Flipping Foreclosures for Quick ProfitsGlen Gallucci
July 13, 2008 — 1,533 views
Most newbie investors and just about everyone for that matter has probably heard about all the quick and easy money you can make by buying and selling foreclosures. Or as the new term is called "flipping" foreclosures, as well as other distressed or vacant houses.
People hear about this from friends, contractors, real estate agents and other investors. Each one has a story on how they made a quick profit from "flipping" one of these foreclosures and then proceeds to tell you that it would be a great way for you to also make some money. And maybe you nodded your head enthusiastically and said, "Sounds great—I’ll look into it." And for the newbie investors who have joined their local real estate investor clubs seeing many of the members actually flipping these foreclosures are all ready to jump in flipping properties with both feet!
But what is "flipping properties," and how do you go about doing it and doing it correctly? I’m sure people only tell the stories on when they make a quick profit and perhaps leave out the fact that you can actually lose money with one of these babies!
Basically flipping foreclosures involves buying a house that is being foreclosed, perhaps sprucing it up and then reselling it within a very short period of time. And many times, selling the house before you even own it! That is the ultimate quick flip for quick profits! The upside to flipping instead of buying and holding real estate is that when you buy and hold to rent, you obviously become a landlord. And being a landlord is not for the faint of heart nor the undercapitalized investor. But many investors do prosper nicely when they buy foreclosure properties cheap and their tenants pay on time.
So I always recommend beginning investors start by doing a few flips first to build up a cash reserve. This way whether you buy and flip or buy and hold, you will at least have made some cash from your flips. And like I always say, "Cash is King!"
The Basic Flip
There are basically two types of "flips" in real estate. The first type of flip is when you find a property and then without actually buying it, you sell the property (or flip it) to another person for a profit. What you say? Sell it before you buy it? I know it sounds impossible, but you're not really selling the property itself, you're selling the exclusive right to someone else who will purchase the house. It’s actually pretty simple and I’ll explain.
Suppose I sign a contract to buy a property. When I sign a contract, it gives me the exclusive right to buy this property by closing on it, and obligates me to do so as long as the terms and conditions of the contract are met. In the contract under "buyer" I make sure that the phrase "and or assigns" appears right after my name.
Having a contract gives me an interest in that property. The "and or assigns" gives me the right to assign that contract. Having the right to assign the contract is critical, because this means that I have the right to turn around and assign or sell this contract to some other person or entity.
Now say we put a closing date 45 days or so from the signing of the contract. You now have the right and 45 days to find another person or investor and assign the contract to them to buy the house for more money than you were originally paying. Thus giving you a quick profit.
For example, let's say I sign a contract to buy a property on 555 Main St. I know that property is worth $250,000, but I get it for $165,000. A week or two later I assign the contract to a buyer for $10,000, so they are buying the house for $175,000, which is still a deal ($10,000 to me, then $165,000 to buy the house.) If the new buyer will pay $185,000 for the house, that means you just made another $10,000 or a total of $20,000!
But remember, you must have a contract to buy the property before you try and flip it as it is this contract that enables you to assign this property without being accused of practicing real estate without having a license. By assigning the contract, you are assigning your interest in the property. A basic flip is a good way to raise some quick and easy cash that you can use to finance your next deal!
The Buy, Fix and Flip
The buy, fix and flip is what most people mean when they talk about buying and fixing properties. A fix and flip involves buying a distressed fixer-upper that you then fix and improve and sell for substantially more than you spent on the purchase of the property and the repairs, improvements and holding costs.
But please understand the whole trick to a successful transaction for you is your ability to get a good price on the property to begin with. Anyone can pay too much for a house in order to own it. And this is the beauty in buying ugly, distressed properties as most buyers don't look past the raunchy smell, peeling paint, cruddy and matted carpet and the beat up kitchens and baths. They mostly just say, oh yuk! And they leave the house, not to mention the potential huge profits!
Now you, the savvy investor can look past an ugly appearance and wisely assess the situation. What is this house really worth all fixed up? How much do I need to fix it up? That is the key to profit. How much to buy, fix and sell this foreclosure or any distressed house to make a nice profit.
Now I don’t recommend getting foreclosures that need a ton of work, or complete gutting, or one that has structural problems. That’s not where to start. Try looking for foreclosures that mainly need cosmetic repairs. New windows, front door, paint, carpet, maybe new siding or a new roof. You will be surprised how much just those things can change a house and make the value rise dramatically.
Its improvements like that which will get you maximum dollars in return for your investment. Here are a few more ideas to spruce up the house with that will make it very appealing to new buyers. I will also give some basic costs estimates.
• Nice Clean Landscaping - $1000 to $1500
• New Front Door with nice handle $500 to $800 installed
• Refinish Wood Floors $2.50 per square foot
• New Outdoor Light Fixtures $40
• New Carpet $1,500 - $2,500
• Kitchen Stainless Sink - $250 installed
• New Toilets - $200 - $300 installed
• Ceiling Fans - $150 - $200 installed
• Fresh Paint Interior - $1500 to $2,500
• New Stove - $600
• New Refrigerator $600
• New Dishwasher $600 installed
And anything else to make it look cutzy! I also like to put on mini blinds on all windows. They cost less than $5.00 each and make the house look a little warmer.
As far as the quality of these improvements you're planning to make. In general, things like carpet, flooring, cabinets, and even paint jobs have a low end, a mid-range, and an upper end. Unless you are dealing with upper-income properties (which I don’t suggest a beginner investor should tackle), you'll want to avoid putting in upper end, top-of-the-line improvements because the return on your investment just won't be worth it. Don't fix it up as if you're going to live there, because you are not. Fix it up so it looks nice and cozy.
Usually I like to go with mid-range quality. That way you avoid paying through the nose for upper-end and you don't buy cheap low-end stuff that's going to break within a year. You can ask your contractor to give you "builders grade" quality which looks good and doesn’t break the budget. So basically, look at it this way. The improvements should match the neighborhood and can be even a tad nicer. It will sell faster!
Oh, and one more very important fact about neighborhoods. Before you buy, scout out the range of housing prices for comparable properties to yours. See what other houses in that neighborhood have sold for in the past 6 months. These are commonly called "comps". This will tell you where what price you should be selling your house and see if there is enough profit for you before you make your offer.
Having your team members in place is also a recommended practice before investing in real estate. You don’t have to do it alone. Some team members are:
Real Estate Attorney – Guide you in your contracts
Title Company – Will insure you receive clear title
Home Inspector – Notify you of structural and other conditions of house
Appraiser or Realtor – Guide you in selling prices of similar houses
Contractor – To give you an estimate of repairs needed
Sell the House Fast!
A little trick that many people do who sell their own homes is to put chocolate chip cookies in the oven when having open houses. It makes the house smell great! Stay away from sprays as people can be allergic to it or sometimes the whole house will smell like, well, that artificial smell found in bathrooms!
So remember, you want your house to have great curb appeal. This is important because when potential buyers drive up to the curb, you want that property to look so appealing that they’ll park the car and get out to go look at the interior. After all, if the outside looks great, imagine what the inside looks like! This sets their mind frame in a positive attitude.
So, to sum it all up, just remember that in all the things you do to sell the property, you need to think, "Neat, clean, and good-smelling." Curb appeal gets buyers out of the car and a neat, new-looking interior that looks spacious and smells wonderful will induce them to buy. If you do those things, the property will sell itself!
Lastly just remember this important point. When buying, always start with the figure that you will be selling the house for when your done. Then subtract the rehab cost along with any and all expenses you will incur. Things like legal fees, real estate taxes, financing charges, utilities, real estate commissions etc. And please, don’t forget to put your profit it the numbers. After you have that, then you can arrive at your offer price for the house. If you can’t buy it for that amount, and you pay much more, you will not make any money. Then you will not be able to tell anyone you made money on a fix and flip foreclosure deal. And you certainly don’t want to be the one that has the horror story!
Now go find em, buy em, fix em and flip em!
Glen Gallucci, also known as "A Seasoned Investor" actively buys, rehabs and sells residential properties. He has invested, renovated and built numerous residential and commercial projects during his 30-year career. A well diversified businessman; Glen is also engaged in real estate education. From the trenches, and with his down to earth "tell it like it is" teaching style, makes Glen the "real deal" and a sought after speaker around the country as his business experience proves invaluable for the beginner as well as the seasoned investor regarding the successful structure of starting a wholesale or rehabbing business as well as securing private lenders when investing in "quick turn real estate."