The 1-2-3’s to FLIPS - Past - Present - Future

If you don’t know what flipping is to the real estate world than you probably don’t know what year this is or the difference between and REO and a Short Sale!?! 
Flip is a word that is most commonly used in reference to pancakes, a panicked state of frenzy (Flipping out), or for the younger crowd there’s a Hip Hop personality known as “lil Flip.”
When it comes to the Real Estate applications “The Flip” is equal to a walk off home run, the Hail Mary pass that wins the game in overtime, and the three-pointer at the buzzer to close out a game 7 championship series. For all intensive purposes, “the flip” is the ultimate in Real Estate investment accomplishments. There are a variety of methods and applications for flipping real property. However, it is extremely important to understand the processes, the circumstances, and characteristics that are required to identify the “flip environment.”
In this article we will go over several of the strategies utilized in flipping real property. Not all of these will be applicable to any one deal or property. In fact, it takes a trained eye and a diligent researcher to identify the right property and market characteristics to achieve the much sought after “Flip.” However, don’t be discouraged. We here at J. Roberts & Company are here to help!!!
 
Flip Strategies 101
 
Case Study #1: The Ugly Flip
 
Find it-Buy it-Fix it-Sell it
 
This is the most utilized strategy for flipping real property. The premise is simple. First, find a house that is in a good area but is in a state of disrepair. Perhaps the owners are elderly or financially incapable of keeping up the house, or perhaps it is a short sale or an REO and the property has been neglected for some years. Second, make sure to research the market demand in that area and verify, to the best of your ability, an apparent buyer’s interest in the area homes.
 
The Ugly House business is one of the oldest practices in real estate investment.  The concept is simple and profitable. People can make several thousand to tens of thousands per house if executed properly.
 
Here are several things that are important considerations in the process. The success of the Ugly Flip is very dependent on the purchase price vs. the cost of repair vs. sale price (considering closing costs and commissions). The purchase price must be substantially below market. The repair costs have to be estimated relatively accurately in advance or the profit will be eaten up. The final sale price is limited to what the market dictates and therefore all the costs in buying the home, fixing the home, carrying costs of the home, and closing costs and commissions must be able to come out of the selling price and still allow for a profit. After all, that is what this whole project was started for was the profit!!!
Learn more about this and the other strategies at www.jroberts.com
 
 
Case Study #2: The Pre-Construction or New Construction Flip
 
Find it-Buy it-Build it-Sell it “To understand the future we must study the past”
 
Don’t worry, we didn’t just ask you to grab a hammer and build a house or condo. In the past market this was probably one of the most rewarding flip strategies. You could actually see how your money is used to “develop” real property and create homes for people that want and need them.
In booming real estate markets you can generally find that appreciating values and demand for improved property (houses) are growing faster than the production or supply can meet them. In these markets, developers (large and small) will be scurrying to meet the needs of the market with new construction or pre-construction projects. This means that, due to the appreciating market, the cost to build a home is less than the cost to buy that same home when it is complete.
During the Booming times (2003-2006) on average it cost $240,000 to build a new home (only 10% down or $24,000), it took 11 months to build it, the market was appreciating at 1.5% per month, and the value of that home at completion was roughly $278,500. That was a $38,500 gross difference (or 160% gross cash on cash return) on an initial $24,000 cash commitment. Now take that same home and put it in a market that were appreciating at 3% per month (i.e. AZ, NV, FL from 2003-2006) and you had an appreciated value of $332,000. This yielded you a gross difference of $92,000 on a cash commitment of $24,000 (or 380% gross cash on cash return). Therefore, when an investor put down the necessary deposits (generally a mere fraction of the total cost to the home) they had a completed home or condo after a period of time that was at the time substantially greater value than the original purchase price.
Some investors were so good at identifying these markets and projects they were able to reap profits equal to or greater than $100,000 per venture. This was only if the market maintained and there was no contraction or slump. This strategy brought with it the possibility of exponential profits and gains as well as the risk of exceptional losses. All of this hinged on timing and the viability of the market maintaining its strength. 
 
This technique was also ideally suited to the “Buy & Hold” strategies of traditional real estate investment. Remember that you were buying a home at a fixed price with months if not years of appreciation time in front of you. With that in mind, it was reasonable to expect that the appraised value of said property was be substantially higher than the original purchase price and therefore a savvy investor might consider refinancing the property. Utilizing the exceptional mortgage products that were available at the time could potentially yield a cash-out option on the equity and allow for the owner to lease/rent the property for some time with no painstaking, out-of-pocket debt service due to the Refi cash in the bank. Now, that property would ideally benefit from a much larger block of time in an appreciating market. Take the appreciation numbers from above and run some calculations on a two to five year hold. Don’t forget to multiply the percentage of appreciation each month as the value grows. You cannot simply take the annual appreciation and multiply it once. The math doesn’t work that way. Be careful that you sit down for this. These profit numbers were quite shocking!!! For more information on New Construction go to www. jroberts.com
 
 
Case Study #3: “If it ain’t broke don’t fix it….FLIP IT!!!”
 
Find it-Negotiate it-Buy it-Sell it
 
Buy a home in distress for severely below market pricing and immediately list and sell the home for a profit at market pricing or just below.
 
One man’s problem is another man’s opportunity. Does that sound familiar? Well, this is the diamond in the rough, the needle in the haystack, the deal of the decade.
The goal here is to identify properties in distress. Meaning, that in every market there are individuals whom, for whatever reasons, are incapable or not interested in keeping a property. Often, the circumstances of the sale are tragic. There may have been a loss in the family and the resulting income is insufficient to carry the home. Perhaps it’s as simple as a divorce proceeding wherein one side refuses to allow the house to go to the opposing side and will take a loss on the sale rather than sign the home over. Either way, this may be an opportunity to buy a perfectly good home at an extremely reduced price which will enable you, the investor, to sell that same home for market of close to and profit in the process.
 
The name of the game here is negotiation. Knowledge is power in negotiation. 
 
There are two major challenges in this strategy. The first challenge is identifying the property in distress. It is very unlikely that sellers or selling side realtors will advertise that the seller is absolutely desperate to sell and is willing to take a substantial loss. It is equally unlikely that you would find a seller openly reveal the details of their personal life and the challenges therein during the negotiation of contract terms, hence the challenge. Secondly, once the property is identified, and as well the seller’s source of distress realized, the negotiation of the purchase is the next hurdle. It is very difficult to identify the seller’s source of distress. But once identified, it is even more challenging to use that information subtly and tactfully to leverage the negotiations in your favor.
Once both of these obstacles are successfully navigated the next steps should be comparatively easy. List the house for close to market and sell it for a profit (the difference between your very low purchase price and the close to market sale price).
 
Very often strong Real Estate Professionals will have some insight as to the availability of properties in distress. It is not uncommon for a home owner to reach out to their realtor upon first realizing the magnitude of their problem. However, be cautioned, if a realtor has a listing contract or perhaps some implied contract that realtor may have certain fiduciary duties that would make it illegal to convey any information that could be detrimental to the seller.
For more information on distressed sales and flips go to jroberts.com
 
 
In Conclusion:
 
Many of the Flip processes are effective for selling to “end user buyers,” “primary buyers,” or “owner occupied” buyers. This is often referred to as the “retail” market. The benefit here is that end users generally dictate the market conditions. Owner occupied purchases generally make up the majority of the sales in many markets. Whereas, investor purchasers (like ourselves) are looking for below market pricing because investors are hoping for a spread between the purchase price and market values. This will enable the investor to make the desired profit.
 
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