I love working with investors.  Maybe one of my favorite parts of my job is seeing people take properties that were previously run down, neglected, ugly (and sometimes almost destroyed), and bring them back to life and restore them to their beauty.  This Saint Paul home is no exception.

Downstairs this duplex had no kitchen left and someone had tried to combine two of the three bedrooms to make a larger master suite (removing the hardwood floors in the process).  The upstairs tenants had destroyed the bathroom and the property did not have a working heating system.  Once my investor purchased it, they found that the entire plumbing system was incorrect installed.

Needless to say, they spent considerable time and money to restore this 1928 Crocus Hill duplex back to its original glory.  I love it (I was tempted to tell my wife to start packing as we are moving in!).  Here is just a partial list of the work they did:

• New kitchens including cabinets, counter tops, appliances, and tile floors
• New bathrooms with all new plumbing and tile throughout
• Refinished hardwood floors and restored woodwork
• New Bryant furnaces in each unit
• Upgraded plumbing (both waste and supply) including 2 new water heaters

Each unit is 3 bedrooms and 1 bath.  This property will work for either an investor or an owner occupant.  The seller is very comfortable that you could rent either apartment for $1250 per month each.

Check out the website for 728 Dayton Avenue.

I wrote a post almost 2 years ago about making lowball offers on bank owned properties.  I use an offer that is more than 20% below list price as a lowball offer.  Both then and now, most banks will not even consider an offer that is too low.  Sometimes they won’t even respond, let alone accept a low ball offer.

As I have mentioned before, this market has also been very difficult in the last 6 months as the inventory of properties is much lower than 12 months ago and competition is much higher for both retail and investor properties.  In this foreclosure market, many of my customers have been purchasing foreclosed properties to rehab and flip them.  Their margins are much smaller than the huge numbers you see on those type flipping homes shows.  Most my customers are simply trying to make a modest profit and considering the risk they are taking, it is not that much.

I have been very surprised lately to see my investor customers receiving offers on their completely rehabbed properties at prices that I would consider lowball.  My customers price these homes competitively in their neighborhood and so I am disappointed to see offers that are 10-20% below list price.  When you are making only 10% on a flip, maybe $15,000 after all expense, you can’t discount the price by 10%!

While I don’t think we will change our model, it is interesting how aggressive the retail buyers are becoming out there right now.  Come to think of it…..I have been just as aggressive when making offers on retail properties.  Wait, maybe I should delete this post!

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.

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!