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".
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