Archive for January, 2013

27 Keys To A Successful House Flip

27 keys to house flipping success

Successfully flipping a house requires that a lot of different aspects of the flip
go smoothly.

Here is a list of what I feel are the keys to making sure your house flip goes the
way it is supposed to. These have been learned through experience. Some of which
were not pleasant.

Experience is the best teacher. I just wish she was more inclined to hand out an A+ with a gold star more often. :)

Anyway, here they are:

1. Understanding Your Exit Strategy

You’ve got to know what you plan to do with the house you end up buying. If you
don’t know what your plan is with it, you won’t know how to determine how much you
should pay for it.

This post is detailing keys to successful buying, fixing and flipping a house, so
we’re going to assume that is the exit strategy.

The plan is to buy a house, have a contractor fix it up and then sell it. The
plan is to also make money, so let’s continue on so that we can make sure that
will happen.

2. Knowing Where You will Get The Money

If you are going to purchase the property, you’re going to need some money to do
it.

If you don’t already have a source for the money, I would start looking now.

Click here for some other ideas on how to start flipping with almost no money.

3. Knowing How Much The Money Will Cost

Whether you are going to be using your own money, private lenders or hard money lenders, you will need to figure out what the use of that money is going to cost.

You will need to make assumptions for how long you will need to borrow that money.
This depends on how long houses are taking to sell in your area. If they are
typically taking 3-6 months to sell and close, assume 6 months or be conservative
and go 9 months.

If you need money for the investment, try to finding local hard money lenders.
Start a spreadsheet so that you can keep track of their terms and the costs of the
loans.

After you complete some successful flips, it will be much easier to start working
with private lenders.

4. Finding A House That Will Sell

For a successful house flip, it’s best to find a house that is in an area where
houses are selling quickly. The price range of house will probably be what the
majority of buyers in your area are able to afford. In my experience, this is
typically just below the median home price.

You don’t want to buy a house to flip and find out that the area is mostly rentals
and not desireable for homeowners. People just aren’t looking to buy there.

5. Knowing What Repairs Will Be Needed

Always remember to try and set your rehabs apart. Buyers are looking at a lot of
houses and they all tend to become a blur after a while. If you do some nice
things that the other houses don’t have, they will remember yours and are more
likely to either stop looking or come back to it and make an offer.

Focus on curb appeal, bathrooms, kitchens and emphasizing the best aspects of the
house. Fancy kitchen backsplashes, new countertops and updated knobs and handles
go a long way. Bathroom vanities with granites tops are very inexpensive at the
big box stores so it doesn’t make sense to not use them.

A lot of what you use will depend on what the competition has. It doesn’t hurt to
view some of the other houses for sale and try to figure out how you can make your
house more appealing.

6. Knowing How To Estimate The Cost of Those Repairs

In order to make an informed decision on how much to pay for a house, you will
need to know how much repairing and updating the house is going to cost.

The best way to accomplish this if you are not experienced is to bring a
contractor to a house that needs a lot of repairs and take notes on the costs of
replacing everything. You should find a contractor for your house flips as soon as possible.

Go shopping at Home Depot or Lowes and find inexpensive materials that you can
use. Write down the SKU’s and prices so that you can have your contractor use
them if you need them.

7. Figuring Out The Maximum You Can Pay

The max you can pay is usually based on the MAO (maximum allowable offer) formula.
This formula is where you take 70% of the ARV (after repair value which is the
price you can sell the house for after you fix it up) minus the cost of the
repairs needed.

So for a house that could sell for $100,000 fixed-up that needs $10,000 in
repairs, the most you should pay would be $60,000 ($70,000 [70% of ARV] – $10,000
[cost of repairs]).

The 30% of value removed from the ARV includes your profit, holding and closing
costs.

I like to be a little more conservative and go with 65% of ARV minus repairs.

8. Only Offering Less Than The Maximum

Never pay MAO. Always offer less than what you determined to be the maximum you
can pay. You need room to negotiate and you never know if you could get it for
even cheaper. So start with a lower amount and hopefully you will end up agreeing
to a price that is below your max. This will give you more room for profits…or
surviving mistakes.

9. Having Vacant House Insurance Before You Close

It’s very important to have insurance on the house. Vacant houses can become
targets of vandals and squatters.

You’ll want to get a builder’s risk policy that will cover the house while you are
working on it. If you go any other route, make sure to read the fine print and
find out for sure if the policy will pay even if something happens while the houes
is vacant.

10. Being Ready To Start Work As Soon As You Close

It’s best to have a contractor lined up and the scope of work to be performed
determined before you close, if possible. This way you can cut down on your
holding costs (which can seriously eat into your profits or even eliminate them –
which is no bueno, mi amigo).

11. Having A Solid Contract With Your Independent Contractor

Many problems (I’d even venture to say most problems) during a house flip usually
have to do, in one way or another, with the contractor. Whether this is the fault
of you, me, or the contractor is a different story.

The best way to avoid problems is to have everything in very detailed writing.
Make sure you spell out ‘exactly’ what you want and what you expect. The timeline
needs to be determined and the draws need to be determined. I have my draws based
on certain milestones and not on time worked. Don’t fall into the trap of giving
in to a contractor that demands 50% to start. Please, don’t do that. It’s an
invitation to get burned.

Also, spell out how extras and change orders are going to be handled. Require the
time to do them and the price must be agreed upon in writing before being done.

Oh and don’t forget the penalty for not finishing on time. Very important.

12. Making Sure You Hold To Your Contract With Your Contractor

There is always a temptation to bend the rules of your contract when it involves
confrontation or dealing with a problem. We all want to just take the easy way
out and avoid problems. Don’t do this!

If you go back on any terms of your contract, the whole thing can be thrown out
the window and ignored. Make sure to enforce it.

13. Keeping From Over-Improving The House

Don’t fall into the over-improvement trap. This is where you start doing things to the house that you would want in your own house.

You are not going to be moving into this house. It is an investment. It’s not
something to get emotional about. It’s all about the numbers. Don’t over do it.

Don’t spend $10,000 on new windows for a $65,000 house. Just doesn’t make sense.

14. Finishing The House On Time And Under Budget

You’ve got to stay on top of them and push when people need pushing. Show up on
the jobsite unexpected and often. Keep people on their toes and let them know
that you expect things to be done on time. The penalty for not finishing the job
on time can be a great motivator.

Don’t be a jerk and be unrealistic. If all that is left is the exterior and it
rains for a week straight, it can’t be helped. There are times when being realistic
is important.

There’s always a delicate balance needed. Don’t be a jerk, but be firm.

15. Thoroughly Cleaning and Staging The House

Nothing is worse than a completely rehabbed house that is filthy. I’m talking
about dust everywhere, dirty toilets, scufffed up floors, paint drops everywhere,
etc.

These are the things that affect impressions. Sometimes the small things will
make a big impact and may give people a negative impression of the house even
though the whole thing was remodeled.

Staging a house can make a very huge
difference if done right. You want to try and make it so nice that the buyer gets
an impression that they are moving up if they buy the house.

Some studies done somewhere by someone (I won’t pretend to remember) showed that
houses that had furniture sold faster than vacant houses. Plus, it’s just nice to
be able to sit down and really ‘experience’ a house. If there is nowhere to sit,
they probably won’t spend as much time at the house.

16. Listing The House Right Away At A Good Price Based On Comps

Don’t be the investor that prices his house based on what he has into it. Just
doesn’t make any damn sense. This is also typically the one that refuses to
reduce the price and ends up spending way more in holding costs.

Base your selling price on what other similar, nearby properties have sold for
recently. Period.

Even if your house is nicer, don’t price it more than the comps, and if you do,
don’t go overboard.

If a house has been sitting on the market for a while, people will begin to wonder
why.

17. Be Willing To Lower The Price As Needed

This goes along with the last one. If the house isn’t selling, it’s almost always
because it is priced too high.

If there is a fault people are finding with the house fix it. If there is a fault
that can’t be fixed or you just can’t afford or don’t want to, you should lower
the price. Don’t be stubborn.

People lose their shirts all the time all because they are unwilling to lower the
price. This happens a lot when people are into the house for far more than they
should be. They don’t want to lose a lot of money so they don’t lower the price.
Sometimes, you’ve just got to stop the bleeding.

18. Being Willing To Negotiate With Buyers

This one is an extension of the last one. Don’t get angry with buyers wanting to
negotiate. It’s going to happen.

The other side of this is when they offer a price you are willing to accept right
away. Sometimes it’s best to negotiate something insignificant just so that they
can feel that they got the best price they could have. You don’t want them
wondering if they could have bought it cheaper. This might present itself after
the inspection where they want to negotiate some repairs (which appear during
every inspection).

19. Keeping An Eye On What Your Holding Costs Are

If you are not aware of what your investment is costing you as time goes by, you
may end up with a horrible surprise when you have it sold and the dust settles.

Always know how much you have into a project and how much it is costing you every
day.

20. Keeping The Lawn In Good Shape And The House Clean

This is one a lot of rehabbers tend to get lazy about, yours truly included. It
doesn’t take much to go by from time to time and clean up the dead bugs, sweep and
vacuum and wipe off counters.

You also don’t want that beautiful new lawn turning brown and dying on you.

21. Only Accepting Offers From Capable Buyers

This one you will get good at as time passes. You will find that certain lenders
are a pain in the ass and others are a dream come true. Also, some buyers can
also cause you serious grief as well. The ones that go into it making all kinds
of demands are better told to take it or leave it sooner than later. Trust me.

22. Making Concessions, But Only Necessary Ones

The other side of the last one is being willing to make concessions to get the
deal closed, when necessary.

A perfect example is a house that was taking a long time for us to sell. We ended
up finding a buyer and working 2 months to get it closed. At the last minute, the
lender informs everyone that the buyer does not qualify for a loan to cover the
purchase price. WHAT!!!!

In order to do the deal, we had to knock $8,000 of the price. That was not an
easy decision, but one we were willing to make after much deliberation.

Incidentally, the fact that the buyer’s agent even had the nerve to ask if we
would lower the price that much impressed us and she has been our selling agent
ever since. So there is always something positive that can be gained from a
negative situation. You just have to find it.

23. Following Up With The Title Company To Make Sure Things Are
Progressing

You’ve got to make sure people are doing what they are supposed to be doing.
Someone always needs to be pushing. If you are not and someone else with another
closing is, your stuff is likely to be sitting on someone’s desk for a long time.

Call in every several days just to touch base and keep things on track.

24. Checking The Final HUD Settlement Statement Before Going To Close

Before going to closing, make sure to review the HUD1 settlement statement. You
want to make sure all the numbers for the closing are correct. You don’t want to
be in the middle of a closing only to find out that major mistakes had been made.
What’s even worse is if you miss mistakes because your mind is already sort of
numb from all of the stress of getting the deal done.

Besides, don’t you want to know as soon as possible how much you will be making?

25. Remember To Cancel The Insurance And Utilities

Don’t do what I’ve done. On several occasions I’ve received notices to renew
insurance on properties that we had sold almost a year before. Some policies
allow you to receive a refund on policies that are cancelled before the policy
expires. Because I had forgotten to cancel the policies,, I probably lost out on at
least about a thousand dollars.

26. Taking Notes On What Went Right And What Went Wrong

After your successful house flip, review what you did well and what could use
work. Take notes. You should always be working on improving the process so that
you can squeeze more profit out of each deal.

27. Spending The Money Wisely

Don’t go spending the money on a fancy car. This is your choice, but you will be
much better off putting the money back into your company. Spend a good chunk on
marketing to land more deals. Get the snowball rolling.

Don’t forget to also celebrate your success. You’ve got to enjoy your wins.
Positive reinforcement.

In Conclusion

There you have it. All in one place.

Follow these steps and you will have a much better chance at having a successful
outcome to your house flip.

I can’t think of everything and I’m sure some things have been left out that
should be added. Please do me a favor and add what keys you have to successfully
flipping houses in the comments. I really appreciate it.

Danny
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Patience Is The Greatest Virtue

Years of abuse flipping houses.  This lockbox caused me to become very impatient.

Give life time.

Have you ever started exercising at the beginning of the year with grandiose thoughts of being completely ripped by summer? Have you given up early on because you didn’t see the results you wanted happen fast enough?

Here’s the real crappy part of the whole thing: Have you looked at yourself in the mirror when summer started and wished you had stuck with it? By now you would have likely been ripped. Ok…maybe not ripped, just a thinner, cooler version of your self.

The same exact thing happens to a lot of investors when getting started flipping houses.

This post is going to cover some of the places you are likely to struggle with impatience in the house flipping game.

One of the hardest things for all investors is having patience. It takes time for things to start to fall into place and for some of the work to produce results.

I’m very guilty of being just as impatient as the next guy. There are projects that I’ve worked on in the past that I eventually just left unfinished because I became too impatient. It just wasn’t happening fast enough.

Sometimes its because something shinier ended up getting my attention and I wanted instant gratification. I guess this is what they call being a squirrel.

Anyway, I was struggling a little with getting motivated this last week to work on some projects and it occurred to me that this impatience is the reason why a lot of new investors end up getting frustrated. And a lot of them get frustrated to the point of just quitting.

Most of us know that flipping houses is not usually a get rich quick (and easy) business. But, I think a lot of us fail to realize the amount of work involved in getting it started. Once you push through the ‘getting started’ phase, it becomes much, much easier.

That’s good news. That’s exactly why I wanted to talk about patience this week. If we can just be patient and not force things when they don’t happen fast enough, everything will start to fall into place.

Here’s where I’ve experienced impatience that affected the growth of my business.

1. When Getting Started Flipping Houses

There are a lot of times that impatience causes tragic mistakes when new investors are just getting started flipping. The biggest one being jumping in and buying a house that is the furthest thing from being a good deal.

There is a learning curve and it can be tempting to learn some of the techniques and just go out and start looking for that first deal so that you can ‘get it under your belt’.

Don’t let your emotions affect your decisions.

You might find a house that needs a lot of repairs that appears to be for sale for a good price. This desire to do the deal may cause you to make excuses why you should buy the house regardless of whether the numbers fit the formulas you’ve learned for a successful house flip.

You may overlook some problems the house may have that aren’t apparent. Or, someone may be trying to pressure you to do the deal because they will benefit in some way.

Don’t let impatience tempt you into these traps.

2. When Marketing For Those First Flip Deals

There are a lot of people asking me about how to find their first deal. There are many places on the blog that discuss exactly that. Here are some in case you are wondering: Everything I did flipping houses for 34 weeks (all marketing, analysis, rehabs, etc. documented) and here: 57 Ways to Market to Motivated Sellers

I don’t mind people asking, but sometimes they tell me that they’ve heard about or tried several of the techniques already. The questions I always want to ask is, “Did you actually do it?” and “Did you do it enough?”

That’s usually where the problem lies.

Give your marketing a chance to work.

You’ve got to actually try the marketing. Do the marketing, give it enough time to start to produce results (at least several months), adjust it and try to produce better results.

Please don’t mail out 20 letters and give up because you didn’t get any calls. I’ve been discouraged many times after rolling out a good sized campaign that didn’t produce any results. Most of the time I didn’t give up. I changed things, but I didn’t give up.

Mailings depend a lot of the quality of your list. Your list being who you are mailing to. But, with any mailing, I feel you should be sending at least several hundred and mailing the same people with a series of postcards and letters (ideally 7). Now, I will admit that I have a hard time mailing people multiple times because I end up getting too busy…usually from working deals that were generated.

When using bandit signs, you should be putting up at least 25-50 at a time.

As with anything, the more the better.

3. When Negotiating A Deal

Don’t be so impatient when trying to make a deal with a seller that you lose the deal or lose out on saving thousands of dollars on the purchase.

You’ve got to be willing to walk away.

It’s best when you are absolutely willing to walk away. The person that feels he’s got to do the deal will likely lose the negotiation. This isn’t to say that you could still end up with a good deal, it’s just that it won’t be as a good a deal as it could have been.

When you find yourself in the middle of a negotiation to purchase a house to flip, and you are only several thousand apart, it will be very tempting to just give in and take it.

I remember very clearly this one time my wife, Melissa, saved me from paying too much. We were looking at a house that was only 4 or 5 years old. I think it only needed carpet cleaning and some painting. We could have this place ready for sale within a week of buying it. I love those.

I really wanted this house. The seller was from out of town and needed to get back to where she lived. We had been negotiating for about an hour (this is not typical for me – it’s usually 5-10 minutes, if at all) and were only about $5,000 apart (I can’t remember the exact details). It wouldn’t have been as good a deal at this price and wouldn’t have fit my buying criteria. But…I was quickly justifying it in my head by telling myself how new the house was and how little work was needed.

I was being impatient.

Melissa convinced me to let her think our offer over and get back to us. Even after we had driven a couple miles down the road, I pulled into a parking lot. I was starting to turn around and go back.

Melissa asked what I thought I was doing. :)

We went home. Several hours went by and the phone rang. Yep, she ended up taking our offer.
Guys, you need to listen to your wives.

4. When Looking For The Right [Insert Person Here]

People to insert: Contractor/Cash Buyer/Realtor/Tenant/Attorney/Accountant/Any other team member

When you are looking for people for your house flipping team, you should realize you are looking for a person that you are willing to have a long term, business relationship with.

Don’t make the mistakes a lot of us make when we are going down our to-do list everyday. You know, doing something half-assed just to mark it off your list. You’re marking it off your list but not really accomplishing what you should be.

The first contractor you talk to is not likely going to be the one you will end up working with for years, so don’t stop looking after you’ve talked to one. The same goes for everyone else that will be on your team.

Don’t let impatience lead to frustration and, ultimately, quitting.

Success in this business is not going to happen over night. A lot of hard work is necessary. A healthy dose of patience will go a long way in making sure that you stick with it so that you can look back a year or two from now and be able thank God that you didn’t give up.

Coincidentally, the lockbox in the picture for this post was on one of the houses we were working on. I had to take it off yesterday. It should have only taken a second…but it tried my patience. Our typical codes were not working and you can tell some of those buttons have been busted off completely. This thing has been through hell.

I was just about to break it open with a screwdriver and brick, when Melissa called me. She got the correct code for me and it opened right up.

As far as my initial comment regarding exercising and losing weight goes, I’m tempted to say that this business is far easier than exercising…

What do you think? What areas have you been impatient with that have caused you some grief? Please share your thoughts in the comments below.

Also, I like it when people thank me by clicking the ‘like’ button for this post. Thanks.

Danny
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