flipping (3)

Estimating house repairs accurately for an investment/flip.

photo credit: Nebojsa Mladjenovic via photopin cc
photo credit: Nebojsa Mladjenovic via photopin cc

Very few people ever buy a car and then find out the amount of the monthly payments and insurance.  Most people sit down with pen and paper, or a computer, and crunch some numbers to make sure they can handle the purchase.   The same thing should be done before buying an investment property.  However, buying a home with the purpose of flipping takes a bit more knowledge and calculation in order to earn a profit when it comes time to sell.

Understand the Difference between Structural Problems and Cosmetic Needs

Even a brand new novice can recognize the need for some paint or fresh carpet.  People that have purchased a home before could possibly spot an older front door or some outdated windows.  However, being able to see and recognize a problem with the structure of a home takes a bit more knowledge and practice.  Pay close attention to these areas and possible problems:

  • Areas damaged by water; evidence could be water stains, rippled paint, musty odors or flaking of paint
  • Problems with water lines; water supplies that drip or don't run, leaks around toilets, pipes, and water valves
  • Presence of pests, especially termites
  • Dry and rotten wood

Beyond these trouble spots, it is also important to understand that a home 20+ years old will most likely need some kind of other normal repair such as an updated HVAC system, new roof, or new water heater.

The Right Compromise Makes Everyone Happy

Keep in mind that your goal is to FLIP the home.  That means that you can purchase the home well enough below the market value that you can quickly sell it to someone else for a profit.  If you try to repair too many things, then the price will need to be increased and you could scare off a few investors.

Here is a simple formula that will help you when looking at potential properties.

  1. Determine the value of the home after repairs have been made
  2. Deduct the money needed to make said repairs.
  3. Take this new amount and multiply it by 70%.  This figure is top dollar offer.

Here is a simple example.  You are looking at a home that should be worth $180,000 once it has been repaired.  The money needed to fix it up is $15,000.

Estimated new value of home after repairs$180,000.00
Necessary repairs-15000
Current value$165,000.00
Multiplied by 70%$115,500.00

In this particular example, if you could purchase the home for $109,000 and sell it for $114,000 you would make a quick $5,000 without lifting a finger.  To make this better, the investor that buys the home from you has enough room to buy the home, make the repairs and sell for a profit.

How to Get Better at Estimating Repair Costs

  • Habit of looking at homes – You will need to inspect quite a few homes in order to learn how to recognize particular problems. Seeing the same kind of problem multiple times will teach you what to search for in a home.
  • Get acquainted with a contractor – If you are not a contractor yourself then it is a good idea to strike up a friendship with a contractor.  They will be able to give you estimates on your potential properties.  You can also refer work to him to keep him busy.
  • Take good notes – When you are looking at a home with a contractor take notes about the problems that he points out and the price for the repair.
  • Study material prices – Get accustomed to visiting the local hardware stores to get prices on materials. Knowing when prices are going up, or going down, or certain items will help you make more accurate estimates.

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Rookie mistakes when flipping a home.

photo credit: Jeremy Levine Design via photopin cc
photo credit: Jeremy Levine Design via photopin cc

With mortgage rates still at all-time lows and lots of homes available at prices below market, many people are turning to real estate investment for the first time.  In order to be safe, new investors often start out with flipping homes instead of holding a property for its rental value.  Here are some of the top mistakes rookies make in home flipping and how to avoid them.

Not Allowing Enough for Repair Work

This is usually the biggest mistake made by new investors.  People who have never renovated a home often underprice the repairs needed to make the home attractive enough to sell.  This is why seasoned investors recommend that new investors talk to a contractor BEFORE placing a bid on a home.  Getting a good price upfront will help determine if the house is worth the purchase. It is also wise to add a bit of cushion for Murphy's Law for things that just go wrong for no reason.

Allowing Emotion to Let You Pay Too Much

Some investors find the “perfect” home and go full steam ahead with the purchase.  They find a home with a discount in a hot area and they just KNOW that they can sell it for a quick profit.  This is where cold, hard facts should take the lead, not emotion.

An investor should never, ever buy a home for anything more than 70% of the home's repaired value.  This is a rule of thumb that has been used by many investors for years and it has served them well.  Paying more than the 70% will lead to smaller profits or even a loss.

Trying to Do Too Much

Many new investors envision themselves remodeling the bathroom, adding new paint and then finishing up the front lawn in a few weeks and then, voila, the home will sell.  However, it is best to let the pro's handle the tough work.  Repairing or remodeling a home can require some or all of the basic contracting skills such as carpentry, plumbing, masonry, painting and electrical.  It is simply too much of a daunting task to try and do all of this on your own unless you have considerable experience in these areas.  Even if you can do it all, wouldn't it be better to hire someone to do this type of hourly work while you search for the next deal?

Taking Too Long for the Repairs

Each month that you own a property is another month of expenses for items like utility bills, insurance and property taxes.  This can eat in to your future profits and may even cause yourself a loss.  Before buying the property sit down with your contractor and discuss the estimated time needed to repair the home.  If necessary, ask the contractor to break the job down into rooms and develop a timeline.  This will help you and the contractor stay on pace to finish the work and get it back on the market.

Your goal as a home flipper is to find a home at the right price that you can turn around and sell for a profit.  Don't fall in to the trap of these mistakes and don't get too attached to any home.  Always be ready to simply walk away from a potential deal and look for a new one.

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Short Sale Flipping isn’t Fraud…….right? WRONG!

I have argued, for several years now that in my opinion Short Sale Flipping Schemes that use Option Contracts without full disclosure to all parties involved, including the selling bank is fraud however, we still have many agents out there that just don’t get it.

Quote from John Doe Realtor # 1

Jesse you have been ill informed and need to watch out what type of horrible , fear mongering advice you are putting out on a public board.

Quote from John Doe Realtor # 2

“Real Estate Day trading is not illegal. While you may wish to make it so, wishing and hoping won't change the law. Please cite some code somewhere that supports your statement”

Quote from John Doe Realtor # 3

“Jesse you are obviously an intelligent man but a bit misguided”

This is just a few examples of what has come my way however, it hasn’t changed my opinion and, now I have a recent ruling by a Magistrate in Connecticut to support my opinion. To read the entire article yourself, follow this link, http://nationalmortgageprofessional.com/news16047/connecticut-real-estate-agent-admits-defrauding-bank-short-sale-scheme

In a nut shell, like many short sale investor flips I have seen, the selling Realtor doesn’t disclose to the selling bank that they are planning on selling the property for a profit and the Selling Realtor doesn’t disclose that the offer they are sending into the bank isn’t the best offer they received on the property. This is Mortgage FRAUD and now I have precedent to agree with me.

Quote from the National Mortgage Professional.com article….

“According to court documents and statements made in court, McElaney worked with Sergio Natera, also a real estate agent, to defraud Regions Bank, which held two mortgages on a residential property in Bridgeport. On Dec. 5, 2007, McElaney, who was a listing agent for the property, received an offer to purchase the property for a price of $132,500. However, McElaney and Natera subsequently directed communications to Regions Bank that the highest offer to purchase the property was for $102,375 by BOS Asset Management LLC, an entity that Natera controlled. The bank agreed to a short sale of the property for the lower price, and released its mortgages on the property. On June 9, 2008, Natera, through BOS Asset Management, sold the property for $132,500 to the original bidder on the property, and Natera and McElaney retained the difference in the two sale prices.

McElaney is scheduled to be sentenced by United States District Judge Janet C. Hall on May 10, 2010, at which time she faces a maximum term of imprisonment of 30 years, a fine of up to $1 million, and an order of restitution. Natera pleaded guilty to one count of bank fraud on Feb. 11, 2010. He awaits sentencing”

If you are in a Short Sale Flip Transaction and you aren’t disclosing to the selling bank that you plan on re-selling this home for a profit, you are opening yourself to risk that could be argued as fraud and your insurance doesn’t protect against that

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