Many real estate agents struggle when working with investors. It doesn’t have to be that way. In this blog I will show you what I do when working with investors who want to flip homes and how I make a lot of money doing it while they do most of the work.
Investor Rules of Engagement
Flipping Houses for Profit
Areas to Target
When you go out on your hunt for a property to flip you must keep things in perspective. First of all, you are not going to live there. Maybe you will but it doesn’t matter. What matters is data supporting your investment decisions. That data must suggest that any house you flip should be in an area where homes are selling easily, quickly and for all if not most of the listed asking price. Also, what kinds of homes are selling? Three or four bedrooms, two or three bathrooms, two stories or ranch? Do most of them have garages and family rooms? You want to flip the same kinds of houses that are already selling. This information is available to you from your investor/realtor.
How to Find the Right Neighborhood
Focus on where you will get the best return on Investment (ROI)
By now, I’m sure you have questions and maybe even concerns. Fear not. Millions of others have walked your path before. Here is a brief explanation of the different socio-economic classes of neighborhoods. You may be surprised to know that you can flip in all of these areas including luxury high end.
High End neighborhoods are not where you want to be in the flip business if you want a decent return on investment (ROI).
Middle class homes are generally where you want to be when flipping houses. This is a broad range and best of all it includes the range where first time home-buyers are active! There are some areas of the country where middle class houses work exceptionally well for flips. If you are in one of these areas middle class homes may be your thing.
Low income may work for flips but it is generally not as good as middle class. The people living in these neighborhoods may not be as financially well off as you or me, but it doesn’t mean they are bad people.
War zones are usually identified by your intuition telling you to RUN!!!! Trust your intuition. Trust your powers of observation too. If you see cars up on blocks or homes up on blocks, run. If you see windows and doors boarded up, run. If it is a bright sunny day and you don’t see a living soul around, run. If you hear pop, pop, pop, run. Do I need to say anymore?
At the end of the day you need to get to know your neighborhoods. You can change a house but you can’t change where it is.
Targeting Properties to Flip
Some markets have almost no inventory while other markets still have too much inventory. I will describe the pros and cons of the different types of properties.
REO – REO is the accounting term banks use to categorize properties that they have taken back in foreclosure
Short Sale – A short sale is a laymen’s term for properties that are technically in default but have not yet gone through foreclosure.
Estate sales – Estate sales usually come about as the result of the home owner dying and leaving property to their heirs. If there isn’t a spouse still alive then the ownership usually passes to sibling children. More often than not the sibling children at first see dollar signs and are hopeful for a windfall. The reality is that the home they inherited is usually old and in need of a variety of repairs, systems upgrades and just downright remodeling.
Analyzing Properties to Flip
He who masters the discipline of proper property analysis will become the master of profit.
The first and most critical research to perform is the financial analysis. There are certain formulas and ratios you must learn and they are easy to perform. The first ratio is that when you add the cost of purchasing a property to the cost of rehabbing it, the total of these two costs must not exceed 70% of the After Repair Value (ARV) of the subject property. This is the minimum acceptable ratio. The less money you have in purchase and rehab costs relative to ARV the better.
Financial Analysis For Flips – Before you even set foot outside your house and turn over the motor in your car you must do some financial analysis on your desktop.
Before going over the forms to use let’s look at a plan for you to follow when going on your hunt.
This is the exact plan I followed when I made all of my investments. It is the plan I use when teaching several hundred students and it is the plan I follow when I teach real estate agents how to work with investors. It is a good plan. Follow it.
Instructions for new Win Realty Advisor students – Flips
1. First we will have a telephone conversation to go over goals. At this point you need to have available cash or credit to continue.
2. Send in email to me (email@example.com) your name, email address, and phone number.
3. I will set up your search criteria on the MLS system.
4. Initially you will get an email with a link to the MLS system. The first property matching the search criteria will be shown with a drop down box at bottom left allowing you to scan forward to other listings. You will be receiving the “FULL” listings. This first email will consist of several hundred listings.
5. Next, you will separate the good from the bad. Your objective is to narrow the list down to about 30 properties. You do this by comparing the list price to the market values for the area. The list price should be below the market value. Also, look at the photograph(s) of the property, the lot size, room sizes, and other characteristics of the property. This will take a few passes of the listings. As you narrow the list down also use the county web site for further research. This is a process that you will get better at with experience.
6. The resulting list of 30 or so properties is your drive by list. Now you will drive by the properties to further narrow your search down to 10 to 15 properties.
7. At this point you will email me the MLS #’s (in a string separated by commas) of these 10 to 15 properties. At this point I will review your homework and narrow the list down further. I will make notes to show you my work. This will typically result in 7 final properties.
8. Now we will schedule an appointment to go see the properties.
9. After viewing the properties you should have a list of 4 or more properties that you will fill out the MAO and cost sheets for. Sometimes you will do this for all the properties.
10. I will review this work and with my help you will decide which properties to make offers on.
11. You will fill out the “Offer to Purchase”, make a photocopy of your hand money check, and provide both with your proof of funds to me. I will provide comps to verify your ARV(s).
12. Now we make the offer(s)!
As you can see, in the way I teach investors and RE agents who work with them, most of the work is performed by the investor! You get a commission when they buy the property and you get the commission when they flip it. And they are repeat customers. What’s not to like?
To more fully appreciate and learn to use this process please call 800-931-2605, email Gary@WinRealtyAdvisors.com or visit MyInvestmentServices.com.
Written by Gary Wilson, June 9, 2014
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