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If you must flip, flip responsibly! March 18, 2006

(Editor’s Note: I’m extremely excited to announce a new contributor to Rain City Guide. Eileen Tefft is a Managing Partner with Ltd Real Estate and has over two decades of experience in the real estate industry.)

Hello Rain City Guide community,

This is a first for me. First post, first time ‘published’. I’m excited and feel it’s about time I got into blogging as a way to share information to readers interested in real estate. As a kid, my parents bought and held real estate as an investment. My uncle was a contractor, my grandfather a carpenter… In fact, my dear 82 year-old mother was still hanging off rafters, pounding in 2X4’s in her 60’s (she still would be if someone needed a rafter built! Today she’s cutting down trees with her new chainsaw!). I bought my first property when I was 22 and subdivided it at 32. It was fun and it felt natural.

I got 3 calls this week from past clients wanting to begin buying real estate as an investment. After several hours of discussions, I decided to write about the nuts and bolts of my experiences, the mistakes I’ve made and where I found the most success.

There seem to be two types of investment buyers. One that wants to ‘flip’ real estate (turn a quick profit by buying low and selling high) and one that wants to purchase and hold for the long term. I will address the first question here and save the second for another post which will include buying for cash accumulation vs. buying for a positive cash flow, buying using 1031’s and buying using Self-Directed IRA’s.

So, let me start first with the question I get asked most… “How can I buy a house, fix it up, make a profit, quit my job and live off the real estate returns like I’ve seen on T.V.?” (As seen in Will and Grace, The Flippers that Care and those alluring infomercials that promise making thousands a month by following their methods for real estate investing).

So, at the risk of being seriously discounted by those that have made a business of ‘flipping’, I’d like to share my thoughts with you. I encourage those of you that made a profit to share your systems with all of us, too. I have to abbreviate here so I don’t get boring, so consider this a starting point.

The Flippers
Here there are three obvious parts… Obvious, but not so easy to carry out.

  1. Buy at the right price
  2. Put in just the right improvements to maximize the cost-spent to the market value added.
  3. Sell at the right price.

Buying at the right price. Tricky tricky!

  1. Foreclosures
  2. Buying in a buyer’s market
  3. Buying property privately from a distressed buyer
  4. Buying property in dire need of an upgrade.
  5. Buying property that has some upside other than remodeling

Which of these methods work best could be a book all in itself! At the risk of being too abbreviated, however, let me tell you my thoughts on each of these purchases.

1. Foreclosures: There are real estate offices that specialize in assisting buyers to buy on the courthouse steps.

2. Buying in a buyers market: Kitsap County and parts of Pierce County are some of the best places to look for buyer’s markets although they’ve both had price increases in the last two years. Check the statistics to see in which areas listing inventory is going up and sales are going down. That certainly isn’t King County at the present, nor any time in the foreseeable future… At least, that’s my opinion!
3. Buying property privately: Buy from family, friends or anywhere you know of someone willing to sell for less than market value. Remember, sellers want to keep their equity as much as you want to have it.
4. Buying a property that’s listed showing “needs a little work”: This option is finally one that you might be able to make some money on if you do it right. These are generally properties that have sat on the market because buyers couldn’t get emotionally attached to the house, whether it was poor curb appeal, roof leaking, 1910 kitchen, etc… Most buyers don’t want to do much more than change paint color, if that. Here, you’re buying with the intention of remodeling, which can be complicated. Be careful that the remodeling you do will pay for itself. Changing counters leads to changing fixtures which leads to matching those fixtures with the rest of the house, etc, etc. Then you have to sell. Even if you use our Fee-for-Service model for listing a house, you still will pay at least 7% in selling costs. so you have to improve the property 7% over whatever you need/want to earn.
5. Buying with additional upside: Here are some ways of doing that:

My experience has taught me that a great purchases a buyer can make, with the most upside (if the asking price reflects the current market and not the future market), and the least investment and work (still keep your day job!), is new construction. Although this is not for the feint of heart, buying a home or condominium “under construction” that is three months-to-two years from completion has put a lot of money into the pockets of many investors. One would have to be able to put down the required non-refundable earnest money (which in today’s market might be 3-5%), and then sit and wait until the unit(s) are completed. The risk is that you are not contingent on so losing a job or moving from the area would not be a reason to get your earnest money back. The benefits? No payments until after closing, no after-hours labor or weekend working just to make a small profit. As long as you think your ability to get a mortgage will be there at closing and that the market is going to continue moving upward this should be a good investment for you.

Let me give you an example. A client bought a parcel with two houses on one lot. We “condo’d” it into two houses on two lots. We remodeled each home and sold just one for the purchase price of both. The client made around $50,000 with a small investment and a line of credit on their home over a one year period. At the same time, another client bought a presale condo six months from completion. This client also made $50,000 over a 6 month period and the client only had to put down $15,000 for this six month period

Of course, this requires the right new construction, and perfect timing… But I have found that, more often than not, there is money to be made in buying at pre-completion prices.
* A little FYI - Agents don’t like this form because they make far less in commissions and have to wait until closing to get paid.

I hope this post was valuable. Each of these issues could expand to a book! Making profitable upgrades is a science all it’s own as is finding the pre-construction projects that will make the most money.

Look for more posts from me in the future…

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Comments»

1. Mark Argentino - March 19, 2006

excellent, indepth, informative and well written post.

the only thing I could add is that you should buy one property per year and keep one of them every other year, flip one every other year and in 20 years you can retire on the income from the 10 properties you own!

all the best!
Mark

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