Interested in Flipping Rehabb Property

Here is an article I found online, just to let you know it was not my original idea, but hey, I am glad I found it, and more than glad to share it with all of you!

Flipping Homes for Profit

Here’s an example of how a typical flip might work.

You find a house that is run down and vacant, there’s no for sale sign in the yard. Through persistence and a little detective work, you are able to locate the owner and negotiate a “risk free” contract to purchase the property at 50% below the after repaired value with a very low earnest money deposit ($10.00).

You then contact an investor that rehabs houses in the area, offer to sell him the house for $3,000 more than your contract amount. When he agrees, you fill out a one page “Assignment of Contract” form and get $500 in earnest money. A few days later the transaction closes at a title company or an attorney’s office and you get a check for $3000 PLUS your $10.00 earnest money.

But What If….

I can hear all those “But What If” questions already. Don’t worry!

Flipping contracts has been around for a long, long time. Many of the nation’s leading real estate investors, and a few wannabes, have books and courses about flipping contracts. I’ve read much of the material and over the past few years I’ve developed a system that works best for me. In future How-To articles, I’ll share my ideas and suggestions about how to start and profit with flipping.

A Word of Caution

You’ll need to be very persistent – it’s NOT always easy. Some months you may find two, three, or more properties you can flip. Other months you may not find any. You’ll constantly be developing new leads. Some leads will work out, some won’t. Some sellers will be very motivated, and some won’t. But remember that time has a way of changing everything. You must learn to stick with it, even when you are discouraged.

Where Do You Begin?

Start with the end in mind so you’ll know what to do after you find a motivated seller with a house you can buy well below market. If you try to find the house first then figure out what to do with it, you’re in for a nightmare. The first thing you need to do is line up your real estate investment team. You’ll need rehab investors to buy your contract, a title company to close the contract or perhaps an attorney. And the most important element is a good contract or agreement. Let’s go over each of these in a little more detail.

How To Find Investors That Will Buy Your Contract

Read Newspaper Ads. Look in the daily and weekly newspapers for the “We Buy Houses” ads. You may even have some billboards around town that say “We Buy Houses.” Call each one of these ads and talk with the investor. Keep an information sheet on each investor. Be honest and tell them that you are just starting out and will be looking for houses that need to be rehabbed. Ask if they would like to be contacted when you find one. I can assure you that they will all be very anxious for you to do the leg work for them.

You also need to find out where they want to buy houses and in what price range. Some will only work in certain areas and price ranges and others will say anywhere there is a deal! Ask if they are a cash buyer or if they will need some extra time to arrange financing.

Attend Real Estate Investment Club Meetings. Another excellent source of buyers for the houses you find will be your local investment club. Most major metropolitan areas have at least one club that meets monthly. You need to join and attend every meeting. The networking opportunities are endless. When you go to the meetings tell everyone what you are planning to do. Once again, collect names and information about people who are interested in buying houses.

Attend Foreclosure Auctions. Some investors hate to go out knocking on doors and dealing with emotional, distressed owners; they much prefer to buy at the foreclosure auction. At most auctions, the property must be paid for with cash or a cashier’s check within hours of the sale. What a wonderful opportunity for you to meet cash buyers for the houses you find.

Attend the foreclosure auction. Introduce yourself to the investors and hand out business cards. Tell them you find houses just like the ones sold at the auction and ask if they would be interested in being contacted when you find something. Just as you did with the “We Buy Houses” ads, you need to find out where and what price range they buy in. Ask for their business card and make notes on the back or take along a notebook. Make sure and do this either before or after the auction because the investors will be focused on bidding during the auction and won’t appreciate distractions.

Keep Telephone Logs. Once word gets around that you flip contracts, you’ll get weekly phone calls from investors asking if you have anything. Keep a log of who calls, these will be the first investors you need to contact when you have a deal.

How To Find A Good Title Company Or Attorney

Ask other investors who they recommend. This is where all that networking comes in handy. By building a good relationship with the investors you call from ads, meet at the investor clubs or at the auction, you’ll develop a base of mentors that you can call anytime you need advice. Don’t abuse the privilege though. Rarely will you make friends with someone if you call them frequently and keep them on the phone for a long time. Keep your phone calls brief and to the point. Or better yet, take advantage of the time at the investor club meetings for your questions.

The Agreement or Contract

Once you find that elusive motivated seller and just the right house at just the right price, you’ll need a document to “tie up” or buy the house and place to write all the things you and the Seller have agreed to verbally. A contract lets the seller know you’re serious about buying their house and it provides written instructions for the title company. All real estate contracts must be in writing.

Now is NOT the time to get creative about contracts. I’d suggest you consult with an attorney to write your contract in your best interest. If you don’t have the funds to pay an attorney the next best thing would be to start with your state’s real estate commission contract then add, or subtract, a few key clauses. Do NOT use a contract from the local office supply store – it will be too vague. You can get a real estate contract from a Realtor or at any title company. You may also be able to get a good contract through your local real estate investment club.

Whichever agreement or contract you use make sure to add a clause that protects YOUR interest and allows you a way out of the contract. An example is:

This contract is subject to inspection and approval of the property by Buyer’s partner.
If you cannot find a buyer for the contract, you notify the Seller in writing that your partner did not approve the purchase of the house. Then you are no longer obligated to purchase the property. I’d suggest that you send the notice by certified mail.
Everything you and the Seller agree to must be written in the contract or agreement. If it’s not, the Seller may develop a sudden case of amnesia. If the property is vacant, I always ask the Seller to provide me with a key or a combination to the lock box along with permission to enter the premises for estimating repairs and completing inspections. You may even ask the Seller to allow you to place a For Sale or For Rent sign in the yard prior to closing. Remember, whatever you agree to, put it in the contract.

It is essential that the contract does NOT have any clauses that would prevent you from assigning the contract. You could add a simple clause like, “Buyer may assign contract.”

Next time… we’ll discuss where to find houses that are owned by motivated sellers, how to evaluate a transaction, and how to negotiate a deal that’s good for all parties.

How To Find Houses

Hopefully by now you’ve had time to locate three or more rehab investors to flip contracts to, have your contracts ready and thoroughly understand them, and know which title company or attorney you will use to close that first flip deal. If not, before you proceed, take time to complete the preliminary steps in Part 1 of the Real Estate Primer before you start looking for houses.
Now let’s discuss how you can increase your odds of finding and closing more deals in the least amount of time. Here are four ways to find houses:

Farming for Houses
Tell the World – Recruit Bird Dogs
Research, Research, Research
Advertise
To achieve maximum success you need to utilize a combination of all four. However, you may have other time constraints (like a full time job) that limit what you can do. In that case, pick the methods that best fit your schedule or your budget.
Farming For Houses

I recommend you start working within a 10 to 15 mile radius of your home – sometimes called “farm.” If you live in a major metropolitan area like I do, it will be very hard to drive all over town to look for houses. For me, it can take one hour to get from one side of town to the other. You’ll quickly find that you are spending more time driving than actually looking at houses or talking to motivated sellers.

You should get to know your farm area like you know the back of your hand. It can easily be accomplished by working just a few hours on the weekends. Drive around each neighborhood in your farm area. Keep a log or journal with information about your target neighborhoods. For flipping, you need to identify neighborhoods with houses that are about 20 years old. Newer houses probably won’t have enough equity to allow for a profitable deal.

Are there “For Sale” signs in these neighborhoods? Write down the address and contact numbers in your log then call to find out the square footage, number of bedrooms and baths, how long it’s been on the market, and what’s the asking price. Keep all this information in your log. With this information you have just established the approximate market value of houses in the neighborhood.

If all the houses are newer or in good condition then you simple need to find a different farm area.

What To Look For

While you’re driving your farm area – do you see some vacant houses? Occupied houses but in need of repair? Write down the address in your log and other notes about the condition of the property.

How do you spot a vacant house? Tall grass is certainly a give away, as is a porch or doorway cluttered with phone books, flyers and coupons from the local pizza parlor. Or perhaps a mailbox stuffed with mail that has not been picked up. Boarded up windows are a sure sign of a vacant house.

When you find a vacant house, knock on the neighbor’s doors and ask if they know who owns the house. Try to find out how long they lived there, why they moved, how you can reach them, how long has it been vacant, etc…get any information you can about the owner and the house.

Tell the neighbors that you are looking for houses to buy in the neighborhood, and that you work with a group of investors (these are your “partners”) that will remodel the house then sell it to a good homeowner. Chances are they are very anxious to have a “good” neighbor and will cooperate. Don’t forget to ask if they know of any other houses that are vacant or in need of repair in the neighborhood. Leave your business card, they may think of a house after you leave and you want to make sure they know how to get in touch with you.

Sometimes the neighbors just won’t give you names and numbers of the owner, in that case leave your business card and ask them to please get a message to the owner that you are interested in buying the house.

Next it’s time to check the tax records. Some city tax offices will give you the owner’s name and address with just a phone call, others require that you come in to check it yourself. Many County’s tax records are on the Internet. This is the first place to investigate.

Once you find out who the owner is you can either send them a letter or postcard or try to get their phone number and call them. Tell the owner you saw there house at xxxx address and may be interested in buying it. Ask if they are interested in selling and get as many details about the house as possible. Some things you need to find out are:

How many bedrooms, bathrooms, garages – what is the approximate square footage? How old is the house? Does it have central heat and air? Why did they move? (These questions are just to warm them up for the important questions.)

Is there a mortgage on the house? If so, what is the approximate payoff?

Are there any liens or judgements against the property?

What repairs need to be done? Estimated costs?

How long have they owned the house?

From this information you can decide if the house is a good flip candidate or if you should just mark it off your list. For example:
From question #2 & #4 – What if they tell you they owe $40,000 on the mortgage and the house needs extensive repairs including foundation work? You know from the information in your log that homes in good condition in the neighborhood are selling for $55,000. You can quickly determine from this information that this house just won’t work. Next!

From question #2 & #4 & #5 – What if they tell you they lived in the house for 30 years and the mortgage is paid off but it needs $10,000 in repairs and they just don’t have the money for repairs? You know from the information in your log that homes in good condition are selling for $55,000. BINGO. You’ve got a hot one! This has all the ingredients of a potential deal, lots of equity, a motivated seller and a house that needs lots of work.

From question #5 – What if they tell you they owned the house for one year but just couldn’t keep up with the payments? Because it’s such a new mortgage you can determine that they probably owe about what the house is worth and it’s not a flip candidate.

You are looking for houses with at least 50 percent equity – the more the better! So if houses in good condition are selling for $60,000, you want to find houses that have at least $30,000 in equity.

You are also looking for houses that need plenty of repairs. Sometimes you’ll be able to buy a house well below market that doesn’t need a lot of repairs but that doesn’t happen very often. It is the excessive repairs that will motivate a seller to sell below market because they think it will take $20,000 to fix the house and they don’t have the money and have no way to ever get the money.

If you don’t have these two elements–lots of equity and lots of repairs–then it is unlikely that you will be able to buy far enough below market to flip the contract and make a profit for yourself.

But Someone’s Living In That Junker

Sometimes the first sign of a motivated seller is a house that screams “PLEASE HELP ME” when you drive by. Perhaps the owner is having financial difficulty and just can’t afford to maintain the house. Or perhaps that’s just the way they live. It could be a rental and the landlord won’t put any money into fixing the house.

You’ll never know which situation it is until you contact the homeowner. To do this, you can:

Knock on the door and tell the occupant you are looking for houses to buy in the neighborhood and ask if they would be interested in selling (or know someone who is). Make sure to leave a business card. If it’s a renter, try to get the owner’s name and number.

Write down the address, look up the owner in the tax records and send them a letter or postcard saying you are looking for houses to buy in the neighborhood and want to know if they would be interested in selling (or know someone who is).

Look up the owner in the tax records, find out their phone number then call with the same info as #2
If you send a letter or postcard, you may not get a response the first time. So you’ll need to continue mailing to them every three to four weeks.
When you knock on the door they may say they aren’t interested in selling right now. But follow up with a letter or postcard every three or four weeks. And stop by the house every once in awhile to remind them that you are still interested in buying.

You can also leave a flyer on their door (and all the other doors in the neighborhood) saying “I Buy Houses – Cash – Quick Close – Any Condition.”

If they show some interest in selling, then you need to ask the questions listed above to see if it is a candidate for a flip.

The follow-up is VERY important. Time has a way of changing everything – even turning an unmotivated seller into a motivated seller.

Tell the World – Recruit Bird Dogs

You can expand your farm area and not take up any more of your valuable time by telling everyone you come in contact with that you are looking for run-down houses to buy. Tell all your co-workers, the people at the grocery store, everyone at church, your kid’s friend’s parents, your kid’s teachers, the guy that fixes your car, the people at the cleaners, the waitress at Denny’s, the people at the barber shop or beauty shop, etc, etc. The more eyes and ears you have out there looking for you, the more deals you will do.

Hand out business cards when you tell people you are looking for houses to buy. The business card lets everyone know you are serious and it insures they have a way to contact you when they find a house.

You may even want to hand out flyers to recruit bird dogs. Leave flyers at the college, senior citizens center, Mother’s Day out nursery at local churches, the grocery store, etc.

Make sure everyone knows you pay a finder’s fee
of $250 to $500 or more for each house that closes.
The very first flip deal I did was because I told my son’s best friend’s mother that I was going to get into the real estate business. I told her I was looking for houses to buy that were run down and I’d pay a finder’s fee to anyone that found houses for me.

A few days later she just happened to overhear someone where she works talking about a house he inherited from his mother. It had been a rental and was so run down that he thought it could not be sold. She told him I was looking for run down houses to buy. A few weeks later he had his house sold, a rehabber had a new project, my “bird dog” had $500 and I had a check for $4,000.

Get to know the mail carriers, UPS driver and Fed Ex driver assigned to your farm area as well as people that do lawn work. These people travel all over town and can help to expand your farm area. Make sure everyone you talk to has your business card, they know what you are looking for, and they know you pay a finder’s fee for any houses you are able to buy.

Research, Research, Research

A motivated seller is sometimes motivated because of some recent event that has happened in their lives. Some of these events are listed below. Many of these events, like a foreclosure, are time sensitive – meaning you have a window of opportunity to act and after a certain date it is too late to buy the house from the owner. Find out what the state laws are concerning these “events” so you’ll know how much time you have. You can get information about all these properties at your county courthouse, tax office or other city municipal offices. There may also be a legal newspaper where this information is posted daily or weekly.

1. Foreclosure – Trustee sales
2. Foreclosure – Tax sales
3. Code Violations (red tags)
4. Divorce
5. Probate – death of owner
6. Evictions – landlords with bad tenant
7. Bankruptcy
8. Criminal Act – going to jail
9. Out of State Owner
10. Liens or judgements

These properties may take you outside your farm area but your odds of getting a GREAT deal are much higher when you know you are dealing with a seller that is more likely to be motivated – provided there is enough equity in the house. You can research the probability of equity while you are at the courthouse BEFORE you even contact the owners, which will save you time in the long run.

How can you determine there is enough equity? The best indicator is when the deed was recorded. The longer the owner has owned the house, the more equity they will have in the house. If the deed was recorded 2 years ago – you can scratch that lead off your list. On the other hand, if the deed date is 15 or 20 years old or more it’s time to get REAL excited and get to that house FAST!

If you don’t have time to research these properties you can hire someone to do the research for you – but only after you understand how to do the research yourself so you can train them. Some County Courthouses offer free classes to teach you how to research properties. Find out if they do in your area and take the time to learn.

You’ll also need a good system for gathering information. This may as sophisticated as a laptop computer database or as simple as a form you develop for entering the necessary information about the house and the owners. Keep it consistent for quick reference on any property or owner.

Advertising

Every newspaper has a real estate section. Most of the houses for sale in the newspaper are in good condition and the owners want top dollar. However, sometimes you can find an ad that says Handyman Special, Selling As Is, Fixer Upper, MUST SELL ASAP or Estate Sale. These are the ads to call. Call anything that indicates the house needs repairs or the seller is motivated.

You can also run your own ad in the “Real Estate Wanted” section of the newspaper. If it’s too expensive in the daily newspaper, check prices in the weekly newspapers like Greensheet or Thrifty Nickel. The more people that know you’re looking for houses to buy, the more deals you’ll do. Your ad could say, “We Buy Houses – CASH – Any Condition.”

How about running an ad looking for more bird dogs?

There’s no way I can cover all the opportunities for finding houses in detail in this article. I hope this has given you enough information to get started looking for your first flip deal. Happy Hunting!

Next we’ll discuss How to determine you’re the maximum offer and how to negotiate a deal that’s good for all parties.

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