Over the last 6 months, it seems that every new customer I meet wants to do flips.  None of them want to talk about rental properties, they all want to flip houses.  These are new investors that have never done it before and they have little if no expertise.  It is amazing.

Unfortunately, now is NOT the time to start flipping homes.  The market is very fickle right now.  One week the market is hot, the next it is cold.  As I write this, it is very cold.  All of my flip customers have houses that are sitting and most of these customers are experienced rehabbers.

You don’t want to be holding a property for months waiting for a buyer, all the while the interest is eating up your profit.  Wait until the market firms up, then call me and we will take a shot at teaching you how to rehab and sell homes.

With so many foreclosed properties on the market right now, the time has been ripe for rehabbers to get into the market.  They can take these properties that may be otherwise unlivable (and can not have a mortgage put on them), buy them, fix them up, and then resell them making a profit.  It is a win for the rehabber, the buyer of the new beautiful house, the neighborhood, and even the economy (as we put people back to work and buy materials).

One speed bump in the sale of these newly rehabbed houses to the end buyer has always been that if the buyer is using FHA financing, (with certain exceptions) FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days.  With many of these rehabs taking 60 days or less, this can mean that you must lose an additional 30 days of interest while you wait with the property empty until the 90 day mark.  The loan process can not even begin (and the purchase agreement can not be dated) until day 91.

Many of the rehabbers were unwilling to wait the 90 days to resell to anyone with FHA financing. HUD realized that this restriction was shutting FHA buyers out from newly renovated homes, many of which were priced for first time home buyers. This week HUD announced a temporary waiver that removes this restriction.  The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

The waiver will take effect on February 1, 2010 and is effective for 1 year, unless otherwise extended or withdrawn.  This is good news for everyone.

Over the last several months, I have been working with many investors that want to rehab properties in North Minneapolis. As I have mentioned before, you can purchase some of these houses for $30,000. Lately, I have received many questions about how these rehabs work.

It has been a while since I wrote about Flipping houses. Unlike many Realtor blogs, you will never see posts about “my new listing”. This blog is for you: The new or seasoned real estate investor. I thought it would be interesting to show you one of these North Minneapolis rehab projects.

Background

Just like other areas of the country, Minneapolis has been hit hard by foreclosures. In my opinion, North Minneapolis has been hit worse than other areas with some streets having 5-10 REO (bank-owned) properties on them. These large numbers of REOs are driving down the REO house prices in these areas dramatically. Houses that sold for $150-$175k a couple years ago are now vacant and selling for $30-$50k. Most of them have had their copper stolen and all need some work (but that work varies from simple paint and carpet to something short of a tear-down).

This situation has created a unique opportunity for real estate investors to profit from this glut of bank-owned properties. Most investors are buying low, fixing up the property and unlike a traditional flip: renting it out, and expecting to wait 3-5 years to cash out.

Search Process/Criteria

You would think that with the sheer volume of REO properties on the market in Minneapolis, it would be easy to find a property to buy, but we are searching for just the right combination. Here is what we are looking for (in order of priority):

1. Total cost of project including: acquisition, holding, rehab, and overhead costs < $95k
2. ARV (after repaired value) = $125k or greater
3. Decent floor plan/layout
4. Close to properties of our other real estate investor friends.

That’s it. Note that I did not say anything about size, bedrooms, bathrooms, garage, basement, etc. Number 4 is simply to have someone to ask “what’s the neighborhood like”? Ultimately, if we hit #1 & #2, everything else does not matter. In fact, even a 1 bedroom house finished at $95k with $850 per month rent will cash flow!

North Minneapolis Rehab Example

Mr & Mrs Customer G purchased a 1.5 story single family house on 33xx Girard Ave N for $35k. This was a very typical North Minneapolis rehab. It needed new windows, new bathroom, new flooring, all new plumbing, plus new paint throughout (and other miscellaneous items). Fortunately, the kitchen only needed new counters and appliances, saving about $3000 in cabinets. The total renovation costs were $41k bringing the total project including closing and holding costs to about $80k. Best of all, the property was filled by the general contractor/property management group with a tenant that signed a 2 year lease and will cash flow about $400 per month. The property had a final appraisal of $159k, giving the buyer less than a 50% LTV ratio.

 

See some of the before & after pictures here:

What an outstanding deal! The buyer has a completely renovated property, fully rented for 2 years with decent cash flow and a mortgage for only 50% of the value. Keep in mind that this was a turn-key rehab. The buyers bought the house and 6 weeks later the contractor had renovated and rented the property. The buyers only took their down payment and closing costs out of their pocket (in fact-talk to me about how you can get your down payment back).

There are many similar opportunities out there right now. Contact me for more information.

Even though I have looked at 100s of houses in my career, I still get excited about finding an Investment Property that could be beautiful after a rehab. Maybe I am still stuck in 2002 when you could flip houses and sell them as fast as you could buy them. I suppose some would say it is because I am passionate about MN Investment Properties.

About 5 days ago, I was out with a customer looking at bank-owned properties in Minneapolis. We looked at about 15 houses and found 3 properties that looked like good candidates to “flip and hold” (rehab and rent). Our contractor was with us reviewing the houses and preparing estimates. Most of these investment properties required $30-40k worth of work, including bathrooms, kitchens, plumbing, windows, and general repairs. The three finalist REO properties were priced under $50k.

Both my customer and I were excited about Investment Property #1. It was a large 4 bedroom house (in Minneapolis) with beautiful hardwood floors throughout, large pictures windows on each side of the house, original dark woodwork, and the leaded glass windows were intact. After discussing the type of flip we wanted to do on each property, I was crushed when our contractor told us Investment Property #1 was the worst rehab deal of the three.

As we went through his estimate, I agreed with all his numbers and rehab suggestions. Despite being almost move-in ready cosmetically, the house needed 20 windows @ $400 each, all new plumbing @ $8000, the heating system reconnected @ $2500, new kitchen @ $4000, etc.

I forgot all my school of hard knocks training, my years of experience with flips and rehabs, and all my preaching to my customers to analyze the property’s financial numbers. I tried to argue with him about the value of the neighborhood, the number of bedrooms, the size of the backyard, the fact that it was a 1/2 block from the school, etc. Despite my best efforts, he whipped me back into reality like a freshman on the school yard with the following comment: “I don’t get emotional about properties, its all about the numbers”. Ouch! I was hearing my own words coming back to haunt me.

So here I sit licking my [ego] wounds. He is right, though. You must stay unemotional when analyzing investment properties. You can get excited about them when the numbers check out and you put in the offer. Analyze the numbers, use conservative estimates, get good quality bids from trusted contractors, and if necessary, bounce the deal off a trusted advisor. When you fall in love with a house, it make it difficult to stop thinking about it (even when it is wrong for you)! Staying emotionally detached will allow you to walk away from a property or deal when it doesn’t make sense.

No, we have not gone through a time warp and are back in the 1970s!  There really are houses on the market in Minneapolis today for $50k, $40k, and even $30k.  As you expect, most of them are in North Minneapolis, but they are not all in rough neighborhoods.  Many investors/rehabbers are reaping amazing profits and cash flows by doing ”flip and holds” (as I like to call them).

There are properties available in decent neighborhoods that have simply been neglected for years and with the stigma of North Minneapolis, have been on the market for a long time.  Most of these are 2-3 bedroom, 1 bath houses with 2 car garages.  Some have hardwood floors and they were built in the 1930s-1950s.

Assuming you will need to do full kitchen and bath remodels and some other significant repair such as a roof, windows, or furnace, let’s run the numbers on how a $30,000 house may flip:

Purchase Price:	$30,000
Closing Costs:	$1,000
Repair Costs:	$30,000
Total Cost:	$61,000

Many of these house are then appraising for $90k-110k.  Truthfully, they are difficult to sell [today] because of the glut of properties in North Minneapolis and the apprehension of many to buy in North.  We do expect a turn around in a several years.

These are perfect properties to buy, fix up and put in your portfolio (“flip and hold”).  Most investors will take out 90% loans on the properties, potentially pulling out $10-20k (more than they put in for a down payment!).  With a 90% LTV loan on $90k ($81k loan value at 7.5%, 30 year conventional), your monthly loan payment (before PMI) is going to be:  $563.  Add in PMI, water/sewer/garbage, taxes, insurance and you have a monthly cost of approximately $675.

Prospective tenants are very excited to lease these newly remodelled single family houses.  This allows you, as a landlord, to be very picky on who you rent to.  Most of these tenants are paying $1000 for a 2 bedroom and $1200+ for a 3 bedroom.  Your cash flow is $300-500 per month!  And because the property was just completely renovated, your annual repair bills are very low.

These deals can be arranged in many ways with you participating by doing the flip or letting our seasoned investors do it for you.  We even have a very successful property management company that can take the day to day part of being a landlord off your plate.  If you may be interested in an opportunity like this, I encourage you to contact me so we can discuss it further.

After all your flipping prep work, you will need to generate leads on potential properties to flip.  Unfortunately, not all leads will end in you buying a property to be flipped.  Many leads will be dead ends for various reasons including (but not limited to) the lack of a seller’s motivation, condition of property, and even competition.  Because this is a numbers game, you need to define how many properties you want to flip each year or month and then how many leads you will need to generate properties to make offers on.  The following techniques, when used consistently, should allow you to generate enough flip leads which in turn will allow you to find (and make offers) on properties to flip:

• Prospecting-The following tools will generate leads on potential houses to flip.  Once you generate the lead, use the county’s on-line property tax system to find the owner.  Call them or send them a letter asking if they are interested in selling and that you can close quickly.
  • Use the MLS or a realtor to find properties that are below the average price range for your target neighborhood.  Although it is not a perfect statistic, use a price per square foot as a rough way to find leads on properties.  Also, look for keywords in the listings that say:  needs TLC, fixer-upper, As-Is.  Additionally, review properties that have been on the market for an extended period of time.
  • Drive or walk around your target neighborhood.  Look for houses that have uncut grass or are vacant and/or boarded up.  Properties that also appears to need exterior work may be leads.
  • Sometimes desperate sellers will attempt to sell the property themselves first, before using a Realtor.  Check the classifieds in the local paper and Craig’s List for your area.
  • Check the foreclosures listings in the newspaper.  I do not recommend buying the property at the sheriff sale, but  contact the sellers to see if you can help them out of a bad situation.  Otherwise, simply make a note of what properties are going into foreclosure and watch for them to become available (probably on the MLS).
• Advertising can be an effective technique to generate qualified leads as people are calling you to discuss their property/situation.  Small “bandit” signs at intersections and boulevards is a highly effective technique that many national firms use.  You can also create letters or post cards and mail them to your target neighborhoods calling the recipient to call you if they need to get out of their house quickly.
• Networking involves connecting with as many people that you can find that many have knowledge of a lead on a house that needs to be rehab’ed.  These may include Realtors, contractors, neighborhood residents, and other investors.  One great source is to connect yourself with attorneys that handle estates.  Often the family members are not interested in going through the process of selling or fixing up their relative’s home and just want it taken off their hands.  Many times these will be homes that have been neglected for years by an aging owner.

Even once you start your first flip, do not turn off your lead generation process.  If you intend on continuing to do house flips, you will want to always have leads in your pipeline.  The above techniques will not only generate property leads, they should also help you understand your target neighborhood better.