I was driving my daughter to school this morning and another one of those adverts came on the radio; “do you wanna make money flipping houses in the Los Angeles area using other peoples money!?! My name is Dan something or other and I am going to show you how to ……” I think you know the advert I am talking about, we have all heard it.
So you have been to the investor class, you have tapped your 401K. You’ve armed yourself to the teeth with some of your own boot, and hopefully a proportionately sensible amount of other peoples money, and you’re ready to buy. This feels good. The idea of joining the Lambo crowd, and rocking your Tom Ford sun glasses as you hop from fixer to fixer, flip to flip, and bounce up the ladder. Can’t be that hard. Millions of others are doing it.
Well gladly I am here to give you a few tips to save you making disastrous mistakes which will soak up your funds, and see you at best just breaking even; or worse loosing your own money; even worse; loosing “other peoples money”.
First though ask yourself a quick question; why if the flip business is so lucrative. are those motivational speakers spending so much time teaching others how to flip? Surely if they are in that business, wouldn’t they be trying to block other investors speculating in the market further driving up the prices of property that they want to acquire? I asked myself this question several years ago when I first came to the united States. I sat at my desk with a piece of paper, and worked out the average flip, how much goes on expenses, closing costs, materials, manpower; and so the list goes on. I have been (and here comes the horn toot, but bear with me) buying and selling homes for 20 years, have acquired a self funded 40 property rental portfolio so I know the elastic nature of the beast. Hey I came from the old school of save for it and then buy it, so it wasn’t other peoples money I was blowing if the fixer turned out to be a dud, it was my own, so always had a “you’d better get it right” attitude. While doing my research I came to the realisation that, your average investor logs onto redfin, is comping out a fixer home based on sales in the local area; bought price, then sold price, and seeing only the bought and sold price of the property; showing a healthy profit. The heat map shows the activity, and the chart shows the price increase. Can’t loose!! However; some investors are not factoring in the downtime while the property is being turned around. The closing costs, 6% Realtor fees, the property taxes, the margin on the loans (probably hard money in most cases) and so on. So when all is said and done, the sharks bite can be taken off the bone, and leaves the investor just making a wage in many cases. Might as well have not bothered and continued with your day job. So why do those emo speakers push it still. I came to the realisation they understand the property cycle well. They likely bought up hundreds of houses in your area in the downturn at wholesale prices, kept them rented through the stagnant years, then get to work later on pushing prices up in the area flip by flip; encouraging Joe public to speculate, speculate, speculate and over leverage if needed. It’s a win win. And hey, they get a few thousand bucks from their students on the way up. Dan needs that new Rolex and signature gold ball point pen after all.
That is not to say there are not some investors who make serious money out of flipping and developing; your seasoned property investor. You know the one who buys a million dollar property, and bulldozes it to the ground to make way for a Goliath trophy property. He/she has a tight well run crew. They know where to buy materials at the right price. They budget for everything. They know per square foot how much materials will be absorbed down to the very last box of screws. They know about some outside influence that will have an upward pressure on prices in that area. They Know what to spend money on, and they know what to not to spend money on. They are disciplined.
OK so dear investor, now you understand the game a little better, and you still want to sharpen your fangs on a flip or two. You got the pre approval letter, tapped your 401K and let’s do this!. Now let me try and give you some quick tips that could save you money up front. Home inspections are not cheap. Better to have a good idea yourself what you are buying before you put pen to paper and have Mr. agent send over that nail biting offer.
When you tour the property for the first time; actually understand and have an educated idea what you are offering on. Don’t just run comps. Try to factor in everything. It will effect your bottom line later. And lets face it, you are here to make money. Bring a paper and pen and a camera with you to the first viewing. Write things down that catch your eye. Look how the space works. How doesn’t it work? How could you make it work?
Tip#1. First Look. Stand at the street looking at the property. Does the building look straight and square? Does the roof line look straight? You don’t need a degree in angles to know if a line looks horizontal! The roof; Does the shingles look like the kitty litter is wore off it? Are the shingles curling at the corners? If not, you may get away with just power washing the roof down, and making it look fresh. You might think to just go ahead and add a new roof will push up the selling price at the end of the deal later on. Actually it will!. Probably only just by the amount you paid for the roof! Better to spend those bucks on a higher end kitchen for your return, than siphoning money into a new roof.
Tip#2. Trees. Are there any trees in the front garden / Yard around the property? Don’t get me wrong; I love trees. But I don’t love them growing up close to my property. Usually a red flag for me when I am procuring a property for my portfolio. They cause all kinds of problems; roots searching for water crush main drain lines like a hungry boa constrictor. Trees growing near foundations can raise the side of a house, and disturb foundations to detrimental effect costing thousands to repair. Or the roots can suck the moisture from the earth below the foundation sapping all the moisture away causing problems. And that’s just below the ground. Never mind having to clean leaves out of those gutters seasonally. Here is a drain repair my guys recently did due to the effects of tree roots on a drain lines.
Tip#3. Quakes. You’re in California. Worried about earthquakes? You should be. Even little ones can shift a house off square. Those tiny claws feet cracks around the corners of the windows? Yep those ones. That’s your house shifting. And by now your buyers agent is probably telling you “that’s OK the house has bolted foundations, it’s in the disclosures”. Well don’t take his word for it. Go around the house opening the doors and windows one by one. If they stick in the frames good chance the building is shifting out of square. Another problem to chip away at your cash flow later on.
Tip#4. Mold. Yes the black spots you see growing on on the caulk around your tub. Those stains you see dotted on the bathroom ceiling. Well that’s easy you can see it. But what about the stuff you can’t see? But you’re touring the house and want to get an offer in today! You don’t have time to conduct a mold inspection! On this one, this is where you have to trust your gut. Well, your body anyway. Usually when I spend 10 minutes in a house that has hidden mold, I start to feel lethargic and heavily tired all of a sudden. Yep; it’s mold. Yep, It’s an opportunity to negotiate the price.
Tip#5. Floors. Do they feel spongy? Like a diving board attached to a pool side? Or do they feel solid and level as you walk across them? Spongy floors usually indicate those little termite critters or wet/dry rot at the joist tips where they attach into the wall. You guessed it. big $$ coming out of your profit margin when you have to rip up the floors and replace floor joists.
Want more tips? You have to hire me for that. Let me help you find your next investment property or flip.
Why not give me a call today.
Contact me (Barry Boyce) at (323) 247 1699