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Flipping-A Close Look by An Experienced Investor

Mar 14, 2008
The most basic of real estate strategies is "flipping." It's basic because it involves the simple process of buying a property, fixing it up, waiting for a short time, and then re-selling it for a fast profit. This is called "rehabbing." A variation is to "wholesale" the property. In other words, you buy only the contract and then immediately sell it to another investor without getting involved in any rehabbing.

Flipping is essentially a speculative strategy. Investors bet that the market value of a property will rise to the point at which they can make a quick profit before they close on the deal.

There's the potential for big profits, but there's also the potential for big losses. Let's look at the pros and cons in turn so you have both sides of the picture.

The Pros of Flipping The first-and main--advantage is investing a very small amount of money for great gains. Here's a rehabbing example to illustrate this point: * Let's assume you put down $12,500 (5%) on a $250,000 house. * Then, you spend $5,000 and 60 days fixing it up and another $3,500 in payments. * So, your cash investment equals $21,000. * If you then sell the house for an $80,000 profit, the return on your investment is a great one. For that investment and two months' worth of time and money, you've made $59,000.

A second advantage of this approach is that you can do flipping full-time or part time. The part-time option can be a good way to work your way into real estate investment because you learn the rules as you go.

As I mentioned earlier, flipping is the most basic of all real estate strategies; therefore, it's the easiest to learn. This leads to the third advantage: You don't have to be a "rocket scientist" to get started in the field. Flipping is the simplest strategy to master.

The Cons of Flipping To be blunt, the risks of flipping can be considerable. First, if you don't stay on top of things, the cost of renovations, mortgages and time can exceed your profit margin. You can lose money instead of making it!

Second, there's the chance that too many speculators can get into the market. If that happens, prices can drop very quickly, and there goes your profit!

The third downside is that if you fail to do thorough due diligence, this failure can cost you a lot of money. Hidden property problems can turn what appeared to be a good deal into a nightmare. Leaky plumbing, faulty wiring, roof problems, termite damage, etc.-they can all a lot of money out of your pocket.

Fourth, if you don't flip a property fast enough, a tax audit may result By that, I mean that if the money made off the flip doesn't immediately roll into a similar investment (another house flip), then the profit may be subject to a capital gains tax.

Finally, in some cases, you may have to pay a realtor's commission.

Types of Flippers There are three basic types of flippers.

Scouts or "bird dogs" This is often a route novice investors take to get into the real estate business. As the name indicates, the bird dog's job is to scout out potential deals and then sell information on those deals to investors. Investors pay scouts a fee for each deal that's closed. These fees can range from $250 to $1,000 or more, depending on the property price and its potential. The downside of being a scout is that you make the least amount of money in comparison to dealers and retailers.

Dealers Often called "wholesalers", the strategy of dealers is to locate bargain properties, get control of the contracts, and then do one of two things. They can close on the properties and sell them outright; or, they can simply sell the contracts to other investors. For dealers, there's considerable profit potential, no hassle with tenants, and no improvement costs.

Retailers Another name for these investors is "rehabbers." They buy a property at a wholesale price, improve it, and then sell it for full retail price to buyers. This option has the greatest profit potential, but also the big risks I mentioned earlier.

Guidelines for Successful Flipping Guideline 1: Know your market There are several simple but effective methods you can use to learn your market. One is to drive the neighborhoods you're interested in to find out what types of homes are selling well. Nothing beats seeing properties with your own eyes to get a true sense of value. Also, you can work with a realtor, if necessary, to find out the comparable worth of your targeted properties. But, be sure to dig deeper to find out everything you can about a market--property taxes, crime rates, quality of the school systems, etc. Knowledge is definitely power in the real estate business; the more you know, the better prepared you'll be to spot good flipping deals because your radar will be well-tuned.

Guideline 2: Plan-don't enter the market haphazardly Diving into the flipping market without a plan is like trying to swim the ocean without a life jacket; it's a recipe for drowning financially. A better idea is to learn the basics and study the market carefully before dipping your toe in the water. In other words, prepare yourself for success. Once you enter the market, evaluate each property carefully and objectively to see how much work it needs in order to make it a great value for you and for any potential buyer.

Guideline 3: Put together an informal team Unless you have to ability to clone yourself, you can't be everywhere at once, and you can't know everything. That's why you need an informal team to support your investment efforts. The team can supply the knowledge and experience you lack. Think of it as multiplying yourself in order to achieve maximum efficiency, effectiveness, and profitability. So, it's crucial to build an informal support team of realtors, property inspectors, contractors, tax accountants, attorneys, etc. Also, be sure to choose the best possible people for your team. You want advice from experienced and reliable people, not amateurs or incompetents.

Guideline 4: Prepare for problems to occur It's a guarantee that, sooner or later, you'll encounter problems when dealing with the flipping of properties. You can't always prevent these problems, but you can prepare to handle them in the best way possible. That means setting up a financial reserve. So, be sure to save up enough money to absorb the expense of unexpected problems.

Guideline 5: Think long range There may come a day when you acquire a property and then find you can't flip it right away. If that's the case, remember the basic principle that real estate investments perform well over time. So, if you can't sell the property immediately, the options are to live in it yourself or rent it out to others.

The Flipping Process The process of flipping can vary from region to region within the country, but here's a general description of the method so you can familiarize yourself with it:

Step 1: Determine the markets you're interested in.

Step 2: Establish a clear goal. Know what type of flipper you want to be-a scout, a dealer, or a retailer.

Step 3: Put your informal team together.

Step 4: Identify investors and then seek out the properties they want to buy.

Step 5: Do your research by: * Reading newspaper ads * Attending real estate investment club meetings * Attending foreclosure auctions, tax sales, trustee sales, etc. * Touring neighborhoods. * Looking within a 10 to 20 mile radius of your home. * Seeking out vacant houses, houses in need of fixing up, and houses with at least 50% equity. * Contacting owners, talking with neighbors. * Checking sources (county court house, tax offices, etc.) for code violations, divorces, probate, evictions, bankruptcy, criminal acts, out-of-state owners and liens or judgments for possible leads. * Keeping track of all opportunities through voice mail services, computer tracking software, etc. * Networking with other investors. * Understanding all agreements and contracts down to the last detail!

Key Idea: Gather as much information and knowledge as you can before you entering into flipping deals; it's a simple market, but not one for the uninformed!
About the Author
Jack Sternberg is the creator of the renowned "Buyers First Program". As the "gurus' guru", he is well known by the professional creative real estate community as "Obi-Won Kenobi". Having been a full time investor since 1977, Mr. Sternberg has been "at" the closing table more than 1,500 times. Mr. Sternberg has the depth of experience that lend value to his associations. Contact Mr. Sternberg at www.askjacksternberg.com
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