asking price is too high, holding costs will chip away at your profit over time.
Flipping Legally and Ethically
In September 2001, the US Department of Housing and Urban Development (HUD) released FR (Final Rule)-4615 Prohibition of Property Flipping, which made “flipping” illegal.
So why am I writing a book that promotes this illegal activity? Because I’m writing about legal flipping, not illegal flipping. The word flip has a double meaning, as the following sections reveal.
Flipping illegally
Criminal minds have invented countless ways to milk the real estate industry, and one way is to flip houses. This sinister type of house flipping typically relies on some form of fraud — lying or misrepresenting information. In some cases, the con artists team up with crooked appraisers who artificially inflate home values and then sell overpriced homes to ill-informed buyers.
Another way con artists scam the system via flipping is to build a team of buyers, none of whom intends to own the property for any length of time. They buy homes from one another, increasing the price with each sale. False appraisals or crooked appraisers make the price hikes look legitimate, and corrupt loan officers often expedite the loan approval process. As the value of the property increases on paper, the amount of equity in the property increases. The final buyer takes out a whopping loan to pay the previous owner and then defaults on the loan. The team splits the proceeds, sticking the lender with the bill and leaving a legacy of foreclosures and vacancies.
Flipping legally: Buy, fix, sell
Flipping the right way is a perfectly legitimate strategy for making money in real estate. You buy a property below market value, fix it up, and sell it for more than you invested in it. Do it well and you can earn a handsome profit. Make a serious blunder and you suffer a loss. This fix-it-and-flip-it approach has a positive effect on the real estate market: It increases property values, improves neighborhoods, and provides quality housing for those who need it. It’s the American way — capitalism at work.
Determining Whether You Have What It Takes to Flip
Although anyone can profit from flipping houses, it’s not quite as easy as it looks on HGTV. Buying a house that’s brimming with profit potential for far less than you know you can sell it for is a huge challenge in itself, but after you take possession of the property, the real fun begins. The contractor disappears after collecting your deposit. The landscapers hack through a buried cable. You find out that the septic system needs to be replaced. And the neighborhood association rejects every single one of your planned improvements.
Carve out extra time and motivate yourself: Flipping houses requires considerable time and energy for house shopping, lining up financing, scheduling and overseeing repairs and renovations, and more. If you already feel overwhelmed and overworked, maybe this flipping thing isn’t for you.
Focus in the midst of chaos: Distractions can quickly derail a flip, so you’d better be able to focus in the midst of chaos, especially if you have a full-time job, a spouse, children, or other interests. Without focus, you won’t have the attention to detail required for success.
Follow instructions: You don’t need to know everything about flipping houses to get started, but you do need to know how to follow instructions, including those I provide in this book.HOW BAD CAN A HOUSE-FLIP BE?We (Ralph Roberts and company) discovered a fantastic foreclosure property — a $2 million beauty we could get for a cool $900,000! Although the owners, whom we refer to as Mr. and Mrs. Rose, were divorcing, they seemed willing to work with us at first. They even persuaded us to let them stay in the house while we were rehabbing it. Letting people stay in the house is always a bad idea. We agreed to this request to seal the deal, but when you’re flipping a house, you want to close on it only when it’s vacant and broom-clean (free of debris, dirt, and rubbish) — and, in the case of foreclosures, the redemption period has expired. (See Chapter 7 for more about redemption.) Mr. Rose lived in one half of the house; the missus, in the other half.As soon as the contractors showed up, the couple’s version of The War of the Roses commenced. Mrs. Rose declared certain areas of the house to be no-work zones, and these zones changed daily. She tried to seduce the contractors, and when real estate agents arrived to show the house, she called the police. During the rehab, the Roses’ son was caught doing drugs in the house.Mrs. Rose moved out, only to be replaced by Mr. Rose’s girlfriend. When the contractors returned to work, they found the girlfriend at the top of the stairs, dressed only in her nightie, drunk and in a jealous rage. She proceeded to fall down the stairs, shedding her wig along the way. By the time the Roses cleared out, the place was trashed.We finally managed to take possession of the house, complete the rehab, and place the property back on the market. We were willing to sell for $1.8 million, and when we received our first offer for $2.2 million, we were ecstatic — though we weren’t out of the rose bushes yet.During negotiations, we found out that the instrument the buyer was using to pay for the property qualified as an illegal use of Treasury bonds. We informed the FBI, which set up a sting operation to nab the bad guys. The fraudsters showed up three hours early, discovered the sting, and split town.We eventually sold the house for $2 million and netted a $250,000 profit — not bad for a year’s effort, but not the quick and easy money we had expected.
Crunch numbers: Basic math skills are essential when you’re comparing financing options and crunching numbers to gauge how much profit you can wring out of a house. If you’re not good with math, you at least need to know how to use that calculator app on your smartphone.
Organize, schedule, and oversee: When you’re renovating a property, you need to be able to coordinate contractors and material so that the work gets done as efficiently as possible. Remember: Time is money.
Deal with different personality types: Being able to work with people and resolve any differences is the key to many aspects of flipping, including persuading people to loan you money, negotiating lower prices for property, and managing contractors and work crews.
Persist in the face of adversity: Unless you’re really good at flipping houses and really lucky, you’re going to experience failure and disappointment. Those who succeed persist in the face of such adversity. They don’t give up.
