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Flipping Real Estate

It would help if you keep in mind that banks and real estate developers generally do not like doing business with real estate investors. Real estate investors upset the market equilibrium and compete with ongoing development projects.

Flipping generally refers to term used when someone buys a property and quickly sells the property or assigns the sales contract. Holding a property for two years and then selling it is not what most of you have in mind when you use the term. For a while, this was a pretty popular activity in Florida. People were buying and selling like there was no tomorrow. But, a number of market factors have all but eliminated this fast-paced real estate flipping.

At first, the builders were thrilled to sell out their projects to investors and did not care what you did with the property. They could go to the bank and show them a high percentage of units sold. The bank would then lend them the money the needed to complete their projects. Everyone was very happy.

But, the investors were buying multiple homes or condos on speculation and quickly selling them to the next investor, who in turn resold them to the next investor and so forth. Eventually, when the music stopped, some fool was without a chair. They had a property that was artificially priced, could not be rented for anywhere near the debt service and could not be sold for as much as they paid for it. Investors started to get into trouble and were dumping units. The comps used for appraisal went lower and lower. Now, the bank would not even finance the purchase of the builders unsold units at the asking prices. The banks and the builders were left holding the bag.

Vulture funds developed and would buy blocks of condos from the bank at seventy cents or less on the dollar. This is still happening in Miami and Fort Lauderdale.

Of course, the investors needed to be stopped for their own good, so a number of barriers were created.

The first thing they did was get rid of assignable contracts. If you want to sell the property to someone else, you must first close and own it. The apartments could not trade hands while they were being built.

Next, some of the builders and banks imposed higher down payments. If you wanted to speculate on a $700,000 condo you would need to cough up at least $70,000. Although, in desperation they are bringing the down payments back down.

Many developers even put contractual restrictions that said you could not sell or rent the property for a year or two after completion. They did not want you competing with them while they were still selling homes. They also hoped to attract end users instead of investors.

In the single family home market builders also realized that investors did not purchase upgrades. Upgrades are an important revenue center for the builder. My investors buy a home with the idea that they are selling or renting the unit.

The mortgage companies also got into the act and all but eliminated investor loans by requiring high down payments. Although, we can still get 95% or even 100% financing on our projects, the average investor loan is looking for at least 10% down.

Finally, the property owners themselves got smart. Everybody, and I mean everybody, knows what their property is worth. Unless you find someone in dire straits, they are going to sell their homes, apartments and lots at market price. Bargains are few and far between.

How You Can Still Flip Real Estate in Florida

Now let's see how we can get around all of the obstacles I mentioned.

The restrictions imposed by builders do not concern us. We do our own building and our builders could care less as what you do with your house. You can rent, sell, lease option or paint graffiti on your home. Nobody really cares.

Our contracts are not assignable. However, you can sell the home contingent upon its completion. We routinely sell homes a few months before completion. You are not assigning the contract to build the home. That is still yours.

Financing is not one of our problems. We have special 100% construction to perm loans for all of our projects. If necessary we can get conventional construction loans with 5% down. If you wish to purchase a home to live in that has already been completed, we can also get you 100% financing.

How Long Do I Have to Hold the Property Before Selling?

The short answer is, as long as it takes to make a profit. But you are looking for something more tangible.

If you expect to buy a property and turn it over in less than a year you have read too many of the wrong (or very old) books or threw your money away on a bogus real estate rags-to-riches course.

The lesson here is that selling real estate investing courses and videos is a great business.

If you have to pay a realtor's commission to sell the property and you have financing costs to obtain a loan, you will need to clear these costs before you make a dime. So, unless the market is going up like my blood pressure in traffic, you will need to hold it awhile.

I tell all of my investors to plan on renting out the property for a year. Now you have two years of appreciation and can clear your cost hurdles and still make a handsome profit.

Selling on Completion Without Renting - Today's Flip

In many areas we are building spec homes in the $300,000 and up price range. Over time we have learned that not everyone wants the absolute cheapest home. When we build these homes we are obtaining a 110% appraisal prior to construction. In other words, the home we build in Ocala for $320,000, for example, already has a legitimate (its the bank's appraiser and not ours) appraisal for at least $352,000. A year later the home is usually worth even more.

You can sell a pre-construction home on completion and make a nice profit. It is not necessary to hold the house and rent it out. But, you will make more money that way.

What About Flipping Condos?

Presently, there is a glut of units on the market. A condo conversion is, in our opinion, a buy and hold investment. You rent your unit out, get a positive cash flow and tax break and then three or four years later, sell the unit. Nobody lines up overnight or picks lottery tickets out of a drum for these units anymore. It is a buyer's market.

So, Is There Anything I Can Flip Quickly?

You can buy and sell lots of different types of properties. Finding something you can buy cheap enough or a market that is moving fast enough is another story.

If you can sell a property yourself, it helps the profit picture. But, even if I list it for you in MLS for a few hundred dollars, you still will have to offer 2-3% commission to the selling agent. Can you put it in the newspaper and sell it yourself. The answer is - absolutely maybe.

Financing charges can also take the wind out of your profit sails. If you have cash and do not have to finance the property you can buy for less and not have any financing costs. Aggregating money in a Solo 401K or Self Directed IRA to the point where you can purchase for cash really helps.

If you have cash and sell a property yourself you can take advantage of bargains in the market. Some poor individual gets into trouble speculating in condos - you can bail him out at a bargain price. Want to build a house in Ocala with me? Finance it yourself and save $10,000 on finance costs. Sell it yourself and save another $7,000 on sales costs. Now you can come in under market and make 20-25% a year on your money. Double your cash account in three years or less.

I Think You Are Full of .....

I have conversations with investors every day. Many are so disappointed that they continue their Internet search until they find someone who tells them what they want to hear. They do not believe me and that is just fine. I take a conservative approach to real estate investing where steady appreciation and more predictable gains win the race. So, if you have expectations of getting in and out of a property in less than a year I suggest you move on. It is obvious that, as they say in the movie, "you can't handle the truth".

Martin Unger
Real Estate Investments

- Pre-Construction
- Spec Homes
- Condos
- New Homes
- Land
- Relocation

954 - 255-5056 (office)
954 - 461-0319 (cell)
775-254-2881 (fax)

(an associate of London Realty Corp)

9000 Sheridan Street
Suite 90
Pembroke Pines, FL 33024