What is “flipping” a rehab? It is making an offer on a fixer-upper and then selling the contract. It can mean fast profits with little risk, and very little money invested. The downside? You may make fewer profits than if you fix it up yourself, and can spend a lot of time looking for the right properties.
We are talking about classic real estate “flipping” here. You never really own the property or have any of the headaches that go with fixing up a place. Instead, you find properties with a lot of profit potential, get your offer accepted, and then sell your “place” for a profit. What you need to make money this way:
1. A good eye for value.
Without any idea of what homes in an area should sell for, you will waste a lot of time. You should be able to look at a home and say, “It should sell for about x amount once it is fixed up.” Of course, you’ll do research to arrive at a more accurate estimate once you target a particular property.
2. An idea about repair and improvement costs.
Again, you can waste a lot of time if you don’t know what it costs for certain common repairs and improvements. Guessing that a roof repair will be $2,000 and then get a quote for $10,000 means a blown deal after perhaps days of effort.
3. A few good contacts with investors who like fixer-uppers.
Once you get that offer accepted, you need to have some investors to call right away. You have signed a contract with deadlines. This is not the time to start introducing yourself to other investors.
4. The line “or assigns” in every offer.
You put “or assigns,” or alternately “or my assigns” after your name in every offer (talk to an attorney or experienced investor to see what language is common in the area). This gives you the right to assign the contract to another buyer. If the seller asks about this, you can tell him that you may want to bring in a partner or turn the project over to your partner, but that all the same terms apply, so there is nothing to worry about.
5. Financing contingencies and other escape clauses.
If you can’t find a buyer to assign the contract to, you will have to complete the transaction yourself. Unless, of course, you can’t, and you gave yourself a way out for just such a possibility. These escape clauses might include making the deal contingent on getting a certain interest rate, or on getting the approval of your partner within a week.
Flipping a Rehab – An Example
You have been in touch with a few investors that invest in fixer-uppers, or “rehabs”. You know what kind of properties they like, and how much profit they expect to get out of a project. Now you start driving around town, looking for fixer-uppers.
You find three for sale through realtors, two for sale by owner, and several homes that appear abandoned and might have owners looking to sell. You take a lot of notes, and you go to the courthouse to find the owners of the empty-looking houses. Once home, you start making phone calls and talking to owners and real estate agents – and taking more notes.
Starting with the one that has the most potential, you look at the properties. For each, you lay out a plan on paper, then estimate the costs. Using the formula laid out in Number 7, you estimate the eventual sales price and subtract from this the costs and the profit you need to make you and the final investor happy. This gives you the highest price you can offer.
One of your offers is accepted. It is a house that will be worth $156,000 when it is ready. The costs will run about $16,000, and the buyer accepted your offer for $114,000, leaving a projected profit of $26,000. Your good faith deposit is $500.
Now you get busy talking to your investors. One agrees with your assessment of the potential, thanks to your detailed plan showing the repairs and improvements, as well as your market analysis showing what similar homes have sold for recently. He likes to make $20,000 on any given deal, so he offers you $6,000 to have the contract assigned to him.
Of course, it can get more complicated than this, and you are not likely to get an investor who will pay you prior to closing, so you’ll have to wait a few weeks. However, notice that you only invested $500 and your time to make that $6,000. Also, you may not want to handle a dozen fixer-uppers if you were doing them by yourself, but flipping a rehab house is a lot less work, so you could be working on several such deals more easily. You can see why some investors concentrate on flipping properties.