Flipping Houses and More

Aren’t you amazed at all of the real estate shows on TV nowadays, such as Flip This House, Property Ladder, The Real Deal and others? I am especially intrigued by the fact that almost all real estate investing techniques being espoused on TV are those that focus on flipping or quick turning of properties. This strategy focuses primarily on locating properties at a steep discount, often because of either a distressed seller or distressed property, then fixing it up, modernizing the property, thus increasing the equity position and then selling to an end user for a profit. This has traditionally been a mainstay technique for real estate investors and in a sellers market, is a great way to make a big profit fast. But there are some things I’d like to discuss before encouraging a brand new investor to start with this technique, or even promoting this as a primary strategy for today’s seasoned investor.

The first thing I want to draw attention to is the main issue associated with any quick turn or quick profit transaction. Let’s suppose that a savvy investor was able to acquire a $200,000 home for $130,000 (that’s 65% of the Fair Market Value). This leaves a nice $70,000 for project costs and profit. So let’s discuss costs. There are fixed costs and variable costs. Fixed costs will be the same regardless of how quickly you sell this property and variable costs depend on factors such as actual sale price, time for rehab and time on market, etc.

Let’s say that this property cost $15,000 to rehab over a period of 3 weeks, approximately $5,000 for buy and sell costs – excluding realtor fees, and let’s say $5,000 in holding costs if the property can sell within 90 days. So far, that takes our profit pool down to $45,000 – that is pretty exciting.

Now, there are a few decisions to be made. Should you use a real estate agent or not? Should you price your home at the Fair Market Value or less? Let’s say that the speed at which you sell the property depends on whether you have it listed with an agent. So, each month that goes by will cost you around $1,500-2,000 per month for this property, once you figure PITI, utilities, landscaping, cleaning, etc. In today’s buyers market, not only are the investors looking for a bargain, but so are the home-buyers, so you should be around 3-5% below the FMV for a faster sale. So if you list with an agent and price your home right to sell, then you are looking at another $15,000 off the profit, leaving $30,000 in the pot. If you choose to work to sell the home yourself, and the home stays on the market for 6 months, you will still pay at least another $5,000-6,000 in additional holding costs, and would be motivated to take an offer of $5,000-10,000 off the fair market value. You’d be in the same position as with an agent, but over a longer time.

Finally, out of your $30,000 profit, which always looks great on TV and when you leave the closing table, don’t forget that you will have to pay taxes on that sale, and for all sales made in less than 12 months, will be taxed at the maximum capital gains rate that is close to 40%, another $12,000 expense off the profit. So for all that work and roughly 3 months of work, you have a net profit of $18,000, if nothing goes wrong, the rehab stays in budget and on schedule, your retail buyer can get financing and you get a reasonable offer within 90 days or less.

Let me just throw in a mediocre scenario to open your eyes a bit. Let’s say that it takes you 6 months to sell your property instead of 3, increasing your holding costs another $5,000-6,000. Let’s say that your rehab schedule drags out from 3 weeks to 6 weeks, adding another $5,000 in expenses. Let’s say that your only contract offer is $185,000 instead of your target of $190,000-$195,000. You will look at a profit of $10,000 or less after taxes. Does that sound as sexy as the TV shows make it look?

Now I have not even gotten into worst case scenarios, nor do I want to scare you in any way. I only want you to look realistically at the current market. Currently, everyone is looking for bargains, homeowners want a 5-15% discount, and investors want 30-50% discounts. And let me one who lets you know that you will not make money on every deal you do. Plan to be okay financially with losing money on 1 out of 10 deals and breaking even on 1 or 2 deals out of every 10 you do as an investor. This way you will not be devastated when that happens.

So stay tuned to the next group of articles as I discuss wholesaling, options strategies, lease-purchases, multi-family deals, land development, setting up your power team, tax strategies, asset protection, marketing your business and more.

Happy Investing – Charles Dudley – http://www.reimostwantedsecrets.com/

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