Consumers-Are you Flipping Homes or just Flipping out?
I wrote the story Consumers...are you flipping houses or are you flipping hamburgers? on 8/22/07. The story was my opinion regarding the type of impact there was for people that were flipping properties. It when onto say that it can be a highly profitable venture or a very dangerous way to lose your shirt.
I remember back in the day between 2002-2006 when I would hear about consumers that were buying almost anything that had 4 walls. First we had all these condo conversions going up. I developer would come in and usually take an existing building and spend a few million in renovations. most of the buildings I saw were usually built in the 70's and some of them went from rental buildings to putting the units up for sale.
I had bought quite a few properties with my partners and we would either rent them out or renovate and sell them if need be. For example.... I bought a unit in a building that was originally going to be built from the ground up and was to be used as a rental building but then they made the announcement that they were selling the units so my interest grew. I was able to get in on the ground floor for this particular deal because I had sold a unit in one of the devolpers other buildings so when I showed up on a Sunday I walked into a makeshift office and bought a unit right off of a floor plan. We handed them 20% down at contract and waited about a year for it to be ready to close. We paid cash for it and after we closed....we carried it for about 3 months and sold it. We walked away with 80K. Not a bad deal huh?
We had an idea where the market was going because we were constantly studying it. We weren't pigs and sold it at a reasonable price instead of holding out for more. I knew that the day we became the owners that there were 55 others that just came on the market looking to do the same thing we were going to do and also knew that there would be plenty more so we decided to get out as quick as we could.
One of the biggest reasons that there are many properties in foreclosure is because the person who bought with the intention of never owning it longer than 30 days were blinded by certain issues that could arise if you don't know what you are doing. Here is an example of what I call flipping a property correctly. By low and try to put as much cash down as you can so at least you'll have some equity in the property.
Don't assume that if you sign a purchase agreement to buy Real Estate $500K ...that in a year from now when the construction or renovations are complete that the market will make the property be worth $250K more after you close. Try not to buy it with little or no money down.
Don't assume that if you sell it for a little less than you were wishing for.... that you aren't going to make a profit. "But Neal ...if I bought it for 180K and sell it for 270K instead of 280K ...I'm losing money!"
You didn't make the money yet so how would you know if you lost 10K? You didn't lose anything...you just won't make as much.
Don't try to predict or be fooled into thinking about how much you will make a year in advance. Borrowing hard money with a fluctuation interest rate could kill you if you don't have enough cash reserves to cover your carrying costs. Seasoning issues come into play as well..generally banks want 3-6 months for the loan to be seasoned. They have to justify why they are paying a premium in such a short time. We did manage to get on to close in 70 days which was pretty good. If you are lucky to get one at a foreclosure price or way under market value.... then you might have an easier time.
The approach we would take would be to add the possible costs in before we even make the decision to purchase. Now of course it's impossible to predict how much in cash reserves you will need to carry the property.....but at least if you have a good plan....you can try to figure out a rough figure or forecast of how much you will need to cover the nut until you can turnover the property to the next person. Borrowing hard money can be a good way to have leverage...but you better know what you are doing. It can be a fun game if you play it conservatively. In a market like this I would say at least 2 years of reserves put aside might be a good figure to work with. "But Neal....I don't have that kind of money to play with." Then I would tell you not to buy until you have prepared properly or you could be risking your financial future.
I can't tell you how many people I knew who jumped on that bandwagon and I would tell them to be careful. Some listened and some would just give me this stare and say "Neal...don't worry about me...I know what I'm doing." Now...some of those people have lost their properties and also lost the homes they lived in and have called me for help....well most of those people cannot be helped. They are upside down and can't sell their properties because they owe more than it's worth. Banks don't seem to want to help investors if their only way out is to sell short. Most banks will only let you negotiate a short sale if it's your primary residence or owner occupied.
There are still many good deals out there if you know where to look.
Don't rush into anything...there is plenty to go around. Don't make the mistake that so many people made...buy property...but buy it with a plan. And most importantly "Don't be flipping out!"
For more information please contact Neal The Real Deal Bloom-CRS-Realtor® /Remax Hometown
2500 Weston Road ,Suite 103
Weston FL 33331
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