rel="nofollow" href="#fb3_img_img_79f166aa-e275-5d25-91aa-ec5d43f30da1.png" alt="Bullet"/> Plotting your course well in advance
Our goals can only be reached through the vehicle of a plan. There is no other route to success.
—PABLO PICASSO
Before making an offer on a house, know how you’ll profit from it. Will you buy it at a bargain and resell it immediately at market value (or for less, to sell it faster), do a quick makeup job and resell it, perform a few major renovations, or fix it up and use it as a rental? Each of these strategies has benefits and drawbacks, but each strategy is a perfectly legitimate way to flip property for a profit.
This chapter explores several house flipping strategies and encourages you to develop your own strategy based on your neighborhood, the resources you have at your disposal, and your preferred approach.
Deciding on the Role You Want to Play
Flipping a house generally involves buying it, fixing it, and then selling it, but you can profit from this overall process in various ways — depending on how involved you want to be in each of these three progressive steps:
Do it all yourself. Casual flippers often do it all (or mostly) by themselves — buying the property with their own money (or a conventional loan), completing most of the repairs (and hiring professionals to do anything beyond their level of expertise), and listing the home. Maybe these flippers have a real estate agent help them navigate the buying-and-selling process. This approach may be the most profitable, especially if you live in the home you’re flipping. Making all the repairs yourself isn’t necessarily the most profitable approach. If you take a long time to complete the repairs, holding costs (interest, insurance, utilities, maintenance, and so on) can eat away your profits.
Delegate the heavy lifting. Experienced flippers often delegate most or all of the work, buying and selling properties through an agent and hiring a contractor to coordinate the repairs and renovations. Sometimes, experienced flippers play the role of contractor, hiring subcontractors (electricians, plumbers, painters, and others) to do the work. Hiring out the work increases repair and renovation expenses, but it can speed the process and reduce holding costs.
Put up the money. If you have money to invest and don’t want to get your hands dirty, you can loan money to people who are willing to do all the work and charge them interest. Or, you can partner with a flipper for a percentage of the profits (assuming that the flip generates a profit).
Bird-dog it. Bird-dogging (also referred to as wholesaling) involves buying and selling contracts. You’re a treasure hunter, finding properties and contracting with sellers to buy the properties for an agreed-on price. Then you sell the contract to a house flipper for a finder’s fee. You never take possession of the property or make any repairs — you’re just a go-between. See the later section “Flip contracts (or do it all on paper)” for details.
Surveying Different Strategies
When developing a game plan, you try to maximize your strengths, minimize your weaknesses, and fully exploit the opportunities that surround you. Many flippers have already developed their own strategies that achieve these three goals. By becoming more aware of these existing strategies, you can choose the one that fits you best and perhaps even improvise to develop your own, unique strategy.
In the following sections, I reveal house flipping strategies that many flippers practice with varying levels of success.
Buy into a hot market
In a sizzling real estate market, you can turn a profit fairly quickly by buying a house, moving in, and then sitting back and watching the real estate values soar. This approach works only if you have time on your hands, are speculative by nature, and have a knack for purchasing houses in a hot market at just the right time. This strategy offers several benefits:
If the market remains strong, your property value rises and you don’t have to lift a finger.
Your equity in the property rises, boosting your borrowing power for other investments.
When you live in the home for two years or more, up to $250,000 of your profit ($500,000 for a couple filing jointly) may be tax free, at least according to the tax laws in place when I was writing this book. See Chapter 23 for more tax-saving tips.
Soaring property values often create a housing bubble, which can burst, leaving you with a home that’s worth less than the amount you paid for it.
Stuff happens. You can have a great house at a great price in a hot market with the top agent working to sell it and the house still may not sell. Prepare yourself for all contingencies.
Chapter 5 has more details on evaluating the real estate market in any neighborhood you’re scoping out.
Buy low, do nothing, sell quick
Occasionally, you stumble on a house that’s priced significantly below market value and requires few or no repairs. The property may be in foreclosure or perhaps is part of an estate that’s being liquidated, making the owner highly motivated to sell. By being at the right place at the right time with ready cash, a solid plan, and a friendly, approachable demeanor, you can pounce on the deal and put the house back on the market the very same day!
Sounds great, huh? Well, getting a house that’s far below market value is ideal when it happens, but being in the right place at the right time requires time, effort, and luck. You need to build a solid team (see Chapter 3 for details), do plenty of research, secure some solid investment capital (see Chapter 4 for tips on financing the flip), and be properly equipped to execute this strategy.
