The 8 Rules of Flipping – Part 2
In The 8 Rules of Flipping in the New Economy – Part 1, I listed the first four incredibly important rules for successful flipping in today’s volatile real estate market…
In this article, I wanted to continue that list:
- Location, Location, Location: While this has always been a key maxim in real estate investing, the difference between then and now is that today, you need properties that will get a lot of potential buyer traffic through them. This means buying in the front of subdivisions, buying on well-traveled (but not too busy) roads, and buying in areas near shopping and other amenities that draw crowds.
Many buyers these days are finding houses because they drive past them and see signs; they may not have even been on the market previously to buy, but they stop into yours and they fall in love. If you buy in locations that will only get foot-traffic if an agent brings them in, you’ll get a lot fewer potential buyers through the house, and today, it’s all a numbers game. You need to get lots of buyers to at least look at your property, and just listing on the MLS and waiting for agents to bring potential buyers though isn’t going to accomplish that goal.
- Staging: I’m a huge proponent of house staging. And I firmly believe that while staging may not get you a whole lot more money for your property in today’s market, it will certainly increase your likelihood of getting offers if your house is priced correctly. While buyers aren’t likely to increase their spending limit in this market (they don’t have to), they will most certainly be drawn to houses that they can imagine themselves living in.
Staging accomplishes this by allowing your buyers to make an emotional connection with your property — by allowing them to associate it with a home, not just a house. A house without any furniture is just a faceless property…a nicely decorated home provides a feeling of warmth, comfort and security. And not only does staging create an emotional connection, but it allows those buyers who aren’t very imaginative (read: MOST BUYERS) to get a better feel for how the house will look once they move in. In fact, if a house is staged well, it will give your potential buyers ideas for how to make their next home (this one!) even better than their last.
- Know The Rules: House flipping is a lot more complicated than it appears on TV. There are lots of rules, regulations and roadblocks that — if not heeded — will hinder your ability to make money in this business.
For example, many rehabbers don’t realize that once they purchase a property, they have to wait a minimum of 90 days to turn around and sell that property to an FHA buyer (and these buyers make up a large percentage of the total buyers in this market). I can’t tell you how many people I’ve met who had a plan to buy a property, slap on some paint and carpet, and resell to a retail buyer in just a couple weeks, and then got caught by this FHA rule. But, instead of selling in a couple weeks, they had to hold onto the property for three months, increasing their holding costs (and tying up their cash) while they waited for the opportunity to sell to their FHA buyer. And in some cases, the buyer didn’t want to wait around (did I mention that buyers have lots of choices these days), and the deals fell through.
To be successful, you must know the rules — this includes buying rules, selling rules, lending rules, construction/permit rules, etc.
- Build A Strong Team: The difference between a successful real estate investor and an unsuccessful one is the team she surrounds herself with. A real estate investor is only as good as his CPA, attorney, real estate agent, inspectors, contractors, title company, etc. When it comes to pulling off all the other rules I listed, you need a strong team to be successful; if you don’t have that strong team, you can bet your competition does.
A weak team will cost you time, money and headaches that you can’t afford. All it takes is for your agent to negotiate poorly, your attorney to miss a contract loophole, your inspector to miss a structural problem or your contractor to screw up to turn a profitable flip into a loser. A couple of those can quickly end an otherwise successful real estate career.
Great Article … keep up the good work~!
Hey J
If needed to find out more info about my state rules on buying rules, selling rules, lending rules, construction/permit rules, etc. and things like that where can I go.
Hey J
If needed to find out more info about my state rules on buying rules, selling rules, lending rules, construction/permit rules, etc. and things like that where can I go.
Corey –
As far as permits and construction concerns, I would recommend talking to (or at least visiting the website of) the Permits Office in your city/town. They should be able to provide you information on building codes, how to get permits, the process for getting inspections, etc. If you live in a relatively small town, visit the permit office and see if you can chat with an inspector for a few minutes…that relationship may be very helpful in the future for when you have questions or for when you need some “help” getting an inspection issue resolved.
As far as the buying/selling rules, this is going to be set by your local Real Estate Commission, and the best way to learn these rules is to chat with a knowledgeable real estate agent/broker, or better yet, take the course to get your real estate license. Even if you choose never to get your license, the course will provide a wealth of information on the rules and processes of buying and selling real estate in your state.
Lastly, in terms of lending rules, these will tend to be set at the Federal level, and talking to a licensed mortgage broker is probably your best bet for getting any specific questions answered. For some general info, take a look at RESPA rule and the SAFE ACT, two sets of regulations that control lending and property closings.
Hey J
Thanks for that great advise and info. I’m going to start my research about getting My real estate license in Milwaukee, Wisconsin. Once again Much blessing to you and your family and crew for your help and great examples you all provide God Bless.
j
amen brother.
a good team is essential. i had a lousy carpenter but couldn’t pull the triger to fire him. i should have because i had to fix a shit ton of his mistakes. my attorney wanted to charge me $1500 but i got him down to $600 cause i was a newbie and it was my first house. i think never again. my concrete guy tried to put off as long as he could with so many excuses, i stopped counting and then he tried to charge me more for less work due to a change in plans.
i do have a great painter, flooring guy and cpa but i have to build my team all over.
damn i wish i knew then what i know now, never heard that before eh?
thanks for the blog and all of the info you give away.
danny
Danny –
I’m constantly building (and re-building) my team. While some of my contractors have been with me for 4+ years, others come and go and often need to be replaced. It’s just the nature of the business, and while it’s not fun having to fire and find new contractors, it’s even less fun dealing with contractors who are slowing down a job or worse yet, screwing things up or overcharging you.
Hi,
Great article. I love the little examples you gave.
Could you please explain a little bit more about Staging? I agree it work. However, I am not sure what to do with the stuff i put in the house after.
I have a house that i did minor refresh and ready to rent it out. Now is totally empty. If I spending the money to staging it. What am I going to do with the furniture after? Do I leave it to tenant or toke it back to store them. Same thing if i selling the house.
Could you advice? Thanks!
Hi M Wong –
I only recommend buying your own staging furniture if you’ll be doing enough houses that you can move the furniture from one house to another. If you’ll only be doing one or two houses per year, then you should talk to a professional stager who can both provide the furniture and arrange it for you.
Hi J,
Quick question on staging, do you stage each house that you sell or do you limit staging to only homes within a certain selling price, like 75,000 and up?
Hey Alex,
We stage every house we sell to a homeowner. We don’t stage the ones we sell to investors. But, regardless of the price point, if we’re selling retail, we’ll stage (unless we find a buyer before the house is finished, of course)…
Great advice.
I have a question about rehab costs. I am currently searching for properties to rehab but do not know much in the way of repair cost and determining how to decide what it would take to fix up a house when looking at prospective properties. I know one option is to have a contractor go with you to look at properties to give you an estimate but it doesnt seem to feasible to do this when you are considering 10-20 properties. It would be a waste of the contractors time to look at that many houses with you especially when there is no guarantee of you buying any of them but obviously you have to know what the costs are to help you decide whether or not a property is going to be profitable when you go to sell. I have passed on many properties just out of fear of not knowing if repair costs could sink a deal down the road.
Do you have a good way of determining repair costs when looking at properties that is reliable especially for someone who isnt to knowledgable in construction.
Thanks for your help.
Hi Adam,
I’ve actually written and published two books that you might find particularly useful when it comes to flipping and estimating rehab costs:
http://www.biggerpockets.com/flippingbook
Just thinking about getting into this business. Know it is much more complicated than it appears. What is the best way to find reliable contractors? Wholesale products? After paying labor costs, buyer commissions and taxes, what ideal profit margin is reasonable to expect IF all goes smoothly with no hidden surprises?
Hey Karol –
I’ve actually written two books on these topics:
http://www.biggerpockets.com/flippingbook
In addition to Mr. Scott’s books, pick up the bbok FLIP, it has a whole process laid out for rehab, how to price items out if you dont have a GC give you a written estimate.
Hey Justin –
FLIP is a great book! But, for the record, my second book is geared specifically towards estimating rehab costs and creating a scope of work if you don’t have a GC…
I think the FHA rule does not apply any longer:
” Since the first waiver in 2010, according to the official, FHA has successfully insured $11 billion worth of mortgages on 65,250 homes where the seller had held title for less than 90 days. – See more at: http://www.inman.com/2012/12/03/fha-says-flip-away-within-limits/#sthash.H1sMn137.dpuf“
Hi Asbestos –
Yes, I address the rule change in detail in this article:
http://www.123flip.com/education/fha-90-day-rule/
Hey Mr. Scott- Excellent advice. As a rookie in this business I am still learning. It is an ongoing process. I have yet to close my first deal however I have partnered with some colleagues in the past where we split commissions on some deals. If possible I would like to ask if you will consider mentoring me in closing my first deal and how much will it cost me. Thx. V.
Hi Valentine,
I do some mentoring on occasion, but never charge for it — I don’t believe in charging as a mentor. That said, things are pretty crazy busy these days, so I don’t currently have time to be mentoring anyone…sorry about that!
For someone who does not have a lot of capital how do should they get started in this business by buying in community changing around.
Hey Russell – Check out my books (http://www.biggerpockets.com/flippingbook). I talk a lot about getting started using partnerships and other low-cost methods…
I have read your flipping book and am waiting for your new estimate book that is due to come out in January 2019. What I did not see in the book is where you get your great prices on materials. Loved the book, and currently reading your negotiating book.
Hi Bonnie,
Most of our materials come from either Home Depot or Amazon.com. Remember that even for mid-level houses, lower-end BRAND NEW finishes are generally sufficient. For the most part, there is little difference between the standard Home Depot finishes and the higher-end finishes, and unless you’re renovating a higher-end house, the basic finishes will generally suffice. Just make sure everything matches and is neutral.