip houses. Some people are too nice, too nervous, too timid, or too lazy to pull off a successful flip. Others may get so emotionally attached to a house that they pay too much for it. And some people can’t handle the math and extra paperwork. Those who excel have the following qualities:

Energetic:

Flipping houses is stimulating, but the work involved can sap your energy faster than an overdue tax notice. Couch potatoes don’t survive.

Function well under pressure:

Few crises are more stressful than real estate deals gone bad. Imagine that your financing falls through, or you discover that the house you just bought is infested with termites, or you put the house up for sale and it lingers on the market for more than a year. When your life savings are on the line and you find yourself in a situation that’s completely outside your control, how well do you think you’ll function?

Organized:

Flipping requires strong organizational skills, attention to detail, and the ability to schedule work for maximum efficiency. If you have these skills, you have an edge over less-organized flippers, but if these skills are lacking or completely absent, don’t give up. Get organized, perhaps with the help of a computer; hire a top-notch assistant; or team up with someone who has the skills you lack.

Good with people:

The most successful property flippers are approachable motivators with good people skills … or they partner up with someone who fits the bill. Being good with people means you can

Knock on a stranger’s door without fear of being shot.

Calmly motivate others involved in the deal to move quickly.

Empathize with the needs of others and meet those needs in a way that’s encouraging and motivational.