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Flipping Real Estate
by Robert Moskowitz

One of the popular topics at cocktail and tailgate parties during the past few years has been "flipping" real estate. Basically, "flipping" real estate refers to the process of making a quick transaction where you buy and sell a particular property within 3 to 6 months, or possibly with 6 to 12 months if you're going to do major renovations. Once you own the property for more than a year, you may still be profiting, but you're not strictly "flipping." Everyone has a story about a friend or a cousin or a coworker who profited from "flipping" real estate. But no matter what people tell you, flipping real estate is both easier and harder than they typically lead you to believe.

Let's go through some "flipping" scenarios and see what's really involved.

1. Flipping the contract -- This is the easiest and quickest way to flip real estate. But in some way's it's the hardest. Flipping the contract simply means you buy a piece of property and without touching it you sell it to someone else, perhaps within hours or days of your purchase. This is the easiest way to flip property, because you make your money merely by signing some papers. But it's the most difficult because there simply are not very many properties you can buy for so much less than fair market value that you immediately can find another buyer to pay more than you paid. Sometimes you can buy distressed properties at auction, or at a tax lien sale, and pay 50 cents or less per dollar of value. In these cases, you might be able to flip the contract almost immediately. Keep looking for these, but look for other opportunities, as well.

2. Flipping a fixer -- This describes a situation where you buy some land with a building in disrepair or with a great deal of unrealized potential. You buy the property, invest a few tens of thousands of dollars in fix-up, paint-up, and simple improvements, and then sell it at a significantly increased value. The key to these kinds of transactions is not to spend too much; you have to develop an eye for inexpensive improvements that will dramatically increase the appeal and value of the property for the next buyer. It's one thing if you want to buy the property and fix it up to live in it for ten years. Then you can invest in expensive changes like moving walls and adding improvements that you will appreciate while living there. But it you intend to flip the property, limiting your investment is central to taking out a profit when you sell.

3. Flipping a re-zoner -- This is a longer-time flip transaction that depends on increasing the value of a parcel by changing how it can be used. For example, a parcel of land zoned for farming has a certain value. If you can get it rezoned for housing, the value increases dramatically. Similarly, if you get the zoning on a parcel changed from single family housing to condos or townhouses, you can pocket millions without turning a spadeful of earth.

Here are some of the things to think about and do when flipping real estate:

Find the Right Deal: There are tens of thousands of properties for sale on any given day. Only a small fraction of them are priced properly for you to make a quick profit. If you want to live on a piece of land, pay whatever you need to. But if you're trying to flip it, don't even consider paying for it until you have a rigorous plan for how you're going to sell it, and you understand why it'll be worth significantly more when you do.

Estimate Your Investment: The cost of the parcel is just the down payment on your total investment. You'll have to carry the property (that is, pay interest on the mortgage) while you're making whatever changes you plan to make. You'll also have to pay for whatever improvements and repairs you plan. There may also be legal fees, filing fees, and other costs to make the changes you plan. Finally, there is the cost of sales, which includes the various fees, commissions, advertising costs, and other expenses associated with selling real estate.

Incidentally, when you make your estimates, it's dangerous to plan too close to your limit. In other words, have a little spending power in reserve, because if you get in over your head and cannot keep up with your loan payments, you could lose some of all of your investment.

Negotiate a Favorable Contract: The contract to buy or sell the property is an essential element in successfully flipping real estate. The contract is where you get to specify all the details of who pays for what, who is responsible for what, under what conditions the contract can be canceled. One important consideration is "pre-payment penalties." This describes whether or not you can pay off the loan sooner than scheduled without having to pay financial penalties. There are many other terms to consider in these negotiations, as well.

If you negotiate a good enough contract, you can almost lock in your profits before you every pay a dime for the property.

Get a Good Loan: Some of today's loan brokers are very knowledgeable about the in's and out's of where to borrow money to complete a real estate purchase. Look around for experienced loan brokers and talk to several. When you find one you like to work with, get his or her advice and encourage them to find you a loan that makes your real estate flip as profitable and sure-fire as possible.

Find a Reliable Contractor: There are three important considerations in finding someone to do the repairs and improvements on the real estate you're trying to flip. First, will they do the work to your satisfaction? Second, will they do it within a budget you can live with? Third, will they do it as quickly as you need it done? These are all variations on the same theme: money. When you find a good contract, the cost of improving the property is satisfactorily low. Without one, you can lose a considerable portion of your profits, or even lose money on the whole deal.