Flipping Property

Before you Flip!

So you say you want to get into flipping houses.  If all you have done is watch a marathon weekend of “Flip this house”, you haven’t even begun to get ready!
To be successful at flipping houses, there is a considerable amount of prep work that you need to complete before you ever begin to make [...]

So you say you want to get into flipping houses.  If all you have done is watch a marathon weekend of “Flip this house”, you haven’t even begun to get ready!

To be successful at flipping houses, there is a considerable amount of prep work that you need to complete before you ever begin to make offers on houses.  You should be able to answer the following questions with confidence: 

1. Do you know what type of flip you are going to do?  Read my August 27 article:  “What type of Flip are you doing”.  The type of flip will determine how much prep work you need to get done.
2. How are you handling the financing for the initial purchase of the property as well as the renovation expenses?  Do you have an emergency reserve, in case the house needs an unexpected and/or expensive repair or it takes longer than anticipated to sell?  If you are planning to do a “Flip and Hold”, your financing should be slightly different to allow you to recoup your renovation costs and roll them into permanent (and possibly less expensive) financing.
3. Have you researched various neighborhoods and do you understand what price range is selling (and which is not) in your target neighborhood?  You know that you are ready on this point when you can walk up to a house for sale and name the price before looking at the Realtor flyer or on the MLS.  Your flip profit and your on market sale time are dependent upon you very accurately understanding the price range you are targeting with your completed flip.
4. Have you interviewed various contractors that you may need for the various phases of the project such as:  plumbers, electricians, carpenters, landscapers, etc?  Are they available to start when you need them?  Do they know they would be working on a flip (I have found some contractors that hate working on renovations).  Do you have back-up contractors in case your first choice is not available or does not show up?
5. If you are planning to do most of the work yourself, have you mapped out the project time-line and overlaid that with your availability?  If you are not working on the house, it is sitting idle, and the interest clock is running on your loans.  Do you have buy-in from your significant other that you can spend that amount of time working on the flip?!
6. Do you know how much new cabinets generally cost or what a new tile floor costs per square foot for the tile you want?  How about any of the other materials you will be installing?  Although each flip is different, if you  understand what price range you are targeting and what type of flip you are doing prior to finding the house, you should be able to do some early materials selection.  This will help you when you prepare your budget when putting your offer together on a prospective flip.  (It is also easier to be prepared with all those selections now instead of making them in a rush once you are in the middle of the flip.)
7. How are you planning to sell the completed property?  If you are using a Realtor, have you identified him/her?  If so, plan to include them in the property selection, the scope of the renovations, and material selection.  If s/he has to sell it, make sure the Realtor is confident in the price, materials, and property.  If you are selling it on your own, what are you doing to market the property once it is completed to generate interest?

The answers to most of these questions are not difficult.  You would need to have answers to all of them eventually, so why not take the time up front to do the research and make the best possible decisions you can?

What type of Flip are you doing?

The definition of flipping is as varied as the definition of a “good” investment.  I looked up the definition of “Flipping” (houses) and there isn’t actually a dictionary entry yet!  The closest definition I could find actually applies to equities in the stock market (but it seems correct):  “To buy and sell an equity within a short [...]

The definition of flipping is as varied as the definition of a “good” investment.  I looked up the definition of “Flipping” (houses) and there isn’t actually a dictionary entry yet!  The closest definition I could find actually applies to equities in the stock market (but it seems correct):  “To buy and sell an equity within a short period of time to take profits is called flipping.”  Source

As you begin to work on deals for your flips, you will find that every flip will fall into one of the three categories:

• Paint and clean
• Bath and kitchen rehab
• Major renovation

These are NOT concrete categories, as often a flip will involve some of all three categories, but generally it will fall into one of these categories overall.  Here are the definitions:

• Flip #1-Paint and clean-You are not looked at any differently if you admit you do this type of flip!  It is probably the lowest capital requirement and lowest risk, but also possibly the lowest amount of income potential.  This type of flip has a low degree of difficultly and is very good for new flippers that are going to do most of the work themselves (almost anyone can learn to paint in a short amount of time and hopefully you already know how to clean!).  Because of the lower income potential, the key to the success of this flip is to do the work as fast as possible.  These are also good candidates for “flip and holds” (as I like to call them) as you should be able to quickly begin to rent them out and generate cash flow (possibly even before you first mortgage payment is due).
• Flip #2-Bath and kitchen rehab-Often these flips are not totally confined to the bath and kitchen, but they generally do not include significant wall removal, installation, or any structural changes.  They will normally include a paint and clean of the entire property also.  These flips can produce high income, but require less risk and capital than a major renovation as you may not be moving walls and adding square footage.  The key to success with these flips is to minimize the lead times on cabinets and have a standard “package” of materials (cabinets, flooring, counters, etc) that you use repeatedly and become familiar with and know that they appeal to your buyers.  The level of difficulty is moderate with this type of flip and will require the use of professionals for plumbing and electrical at a minimum.
• Flip #3-Major renovation-These are renovations that add square footage, change the floor plan significantly, or repair/replace a major part of the property.  These include additions, finishing basements or attics, moving walls (including load bearing walls) to open a room or add more space from one room to another.  This type of flip has a high degree of complexity, risk, and capital requirement.  It should be undertaken by individuals that have experience (or access to someone with experience) in framing and general contracting.  The key to success is to have an accurate understanding of everything that must be done and when to coordinate this complex project.  Often new flippers will take on a project of this size in their spare time and weekends, only to find themselves overwhelmed, over budget, and over schedule.

When considering getting into flipping, it is important to be realistic in assessing your capabilities, the capital requirements of the project, the time commitments, and risk.  It is always better to start small or easier and graduate to larger and more complex projects.

Amazing Minneapolis Investment Property Deals

Last week I toured several duplexes in NE Minneapolis with a client.  All of them were bank owned (foreclosures) and all needed some rehab.  I was amazed at how low the prices had gone for otherwise decent buildings in decent neighborhoods. 
Two of the three buildings needed around $20k to rehab the bathrooms and kitchens  One was [...]

Last week I toured several duplexes in NE Minneapolis with a client.  All of them were bank owned (foreclosures) and all needed some rehab.  I was amazed at how low the prices had gone for otherwise decent buildings in decent neighborhoods. 

Two of the three buildings needed around $20k to rehab the bathrooms and kitchens  One was priced at $165k and the other was priced at $115k.  They were located about 4 blocks from each other.  The lower priced building needed some additional work, but I would not say it was NOT $50k worth.  It was a typical investment property in NE Minneapolis that had been neglected and the repairs had been deferred for many years.  It was an otherwise solid building.

The third duplex that looked at was definitely a find.  It was 2 bedrooms up and 2 bedrooms down.  Both units needed cleaning and paint, and the upstairs needed carpet.  We estimate that if you wanted to get by with the least amount of money invested (in rehab), you could spend less than $5k to get the building rentable again.  Best of all, this property was listed for $137k.  It had sold 2 years previously for $225k and the owner went into foreclosure recently. 

There are amazing deals in all parts of the Twin Cities and even the greater Minnesota area.  Now is the time to be a buyer.

The Guidelines of Flipping Properties

Are you memorized by those shows in which people are buying run-down houses, fixing them up and reselling them for huge profits before the first mortgage payment is due? Wow!
What’s more, these people claim they made as much money on this one house as you did all of last year. They don’t look or sound [...]

Are you memorized by those shows in which people are buying run-down houses, fixing them up and reselling them for huge profits before the first mortgage payment is due? Wow!

What’s more, these people claim they made as much money on this one house as you did all of last year. They don’t look or sound any smarter than you, and they’re raking in the cash! You start crunching numbers and before you know it, you’re thinking about a career change.

Flipping houses can be exciting, lucrative, demanding, risky, and rewarding all at the same time.  The best line I ever heard applied to flipping houses (and also applies to investment property in general) is:  “You make your money when you buy, you get paid when you sell”.  

If you do your homework, watch your time and money, and following a few overarching guidelines, you can be successful:

• You must be 100% confident you understand what the house will sell for QUICKLY after you fix it up.  Be realistic.  Don’t shoot for the top price in the market; in fact I recommend to price it 5-10% below what it should sell for to move it quickly (especially in this market). 
• Itemize what your costs are going to be to not only fix it up, but to hold and market the property.  Make sure to include some contingency for unseen problems or items you decide to repair/replace once the work begins.  Then don’t stray from that budget.
• Just as important as the budget is a schedule.  Every day that you own the property means less money (profit) in your pocket when you sell.  Make sure you are not slowing down the project.  Keep the house busy with activity.
• If you are a armchair do-it yourselfer, pick your battles.  Make sure that the quality of your materials and workmanship meet the price point you are working in.  I have seen many do-it-yourselfers, do a poor job on an area they were trying to save money on, only to have the house not sell because everyone through the house saw the problem.  Hire talent and quality.
• The potential profit margin ultimately drives the amount of work you can do on a flip, but I recommend to newer flippers that they should buy a house that needs a few (potentially major) items to repair, such as needing a new kitchen and bathroom, instead of 100s of small ones, such as new doors here and outside facia work there and a reworked kitchen here and tons of TLC everywhere.
• Have an exit strategy.  What if the house doesn’t sell quickly?  What are you prepared to do?  I believe there are two easy answers:  move yourself in and sell your house or turn it into an investment property and rent it.  While moving in may be difficult or impossible, turning it into a rental should be one of your considerations.

Although this is not a comprehensive list, these are the guidelines that I give everyone that I meet that is interested in flipping.  They will make you more successful, more money, and less stress. 

Good luck! 

Great "Fix and Hold" Investment Property Purchase

Many newer investors ask what kinds of “deals” I am seeing in the market today. As an example, here is the breakdown of a “Fix and Hold” Investment Property that we will close on in August: 
Property Details
27xx Bloomington Avenue South, Minneapolis, is a Duplex (3br up/3br down) in a decent neighborhood that is currently vacant, [...]

Many newer investors ask what kinds of “deals” I am seeing in the market today. As an example, here is the breakdown of a “Fix and Hold” Investment Property that we will close on in August: 

Property Details

27xx Bloomington Avenue South, Minneapolis, is a Duplex (3br up/3br down) in a decent neighborhood that is currently vacant, bank owned, has been on the market for 9 months and needs about $10k in renovations. 

Financial Details

Purchased for $94,500 with 10% down on an option ARM, the mortgage payment will be $396 per month (plus escrow & expenses). Three-bedroom apartments in that neighborhood rent for $900-950. The tenants pay all bills except water/sewer/garbage, taxes and insurance. The net income on this property will be over $1000 per month. Plus, it should appraise for $160k once all renovations are complete.