Flipping Houses For Dummies. Roberts Ralph R.

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