OLD NEW The Frugal Home Flipper

Transcription

The Frugal Home Flipper
Forming a Plan to…..
Make the
OLD…..
By: Kyle Travis
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NEW Again!
Introduction
“Give me six hours to chop down a tree and I will spend the first
four sharpening the axe.”
Abraham Lincoln
Have you ever wanted to fix up an older home to flip for a profit or perhaps call it
home yourself? If yes, then you are one of many. In fact, flipping houses has become
tremendously popular, but be aware that it isn’t as easy as it seems on TV. Truth be
told, there’s a lot of planning, preparing, and sweating that takes place behind the
scenes. With all of these steps left out of the equation many eager entrepreneurs jump in
head first without knowing the possible pitfalls. The end result can be stressful,
discouraging, and unprofitable. Well, I am here to tell you that with a plan of action this
dream can become a reality. That being said, this is not a get-rich-quick scheme and I
won’t show you how to buy a house for a dollar. The goal of this ebook is to help
potential home flippers “sharpen their axes” so to speak. This involves developing a
plan that’s sensible, cautious, and thrifty (all aspects of being frugal) to minimize
risk. There’s always risk associated with flipping houses no matter what the market is
doing, but when a sound strategy is used and good decisions are made that risk will
shrink significantly. This ebook teaches how to prepare your finances, get a sober self
assessment of your skills, find a good project house, navigate price negotiations, reduce
realtor/bank fees, manage projects, select good materials, and find wise councilors in the
real estate/construction business to make flipping houses rewarding and profitable.
You might be thinking that sounds great, but how do I know you have any clue
what you’re talking about? Good question. For 30 plus years my father has owned and
operated a successful construction company. Ever since I can remember I have been
around the construction business in some capacity. I began working summers with his
crew while in junior high school. This continued throughout high school and college.
There were also many weekends spent working on project houses. During this time I
was able to learn a great deal about the technical side of home construction as well as the
business side.
After I graduated from college with a degree in chemistry I got a job with a large
orthopedic company. After a few years I started flipping houses on the side to earn
some extra income. In early 2009 I purchased my first house. It was a fixer upper to say
the least. About 13 months later the entire interior and exterior of the house was
remodeled. This process reaffirmed my passion for carpentry and cost effective design.
It also gave me the opportunity to get creative with different remodeling ideas and
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inspired me to start a BLOG called frugalhomediy.com. However, I haven't stopped at
just one house; I am continually looking for other properties to flip because I find the
process of transforming a dilapidated house into a beautiful home enjoyable. This
ebook shows the process I go though when flipping houses. I took all the information I
feel is relevant, condensed it down, and put it in logical order. The end product is a
clear, repeatable plan that helps you make informed decisions to minimize risk and
maximize profit.
If you like this ebook, please pass it along to your friends and family
because it’s 100% FREE and intended to be shared.
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Be Set Free
Proverbs 22:7 the rich rule over the poor and the borrower is slave
to the lender.
Most who have been in a lot of debt would say that Proverbs 22:7 is definitely
true. Being in debt makes you feel enslave because your freedom to use money to better
the world around you has been revoked. No one wants this to be their reality, but this is
the truth for some. In fact, the majority of Americans have credit card debt, a mortgage
payment that’s too big, and multiple car loans. This is not the road to financial
prosperity. However, there’s a way to be set free from the shackles of debt. This is
done by spending less than you make and using debt sparingly.
All of this ties into homeownership. An ideal mortgage payment is less than or
equal to 25% of your take home pay. A house payment larger than this, plus other
possible debts, can strain your finances. Given time, too much debt will destroy any
perceived returns that could be gained through the leverage of debt. This is why the
housing market collapsed. Many were signing up for adjustable rate mortgages with
interest only payments and no real plan of how to pay it back. When a house payment
can no longer be paid the loan goes into default and the home is eventually repossessed.
The market became saturated with situations like this which caused the “housing
bubble” to burst.
So, my point is that to get started in the house flipping business you have to get
your finances in order. This will help you focus on the task at hand and not worry solely
about money. For help getting your finances in order I am a fan of the Dave Ramsey
plan. His plan has what he calls “baby steps.” These steps are as follows:
1) Save a $1,000 Emergency Fund to protect against life’s unexpected expenses.
This can be obtained quickly by selling stuff you don’t use.
2) Pay off debt using the “Debt Snowball.” This is done by starting with the
smallest debt and hitting it the hardest. Once smaller debts get paid off you will
begin to see progress and build momentum. This creates a “Snowball” effect.
3) Save an emergency fund of 3 to 6 months of expenses. This money is for
emergencies only. Having this cushion helps keep incidents that would have a
major impact on you and your family at bay. Keep this in a money market
account and pretend like it isn’t there.
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4) Invest 15% of your household income into retirement accounts.
5) Fund your child’s college.
6) Pay off your home early.
7) Build wealth and give.
Dave also insists that having good financial health is rooted in good behavior. To
reach or exceed financial goals one must break bad habits and create good habits. Dave
pegs this as the true cause of financial woes. To learn more about Dave’s plan get his
book The Total Money Makeover.
So, once you’ve paid off your debt, accumulated an emergency fund of 3 to 6
months of expenses, saved a down payment of 10% or greater (20% down is more
desirable), saved money to cover the remodeling costs, and are pre-approved for a loan
you are ready to begin your house search. Now, you may be thinking, “that is a lot of
work in itself!” and you would be right. However, this is the best way to decrease risk
and increase life stability. So, the amount that you need to save depends on where you
live, your income, and the project house you choose. As a result, this value will vary
greatly. It could be anywhere from $20,000 and up (plus your emergency fund). When
flipping houses there are always unexpected expenses, so the more prepared you are the
better. Thus, the more you have saved the less stressed you will be.
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Getting a Loan
Debt can be used to your advantage. However, it needs to be
used responsibly…
When purchasing your first home, it’s smart to get a 15 year fixed rate mortgage
where the payment is less than or equal to 25% of your take home pay. When
purchasing additional properties to flip be sure to have considerable equity in your
primary residence first. This keeps your debt in check and allows you to use your
home’s equity to fund other projects. Be sure to shop around to find the best loan for
your situation, and try to save a down payment of 20% or greater. There are several
advantages in doing these things….
1)
All Banks Are Not Created Equal
Shopping around for a loan will help you get the best deal. A loan, just like most
things you buy, is a product where the price and terms may be negotiable. In fact,
many banks are willing to negotiate on closing costs and interest rates. Be sure
there’s no early payment penalty attached to any loan you’re considering. Also, if
you’re a first time home buyer, there could be a bank in your area that will waive
the closing costs altogether. If you don’t feel like doing your own research go to
LendingTree.com to quickly compare loan offers from various lending institutions.
Lending Tree is a free, no-obligation service that connects you with multiple
lenders who will compete for your business. Get quotes within minutes by clicking
here and filling out some basic information on their secure form. Once you’ve
received some quotes, go to the lender rating and review section at Lending Tree to
see how other Lending Tree customers rated their personal experience with the
lenders you’re considering.
2)
Instant Equity
Having equity in your home is a great thing. If you already own a home be sure to
have considerable equity before looking to purchase another property. This is
because a home equity line of credit is a great tool for purchasing investment
property. Home equity is the total value of your home minus the outstanding
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balance of your mortgage. For example, if your home’s value is $100,000, and you
currently owe $80,000 on your mortgage, your home’s equity is $20,000. Many
lenders will not let you use home equity as collateral unless it’s greater than or equal
to 20% of the value of the home. So, if you put 20% down, you will have instant
usable equity. A home equity loan is reusable, has low fees, and can be spent as
easy as cash. Be aware that some home equity loans have adjustable interest rates
which add more risk. It’s also important to remember that this is a loan that uses
your current home as collateral and needs to be paid back. So, to remove the risk
of purchasing investment properties save up and pay with as much cash as
possible. This is the safest way to go.
Tip: It takes a long time to build equity by just paying down the mortgage.
However, this isn’t the case if you move into a house that you fixed up. All of the
work that was done to increase the value of the home will also increase the equity.
This is how the term “sweat equity” was coined. Let’s say that you did your
homework and made a wise purchase of a distressed house for $60,000. You put
20% down ($12,000) and got a mortgage for $48,000. After making substantial
improvements with your own money at a cost of $20,000 you move into the house
and call it home. You enjoyed this process and would like to try again on another
house (not necessarily to move into, just to flip for a profit). You go to the bank to
see about a home equity loan. You fill out the paperwork and they send an
appraiser out to assess the value of your home. The appraisal comes back at
$125,000 because of the improvements you made. The mortgage you have on
your home is only $48,000 because the $20,000 used for improvements was
money you saved. This means you have $77,000 of equity in your home
($125,000 - $48,000 = $77,000). After you are approved for the loan you are
given a checkbook to use at your discretion. The spending limit should be high
enough to purchase another house and cover most (if not all) the remodeling costs.
I feel this is the best way to get started in the house flipping business.
3)
Better Interest Rates
Lenders may give better interest rates to borrowers who represent less risk. If
you’re able to make a 20% down payment then you are less likely to walk away
from your mortgage and will probably continue to have enough income to pay off
your loan. From the lender's perspective, the less money they need to lend, the less
risk they take on. Also, banks may raise the interest rate and require a higher down
payment when lending money for investment properties.
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4)
Smaller Loan = Less Interest
The more money you start with, the less you will need to borrow. Less money
borrowed translates into less interest paid during the life of the loan and smaller
monthly payments. For example, suppose you purchase a home for $100,000 and
get a 30-year mortgage with a 5% interest rate. If you put 20% down ($20,000) and
borrow $80,000 then the monthly payment would be $429.46 and the interest paid
over the life of the loan would be $74,604.63. If you borrowed the full $100,000
at 5% interest, the monthly payment would be $536.82 and you would pay
$93,255.79 in interest.
5)
No PMI
If you cannot make a 20% down payment your lender may require you to purchase
PMI (private mortgage insurance). This insurance is not for your benefit but your
lender’s. PMI protects them if you default on your mortgage before your home has
equity. The cost varies but can exceed $100.00 a month. This money is not
counted toward the interest or principal on the loan. However, if you put 20%
down PMI is usually not required.
6)
Say No to Construction Loans
To speed up the process you might feel tempted to get a construction loan. A
construction loan is separate from your mortgage and is used for remodeling.
Construction loan choices include the 30 year fixed, 15 year fixed, 1 year ARM, 3/1
ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM, and the very popular interest-only loan.
The normal structure is a short term 1 year loan that you have to refinance into a
new conventional mortgage loan once the construction is completed. So, this
process costs you two sets of closing costs and you have to re-qualify for the new
loan once the home is completed. Construction loans are hard to get, the interest
rates are much higher to offset the risk, they have a very tight time table, and the
bank is breathing down your neck the whole time with prescheduled mandatory
inspections that you have to pay for. Also, overspending with a construction loan
is easier to do because the money doesn’t mean as much. This is because all you
had to do to get it was sign some papers. This is very similar to using credit cards
(just charge it and worry about it later). When a person is spending money they’ve
saved they make wiser purchases. Needless to say, a construction loan is a big
headache and not worth it.
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7)
Cash is King
If cash is used to buy a house, that house can be in any condition. This is great
because the chances of getting a deal are much better. Besides, banks are reluctant
to loan money to buy a property that isn’t move-in ready. The only people looking
to purchase homes that aren’t move-in ready are handymen or investors with cash
on hand. In addition, using financing to buy a house takes money away from the
bottom line. It’s important to remember that cash is king when it comes to buying
distressed properties.
If all of this makes you feel discouraged, don’t be. Once your mind is made up you
will be amazed at how fast money can be saved by simply getting on a budget. In the
meantime work on your carpentry skills. If you know of someone remodeling their
house, offer to help. If no one comes to mind a great option is Habitat for Humanity.
Most likely there are Habitat projects underway not too far from you. Visit their website
habitat.org to get plugged into a project. Doing this will sharpen your carpentry skill and
give you the satisfaction of helping others. On top of that, it will help you figure out if
flipping a house is something you even want to attempt. However, if you think home
flipping is for you use this time to gain more experience and amass tools. Craigslist and
Habitat for Humanity Restore’s are great places to find used tools at a deep discount. I
have made several trades on Craigslist for a host of high quality used power tools.
However, if you can’t seem to find any used tools you like, or would rather buy new,
Amazon.com is a great place to find deals on new tools.
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Searching for the One
“Although men are accused of not knowing their own weakness,
perhaps few know their own strength.” Jonathan Swift
Before purchasing that fixer upper you need to discover your strengths and
weaknesses to get a sober self assessment of your carpentry skills. What experiences do
you have to draw from? How confident are you in your abilities? Make a list of your
experiences. Figure out what you’re good at, what you can manage, and what you
struggle with. Stick with what you know or can manage and find a reliable contractor to
do the rest. After taking all this into consideration, look for houses that need what
you’re good at. If you’re good at siding, windows, and roofing look for houses that need
those things. This will aid in narrowing your house search and stop you from getting in
over your head.
Tip: Word of mouth is the best way to find a quality contractor. If you
want more opinions to solidify your choice go to a local home improvement
store and ask who they recommend. Both Lowe’s and The Home Depot have a
list of local contractors they work with. Once your list is shortened, call
and ask for references.
Another factor to take into consideration when searching for a project house is to
determine what purpose it will serve. Do you plan to flip it quickly for a profit? Will it
become your home? If so, will you live there for a few years? These are questions that
need to be answered before you take action. Here are some different house flipping
strategies to help you determine your direction …
1)
Buy low, make quick/easy fixes, and sell fast.
Even a good house can look like a dump if it’s neglected long enough. A great
candidate for a quick flip might have overgrown landscaping, weeds growing rampant,
debris overflowing from the gutters, peeling paint, mildew growing on the siding, dingy
interior walls, stained carpet, and clutter everywhere. All of these things will deter most
buyers. The usual story behind cases like this is that the owner cared enough to keep all
the big ticket items in check but ignored the routine maintenance. A house like this is
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great for first time flippers because there are no major renovations to get overwhelmed
by. This allows one to get more familiar with the house flipping process. After an
individual has tackled a few of these with success they’re ready to move on to bigger
projects.
Houses can be flipped quickly using this strategy. In fact, it’s advantageous to sell
quickly to lower holding costs. Be sure to take into account all holding costs, bank fees,
realtor fees, and taxes owed on any profits because sometimes (although not always)
profit margins from this strategy can be slim. Furthermore, be aware that flipping a
house in under a year comes with higher taxes. Profit from the sale of real estate is
considered a capital gain and is taxed at two levels depending on how long you owned
the property. When you flip a house in less than a year and make a profit, you have what
is called a short-term capital gain that is taxed at 35%. Moreover, if you complete
numerous house flipping transactions in a short period of time and continue to do well
into the future the IRS may consider your transactions a business rather than an
investment strategy. If this happens, you will be subject to state income tax, federal
income tax, and a self-employment tax. This will severely diminish your profits. So,
make sure all that extra work is worth it, because by flipping fewer houses (or holding
onto them longer) you could make more money by avoiding these taxes. Thus, instead
of busting it, a tax-wise flipper might benefit from a somewhat slower pace.
Tip: There is no set standard as to what constitutes a business versus an
investment strategy when it comes to flipping houses. There are several things
the IRS looks at to determine if you’re fulltime like how many houses you
flipped on the year, how much you made from flipping, if you have a day job,
how much you make at your day job, and how long you owned each property.
Get advice from a trusted CPA if you’re not sure what category you fall into.
They will help you determine if you have a business or an investment strategy.
2)
Buy low, undergo much needed renovation, sell high.
Some homes are ugly, outdated, worn-out, and rundown. Over the years, wear
and tear causes homes to fall into a dilapidated state if they’re not maintained. These are
the homes that no one wants. This causes them to be undervalued because the cost of
buying and fixing them is way less than buying a similar house already remodeled. Most
homeowners don’t want to deal with remodeling. They just want to move in and be
done with it. So, renovation is needed to turn this kind of house into a home people
want to own. The great news is that doing a major renovation maximizes profits,
especially if you do a lot of the work yourself. Thus, being handy is a must if you want
to take on a job of this difficulty. Also, be prepared to lose most of your weekends and
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some of your weeknights for the next several months. Just be careful to not take on too
much. Some jobs will most likely require the assistance of a friend or possibly a
specialized contractor. Be sure to have these houses professionally inspected to
determine if there’re any major problems such as asbestos, toxic mold, or a cracked
foundation (these could be catastrophic to your bottom line if not caught).
Renovating a house takes time. It could take a year (or longer) if you’re doing
most of the work yourself while keeping a day job. This is actually good news when it
comes to taxes. Flipping a house you have owned for longer than a year is treated as a
long-term capital gain and is taxed at a lower rate. The long-term capital gain tax rate
tops out at 15%. So, if a house you purchased 10 months ago is ready to sell you may
want to wait two more months before putting it on the market. This strategy can save
you thousands of dollars, but be sure that the market is strong and growing when you
choose to wait.
Tip: If you’re new to flipping property, keep your day job and flip on the
side. Your job will help you secure financing, provide income for
renovations, pay the bills, and keep food on the table. The downside is that
you will have no free time and little energy for anything else. This is why
a strong work ethic, well defined plan, and the support of your family are
very important.
1031 Exchange
There’s also the possibility of exchanging your property for a like-kind property
thru a 1031 exchange after owning it for a year or longer. In a 1031 exchange, the seller
of a property can defer payment of the capital gains tax and immediately roll the profits
into the purchase of one or more like-kind investment properties. The exchanged
property cannot be a personal residence or second home. No gains get paid to you, and
you cannot take possession of the money from the sale. The money is held in escrow
until a replacement property is acquired. The only restrictions are that the exchanged
property can't be a personal asset and it has to produce income. 45 days are given to
identify a replacement property and 180 days are given to close. If you are considering a
1031 exchange, consult with a lawyer because the rules surrounding this can be
complicated. Keep in mind that a like-kind exchange will only postpone your tax bill.
When you sell the investment property acquired in the exchange you'll owe taxes on
both properties.
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3)
Buy low, fix up, move in, sell high in two years or longer.
This strategy is by far the best at reducing expenses while raising profit margins.
By living in the home you’re flipping you save money by avoiding two sets of utilities,
taxes, and mortgage payments/rent. Doing this also provides a nice tax exemption. The
law states that if a home is your primary residence for 2 out of the last 5 years ending on
the date the property is sold, you do not have to pay taxes on any profit made from the
sale. This tax exclusion is capped at $250,000 if you’re single and $500,000 for a married
couple. In other words, if you live in a house for more than two years, sell it, and make
a profit you don’t have to pay any taxes on that money. Now, that is a good deal. In
fact, many in the house flipping business take advantage of this. They remodel a house,
live there for 2 years, start on another house, sell the house they’re living in, move into
the house they just finished, and repeat.
When going with this strategy be selective in the house you choose. Don’t buy a
house that you don’t like or can’t see much of a future in. If you plan on living there for
an extended period of time pick something that fits you and your family with room to
grow. Also, it you aren’t planning to sell in the near future the remodeling cost should
not be as much of an issue. The house should be fixed up the way that you want it
(within reason). So, you won’t want to cheap out because you could come to regret it.
If you plan on living in the house while you’re remodeling beware. Living in a
construction zone adds A LOT of undue stress to you and your relationships, makes it
harder to get work done (for numerous reasons), and will undoubtedly make the
timetable for the project longer. However, the stress of living there subsides once the
bedrooms, kitchen, and at least one bathroom are done. But, the situation is still less
than ideal. This should be avoided if possible; especially if you have children. I learned
this from personal experience. My wife and I moved into our current home before it
was completed and were both ecstatic when we finally had a living room that wasn’t a
workstation.
Take note: Tax laws change over time. Check with a tax professional to make
sure these laws haven’t changed.
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Evaluating a Potential Flip
“True genius resides in the capacity for evaluation of uncertain,
hazardous, and conflicting information.”
Winston Churchill
As I stated earlier, the basic strategy for flipping a house is to buy a distressed
property at a price that’s low enough to be able to fix it up and still make a profit
without taking advantage of the seller. So, if a house is worth $100,000 in top condition
and needs $30,000 of work, you better be buying it for less than $70,000 if you want a
profit. Hence, getting a good deal on the front end is crucial to avoiding razor thin
margins. Once you have identified several houses that appear to be good deals check it
with math to be sure. Ideally, the price when remodeled should be equal to the sum
total of the initial purchase price, remodeling/holding cost, realtor/bank fees, and the
expected profit. So, it’s up to you to evaluate the house and estimate all of these values
to make sure you’re getting a good deal.
Realtor/Bank Fees
Remodel/Holding Costs
Profit
+ Purchase Price
$ Selling Price
Do not buy a property to flip unless you have a good idea of what the market
price is for that home in peak condition. Form a plan to price it just below the market if
you want to move it fast. Don’t make any assumptions about market value. Base it on
facts and get professionals to help because all of these values can be estimated with
accuracy. Let’s use the last house I flipped as a real world example using the actual
numbers rounded to the nearest thousand. By working with a realtor it was determined
that the house’s value would be approximately $130,000 to $140,000 after remodeling.
This was figured by looking at the location, surrounding home prices, condition of the
surrounding homes, square footage, lot size, and house style/character. Then a detailed
list of remodeling tasks was made. Things like new windows, siding, kitchen cabinets,
countertop, flooring, paint, appliances, etc. An estimated cost and time was assigned to
each task. A cost of $30,000 and time of one year was purposely estimated on the high
side to show the worst case scenario. For help estimating remodeling costs I created an
evaluation checklist at the end of this ebook.
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Here is what I came up with….
$8,000 Realtor/Bank Fees
$30,000 Remodel/Holding Costs
$25,000 Profit
+ $???? Purchase Price
$130,000 Finished
So…. $63,000 + x = $130,000 …. x = $67,000
Purchase price should not exceed $67,000
Here is what actually happened
$8,000 Realtor/Bank Fees
$35,000 Remodel/Holding Costs
$ ???? Profit
+ $56,000 Purchase Price
$134,000 Sale Price
So…. x = $35,000 Profit
As you can see the final outcome was far better than estimated.
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Other Considerations…
There are many other things to consider when flipping property. Are home sales
in the area rising? How long are houses typically on the market before they sell? Are
more people moving to your area then are leaving? Is the local economy
growing/stable? Are houses affordable when compared to the average household
income? All of this information can be found with the help of a realtor or by doing your
own research.
Finding a House with the Help of a Realtor
As a potential home buyer, there is no advantage gained by not using a Realtor
because their entire commission is paid by the seller. Usually half of the commission
goes to the listing agent (the agent representing the seller) and the remaining commission
goes to the buyer's agent (the agent that represents the buyer). Typical commissions
range from 5 - 7 % of the home’s selling price. A buyer’s agent can help home
flippers….
Tip: Find a different real estate agent if they only show you properties
they have listed. They’re pushing their own listings so they can collect on
the entire commission. Showing some of their own listings is fine, but if
that’s all they’re showing you then they probably don’t have your interests
in mind at all. Most likely there are better deals to be found. Find an agent
that’s willing show you houses regardless of who has them listed.
1) Analyze the market with a Comparative Market Analysis (CMA). A CMA
categorizes houses for sale by active listings, pending listings, sold listings,
withdrawn/canceled listings, and expired listings. Then a comparison of these
houses is made by price, time on the market, square footage, age, style, condition,
and location to determine where the market’s at and where it’s going. Some
realtors charge for this service, but if you agree to use them in your house search
most can be persuaded to waive the fee. The CMA information is gathered using
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the Multiple Listing Service (MLS). The MLS can be accessed by anyone on the
internet to search house listings, but the statistics found in the CMA are only
available to realtors. A CMA is only accurate for about 6 months to one year.
2) Find houses quickly by accessing the MLS on a deeper level. Finding the right
property to flip takes time and when a good one comes up for sale a buyer’s agent
can alert you quickly.
3) Find information about the home itself such as how long it's been on the market,
the neighborhood, school system, if it’s a foreclosure or short sale, and so on.
4) Set up appointments on behalf of the buyer for things like a home inspection,
pest inspection, and appraisal. Buyer’s agents also know who’s reputable in these
areas.
5) Negotiate. This is where a buyer’s agent really comes in handy. Your agent will
negotiate on your behalf when you make an offer. The agent can help you
determine exactly what to offer and will haggle for things such as appliances or
repair work needed. The buyer’s agent will also write up the offer and present it
to the seller's agent. This helps remove the emotional aspect of buying and selling
a home from the negotiation process to make the deal go smoothly.
Tip: Some flippers like to target houses that are “for sale by owner.”
Typically, people trying to sell their own home do so to save on the sales
commission they would pay a real estate agent. They’re often highly
motivated to sell and willing to deal with serious buyers. Go to
forsalebyowner.com, the nation’s leading “by owner” real estate website, to
search listings in your area.
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Do Your Own Research
When it comes to doing your own homework, there are several places to look…
1) Search the MLS. Searching the MLS for houses in your area is good practice to
get a feel for prices and market stability. Go to realtor.com to search listings from
all over United States. Just know that your access is limited.
2) Read the newspapers. Auctions, foreclosures, short sales, and articles about the
housing market can be found in the local newspapers.
3) Go to the chamber of commerce. There you can find out the population growth,
the average household income, and the average mortgage payment in your area.
Obviously, if more people are calling your town “home” the supply of houses is
lower and the demand, along with price, becomes higher. This means that the
strength of the local economy is good. If the economy is getting stronger then
new businesses are opening, existing businesses are growing, and new jobs are
being creating. House affordability can also be determined by comparing the
average household income to the average mortgage payment. Houses are
affordable if the average mortgage payment is less than or equal to 25% of the
average take home pay. All of these factors create a strong real estate market.
Below is an example of how to calculate the affordability of homes in your area.
Let’s assume that the average after tax household income is $50,000 and the
average mortgage payment is $850.
$50,000/12 months = $4,166.66 of income per month
$3,333.33 x 0.25 = $1,041.66
$1,041.66 and below is an affordable mortgage payment for the area. Since
$850 is the average mortgage payment, homes in this area are very affordable.
Foreclosures and Short Sales
To find great deals look for foreclosures and short sales in your area. A
foreclosure happens when the owner is unable or unwilling to make the mortgage
payment. The house is then repossessed by the financier and put up for sale. The most
common reason attributed to a foreclosed home is the poor financial situation of the
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owner. There are advantages and disadvantages to buying a foreclosed home. The
biggest advantage being they can usually be purchased at deep discounts. This enables a
lower down payment and allows you to stretch your money further. The disadvantage is
that the condition of a foreclosed home is usually very poor and once the purchase is
finalized it can’t be reversed. This is part of the bank’s risk mitigation strategy. They
want to sell these properties in as-is condition to recover their losses as quickly as
possible. Remember, by the time a house enters foreclosure a serious attempt has
already been made to sell it. So, be sure to inspect it thoroughly. If you aren’t confident
in your home inspecting abilities hire a professional.
A short sale is when the homeowner is upside down on their mortgage and the
lender accepts less than the total amount due. The homeowner cannot pay their
mortgage, so they are simply trying to avoid foreclosure because it’s easier on their
credit. Short sales can go for as much as 20% below market value and are typically in
better shape than foreclosures. Foreclosures and short sales are normally advertised in
newspapers. Real estate agents also have access to information to help find foreclosures
and short sales.
Tip: Finding foreclosure listings isn’t hard. All you need to do is contact
a real estate agent or look on websites that allow you to search for foreclosed
properties. To beat other investors to the punch you can do some hunting
and buy directly from the owner before the foreclosure is official, making it
a short sale. However, the most secure way to buy a foreclosed property is
directly from the bank. Bank foreclosed properties are also called real estate
owned, or REO’s. Buying from the bank or lender will give you the
opportunity to inspect the home before you buy it. Furthermore, when a
bank repossesses a home they clear any outstanding liens so the property
has a clear title. To find these properties call your local banks and ask to
speak with someone about their Real Estate Owned properties or REO’s.
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Here are tips to remember when evaluating houses to flip
 There are fewer buyers in a slow market and everyone is looking for a deal. Thus,
it’s important to flip a house that has some style. This will make your house stand
out and attract buyers. For example, a remodeled home built in the 1950’s with a
lot of character is worth more than a plainly remodeled home from the 1970’s
even if they’re next door to each other. Assuming that both homes are similar in
square footage and amenities, if the home from the 1950’s is loaded with charm it
will sell quicker and for more money. The good news is that character can always
be added during the remodel.
 Although a depressed market may not be very active, it can actually be a great
time to buy. This is because a slow real estate market has reduced prices. This
means that the initial investment needed to start is much smaller and less money is
put at risk. The only downside is that you might have to own the house for a
longer period of time before you see any profit. The buy, hold, and rent strategy
works well here.
 All banks are not created equal. Shop around to find the best loan deal because
many banks have different loan structures and closing costs. If you’re a first time
home buyer there could be a bank in your area that will waive the closing costs
altogether. If you already own a home be sure to have considerable equity before
looking to purchase another property, because a home equity line of credit is a
great tool for purchasing investment property.
 Cash offers always take precedence over noncash offers because no financing
needs to be approved to move forward with the sale.
 Do not buy property in a bad location. Everybody knows that real estate is valued
on location. This means that a home with a great view is worth more than a
home facing a brick wall. And a home located on a busy street is worth less than
a home on a quiet street. You can make repairs, replace carpet, paint, and
landscape, but you can’t do a single thing to cure a bad location. Once you’ve
lived in an area for a while you’ll get a feel for which neighborhoods are desirable
and which to avoid. Also, being close to a park, school, or golf course is attractive
to buyers.
 The perfect neighborhood consists of homes that are in excellent condition with
very few for sale. Everything looks well kept and people are out working in their
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yards, walking, or jogging when the weather is nice. If there’s a distressed house
in this neighborhood it’s a prime candidate for a flip.
 Consider the surrounding towns. The real estate market in your town could be
ok, but the next town over could be booming. This is true of many small town
clusters. Ask a local realtor and do your own research to determine which towns
in the area have the most potential.
 A good school system raises property values greatly. Home buyers with growing
families are focused on finding the best school district for their child’s education.
Look for a high graduation rate, high standardized test scores, low student to
teacher ratios, high quality facilities, and great extracurricular activities. Go to
greatschools.org to find more information online. Even better, attend an event at
the school. What’s the atmosphere like? Are the facilities nice? If possible, talk to
some faculty members to get a feel for what the school is like.
 A high crime rate will lower property values. Read the local newspapers to get a
sense of what crimes are being committed and with what frequency. To get even
better information call local law enforcement and ask questions. Tell them that
you’re thinking about moving into the area. Ask if crime is a problem? What
kinds of crimes are being committed? Are crime rates rising or falling? What
areas should be avoided?
 Home prices in college towns hold their value better than non-college towns.
They may be a little more expensive but the demand for housing will stay
consistent. In fact, the demand for housing in college towns will most likely
increase as time passes.
 Avoid neighborhoods with a lot of rental properties because they will likely drag
down property values. Renters know their stay will be temporary. They don’t
have anything invested in the home or neighborhood. So, if the house starts
looking a little run down they probably don’t care. Once this happens, landlords
tend to stop caring and will only do the bare minimum to keep the house
maintained. As the value of rentals decline, so do the value of all homes in the
area.
 Be prepared to look at a lot of properties. It will take considerable effort to find
the right house for flipping. Be patient, research diligently, and be ready to move
quickly when you find a house that fits your criteria.
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 The more subcontractors you hire the greater your role as a manager will become.
It will be your responsibility to watch the plumber, electrician, and drywaller to
make sure they’re doing quality work in a timely manner. The best way to find
good subcontractors is word of mouth. Also, any subcontractors you hire should
be insured. Make them give you proof of insurance with their job estimate.
 A greater profit is made turning a rundown house into a nice house versus turning
a nice house into a premium house. Expensive upgrades don't offer much return
on investment when compared to fixing or replacing worn out or ruined items.
 Schedule to have property insured on the day of closing. Call in advance to have
the insurance start automatically on that day. This gives you protection from day
one. However, many insurance companies won’t insure homes that are vacant or
being remodeled. American Modern Insurance is one company I’ve found that
will insure vacant properties.
 Be sure to get a home inspection if you aren’t well versed in building codes and
potential hazards. An experienced home inspector can spot problems that a
novice might overlook such as asbestos, lead based paint, toxic mold, or faulty
electrical wiring. All of these things will dramatically raise the cost of your
project. A home inspection could save you from making the huge mistake of
purchasing a property loaded with these types of problems.
 There are laws in place that require a homeowner to handle asbestos and lead
based paint in certain ways. Asbestos was used in a wide array of building
materials (from floor tiles to concrete) because of its insulating, fire retardant, and
wear resistant properties. Materials with asbestos are safe unless they’re disturbed
during home renovation or are deteriorated because of age. This is because
asbestos is only dangerous when it becomes airborne. When inhaled, asbestos has
adverse health effects on the lungs that can eventually lead to a disease called
Mesothelioma. Lead base paint is less problematic than asbestos but is still an
issue. It’s toxic when swallowed (paint chips) or when the dust is inhaled (from
sanding). As long as it remains encapsulated by a non-lead based paint it's not a
problem. Like asbestos, it is most dangerous when it becomes airborne. When
removing material with asbestos or lead based paint certain precautions have to be
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taken by law. The law states that each material requires a certain removal and
disposal process. The use of asbestos in building materials was stopped sometime
in the early 1980’s, while the use of lead based paint came to an abrupt end in
1978. All asbestos and lead paint removal should be handled by
professionals.
 Inexperienced flippers should look for homes that primarily have cosmetic
problems. Chipped/flaking paint, overgrown landscaping, holes in the drywall,
and stained carpet are all things that can be easily fixed.
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Negotiations
“During a negotiation, it would be wise not to take anything
personally. If you leave personalities out of it, you will be able to see
opportunities more objectively.”
Brian Koslow
You’re ready to submit an offer and start negotiations once you have done your
research, evaluated numerous houses, zeroed in on a house that fits your criteria,
calculated all costs involved to flip, and estimated the maximum purchase price. A good
negotiator has patience, self discipline, and understands all factors that affect the bottom
line. When it comes to negotiating, the person with the best information always wins.
Thus, learning as much as possible about the seller’s situation and the house’s condition
is crucial to getting a favorable deal. Good questions to ask are…
1) How long has the home been for sale? The longer the home has been on the
market, the more eager the owner will be to sell. However, if a home has been on
the market for a long time there could be a good reason. To be safe, make all
offers contingent upon passing home inspection.
Tip: Make sure to always have title work done when purchasing a property.
If the title isn’t clear you could owe thousands in liens. A lien is a legal
claim against the property so secure a debt from the owner. Contact a
reputable title company in your area to perform a title search. Make all
offers contingent upon a clear title.
2) Why is the owner selling? Do they need to relocate for a job? Have they
purchased another house and need to sell fast? Answering these questions will
help determine how eager the owner is to sell, and the more eager the owner is,
the lower your initial offer should be.
Tip: A lot can be learned about the seller’s situation by being observant
while walking through the property. For example, if the house is mostly
empty or you see things being packed away in boxes this could be a sign
that they already have a new place to live and may want/need to sell fast.
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3) Have there been other bids on the property? If so, how much and what caused
the deal to fall through? Be aware that laws in most places prevent your realtor
from revealing this information to you. However, if you think they may know
this information ask what they think the seller’s bottom price is. I wouldn’t
necessarily take what they say directly to the bank, but it can give some good
insight as to what the seller might accept. This information can also be gained
through casual conversation with the seller if they make themselves available.
Tip: Be patient. There are plenty of houses to buy. If the seller knows
you're reluctant to walk away from a deal then they have the upper hand. If
you want to stay in control, don't fall in love with any particular house.
Also, by staying detached it’s easier to evaluate the situation from a
business standpoint.
When making an initial offer the goal is to offer just enough to get the
homeowner to counter your offer. Thus, your initial offer should be low enough that it
probably won’t be accepted, but high enough that it will be taken seriously. A good
practice is to offer 5 to 15% below the price you’re willing to pay. Doing this leaves
room to haggle, and the number one rule of haggling is to always ask for more than you
really want. Hence, always determine your maximum purchase price for a home before
making an offer and then offer 5 to 15 % less than that. If you're not sure what the
house is worth you won't be a confident negotiator. On top of that, when a great deal
comes along you won't be able to recognize it and your lack of knowledge will be
apparent which weakens your negotiating position. This is why an accurate assessment
of a property’s value is the most important piece of information one can have when
negotiating in real estate (see pages 14-15).
Tip: All offers and counter offers should be put in writing. This gives time
to evaluate the offer, reduces the use of pressure tactics, and (most
importantly) makes the offer legally binding once signed. Make sure to be
clear about what you want and don’t be afraid to get detailed. Everything
is negotiable such as who pays for inspections, repairs, appliances, closing
costs, property taxes, and so on. I have even heard of cars, furniture, and
artwork being thrown in to sweeten the deal.
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The Chosen One
“The three great essentials to achieving anything worthwhile are; first,
hard work, second, stick-to-it-iveness, and third, common sense.”
Thomas Edison
So, you’ve purchased a house and are ready to finally get your hands dirty. But,
how much remodeling do you do? Do you make it as palatial as possible or do the bare
minimum? The key is to make a house as nice a possible without breaking the bank by
using affordable high quality materials that have a desirable appearance. This, coupled
with smart design, will yield the highest return. An example of this is the kitchen
countertop I installed in the last home I flipped (shown below). I decided to use ceramic
tile over formica or a granite slab. I love granite but couldn’t justify using it because
there wouldn’t be any return on investment due to the target price of the home
($135,000). I didn’t choose formica because the tile was less expensive and it looked
better. By doing the work myself, the tile countertop cost around $350. Formica would
have been around $1200 and granite around $3000. This was a savings of $800 to $2600
without sacrificing looks, durability, or functionality. When thought is put into material
and method selection, great and affordable design is a natural byproduct. Research
remodeling ideas, techniques, and materials to find the best fit for your project. Great
places to start are my BLOG frugalhomediy.com , thisoldhouse.com , hgtv.com , and
home design/repair books.
Tip: Find a friend or family member that has a knack for design and ask
them for ideas or help picking things out. Most people will be glad to help
you spend your money.
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Prioritize Your Projects
Profits will be diminished if too much time, effort, and money is put into the
remodeling process. On the other hand, if things are left undone profits will also be
diminished. This is why the input of your time and money needs to be monitored
continually throughout the entire remodeling process. There’s a fine line that needs to
be towed when dealing with what to keep, what to change, and what materials to use.
This is highly dependent on what the neighborhood is like, since the house you flip will
be judged against the surrounding houses in terms of price and amenities. You want to
make the house comparable (or a little nicer) at an attractive price. Consequently, you
don’t want to turn a $100,000 house into a $500,000 house if it’s surrounded by a bunch
of other $100,000 houses. No one will pay that because people who are in the market
for a $500,000 home will want other homes in that price range close by. If you want to
make money it’s important to only invest enough money to bring a property up to the
standards of the neighborhood and nothing more. Thus, you need to prioritize your
projects by order of importance to ensure the most important things get done first.
Tip: Get a permit before starting any project that might require a permit.
If you don’t get a permit and something goes wrong with the work that was
done you could be held responsible.
1) Any structural or mechanical problems need to be addressed first. This includes
the foundation, framing, electrical, plumbing, heating, and air conditioning.
2) Next, replace worn out or broken items that aren’t directly related to the structural
integrity of the house. This includes water drainage, broken windows, a leaky
roof, leaky water pipes, and so on.
3) Finally, start with the projects that will yield the greatest return on investment.
The best value-added exterior upgrades are new or repainted siding, well designed
landscaping, and a new/well maintained roof. When it comes to the interior, the
most beneficial rooms to remodel are the bathrooms and the kitchen. Focus on
giving these rooms a comfortable, usable, and welcoming design. Also, anything
that easily adds energy efficiency yields a high return such as double pane argon
insulated windows, attic insulation, and a more efficient furnace/ac. When
renovating, it makes sense to start at the top and work your way down. Examples
of this are to re-roof before you re-side, remodel the upstairs before the main
level, and paint the ceilings before the walls. Also, identify the projects you will
do yourself and designate a contractor to do the rest.
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Tip: When buying materials don’t just automatically go to the big box
stores, check your local Habitat for Humanity Restore first. Habitat
Restore’s provide a socially responsible way to keep reusable/surplus
building materials out of landfills by selling them to the public. Every
Restore outlet is a little different and you never know what materials they
will have on any given day. This is because they are driven by donated
goods. The proceeds help local Habitat affiliates fund the construction of
Habitat homes within the surrounding communities. Most locations
generally have things like power tools, home accessories, building materials,
appliances, and even furniture. I’ve saved money by using salvaged
materials such as cabinets, sinks, doors, door knobs, light fixtures, fans,
and trim. The key is to sift through the materials and use them wisely.
This is also a great place to take your unwanted items that are reusable such
as old cabinets, light fixtures, faucets, and so forth. Doing this will give a
nice tax deduction at the end of the year.
Stay on Budget
If a remodeling budget isn’t watched closely it has a tendency to quickly inflate.
Thus, money needs to be tracked diligently to prevent overspending. A good way to
monitor spending is to enter your purchases into an excel spreadsheet. Doing this at the
end of every week keeps your budget on track by keeping you up to date on the total
money spent. Opening a separate checking account also helps track expenses.
Commingling the costs associated with different investment properties in one checking
account can lead to confusion and potential tax problems. Be sure to keep all of your
receipts as proof of how much money has been put into the property. When a house
sells, this information is needed for tax purposes to prove your profit (or lack thereof).
Things can get sticky if you get audited by the IRS and have no record of your expenses.
When you invest in a property and make improvements, the cost of improvements gets
deducted from your tax bill. This is why every expense needs to be recorded such as
interest from your loans, utilities, travel, property insurance, property taxes, labor,
materials, and so on.
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Time Management
Set realistic goals to stay on schedule. When doing this just remember that
projects usually take longer than originally thought. Be sure not to rush yourself. Go for
quality over quantity because quality workmanship is something no one can fake. In
addition, working one or two hours a night after your day job makes a big difference
versus just working on the weekends. This will speed up the process greatly even if you
only do a few things.
To keep motivated, set daily goals and concentrate on the smaller picture. Every
day before you start working, set a goal of how much you would like to accomplish for
the day. Doing this will help you get a feel for how long it takes you to accomplish
certain tasks. To build momentum, concentrate on the smaller picture. For instance, if
you’re building a deck don’t worry about all the other projects that still need to be done.
Just concentrate on the deck and take things one step at a time. This will help you enjoy
the work more and keep on task. Every project that’s completed will give a sense of
accomplishment and build confidence.
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Selling
“American business has just forgotten the importance of selling.”
Barry Goldwater
After months of hard work you are now ready to sell your house and complete
the house flipping process. However, your job isn’t done yet. Selling a house should
not be approached casually. It’s a major transaction that requires you to make many
important decisions that will ultimately determine if your flip was successful. Are you
going to use a real estate agent or try to sell the house yourself? If you don’t use an
agent, are you equipped to sell the house yourself? Are you confident you can get top
dollar? Will you need to get a lawyer involved? These are all questions that need to be
answered to determine your direction.
Using a Real Estate Agent to Sell
While the Internet has made it easier to sell houses yourself, the vast majority of
home sales are still done with real estate agents. A real estate agent does a lot more than
just list your house on the MLS. They advertise online, coordinate open houses, mail
newsletters to prospective buyers, and work together to get your property sold. An
agent can help…
1) Save time and energy. You won’t have to spend time advertising and giving
tours of your home. This will give you time to start on another project or just
relax and enjoy life. They will also prepare the massive amount of paperwork
involved in the sale of the house.
2) Gain knowledge and expertise. A good realtor has been trained, licensed, and
understands the market. They will help you determine how much your home is
worth, attract buyers, understand where the market is going, guide you through
any difficult decision you may encounter, and can help you side step any potential
problems.
3) Negotiation. As I said earlier, a good agent can help a lot in the negotiation
process. They can use their negotiating skills to help you get a good price. Also,
having them represent you helps diffuse the emotional aspect of buying/selling a
home.
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4) Decipher offers. If you get multiple offers an agent can help you determine which
is best. All circumstances surrounding an offer must be factored in.
5) Boost the sale price. Usually potential buyers will offer less to someone who’s
not using an agent. They automatically subtract the would-be agent’s commission
(5 to 7%) off the asking price because they believe the seller is trying to save
money by not using an agent. Thus, it’s quite possible an agent will pay for
themselves by getting 5% (or more) for your property than you could by yourself.
There are some drawbacks when using an agent; namely the pricey commission.
Commissions range from 5 to 7 % of the house’s sale price. However, many agents are
willing to negotiate commission, especially if you become a high volume client. Working
with an agent also requires trust. You’re trusting that they aren’t going to reveal sensitive
information to a potential buyer such as the lowest sale price you would accept or how
much money you might have invested in the property. This is why finding an agent
that’s trustworthy is very important.
Finding a Real Estate Agent to Sell
If you liked the agent that you used to purchase the house try using them to sell
the house too. If all goes well they could become your go to real estate agent. This will
help you build a strong business relationship and when they spot a great investment
opportunity you will be one of the first ones they call. However, if you want to use
someone else keep searching. Continue to ask around for referrals. Go to some open
houses and get a good look at how an agent operates. When starting from scratch try to
find an agent who’s a member to the National Association of Realtors because they are
bound by a code of ethics. It’s more important to have a good agent representing you
when selling a home versus buying a home.
Tip: The terms real estate agent, broker, and realtor are frequently used
interchangeably but they’re actually different. A Realtor is someone who is
licensed by the National Association of Realtors and is bound by their code
of ethics. While a real estate agent and a real estate broker are pretty much
the same thing.
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Questions to Ask a Potential Agent
Once you have found an agent you like, be sure to get some additional
information before signing anything. This will ensure you have a good agent
representing you with a track record of success. Some questions to ask are…
1) How many homes have you sold in the last year?
2) What is your average list price to sale price ratio?
This is a ratio comparing the initial/listing price to the price the property actually sold
for. Ideally, this should be close to 100%. Let’s say that a house was first listed at
$100,000 and sold for $95,000. The list price to sale price ratio is calculated as follows.
($95,000/$100,000) x 100 = 95%
3) Can you provide references?
4) How do you advertize/market homes?
5) Are you familiar with my area/neighborhood?
6) Will you be able to refer reliable construction/inspection professionals?
Ask for copies of the listing agreement, agency disclosure, and seller disclosure
forms. Have a lawyer look them over before you sign anything. You will need a lawyer
present during the closing process so you might as well get them involved early. Once
you have chosen an agent, a contract is signed called an exclusive right to list agreement.
This is a legally binding contract for the right to sell your house over a set period of time
for a percentage of the total selling price as their commission.
For Sale by Owner
Selling a home yourself can be tough but you can be successful. You will have to
advertise, schedule tours, negotiate, arrange things like a home inspection, and get all the
paperwork around on your own. Besides the obvious benefit of saving money, there are
other incentives in selling a house yourself. You might be a great salesperson who feels
you can communicate the attributes of a home you have fixed up better than an agent
can. Also, selling properties yourself gives you complete control and there’s no second
guessing if an agent is being straightforward with you. The major drawbacks are that
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buyers generally prefer dealing with agents, the audience who sees your house is much
smaller, and the likelihood of getting the same price you might get with an agent is
lower. Basically, be prepared to receive a lot of low ball offers. The good news is that
you can always list your house with an agent if an attempt to sell it yourself fails. My
advice would be to use an agent until you feel comfortable with the selling process and
are confident in your ability to sell.
Getting the Word Out
The key to selling a house yourself is advertising. Put your home on
forsalebyowner.com and craigslist.com to get exposure over the internet. Newspaper
ads can also work but are much less effective than they once were. No matter where
you advertise, your ads should include basic information like the number of bedrooms,
number of bathrooms, square footage, number of levels, if there’s a basement,
heating/cooling type, number of garage stalls, asking price, your contact information, a
picture of the house, and any other special amenities such as appliances included in the
sale.
Another great way to spread the word is to ask family, friends, acquaintances, coworkers, neighbors, and anyone else that might be interested if they know someone
who's looking for a house. Not only can this help find a buyer, but someone who comes
through a friend eases the process.
Tip: If an agent calls with a potential buyer be sure to have an attorney
prepare a document stating that you don't have an exclusive agreement with
any agent but are willing to pay a fee if the house is sold to a referred buyer.
In this case, the fee is usually half of a typical commission. If you don’t do
this you may unknowingly enter into an agreement that makes you
responsible for the agent's full commission just by letting them show the
house.
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Get a Better Sign
Whether you’re using an agent or not, get a nice for sale sign to help increase your
street visibility like the one pictured above. A sign like this is higher off the ground and
draws more attention. Put it in your front yard where it's visible from the street. Make
sure to include an information box with handouts about your home. The handout
should include all the information that was discussed earlier.
Staging
Properly staging a home before a showing is crucial. Before giving a tour to a
potential buyer the house should be cleaned and free of clutter. If there’s a little bit of
sawdust in the garage, sweep it up. If you have some tools on site, pack them up. Make
sure your trash cans are put away, clear all countertops, and organize closets and
cabinets. Cleaning and removing excess clutter is something that shouldn’t be
overlooked. Putting some flowers on the counter, getting a nice welcome mat, opening
all the blinds to let in as much natural light in as possible, and lighting a nice smelling
candle are additional things you can do to make your house more presentable. If your
house is empty and you really want to go the extra mile, stage it with some furniture. A
rule of thumb to remember is that a sparsely furnished room appears bigger. So, don’t
overdo it.
Choosing an Offer
Your agent (if you have one) should be able to weed out buyers who can't afford
your home by looking at their credit history, debt history, employment status, income,
and the money available for a down payment. If you don’t have an agent, offers must be
examined carefully because the highest offer isn’t always the best. Lower offers can be
superior if the buyer can close quickly, has a large down payment, is preapproved for a
loan, and doesn’t demand a lot of extras. Also, all aspects of an offer must be examined
to prepare an attractive counteroffer. The key is to anticipate what the buyer is willing to
accept. Here are some things to look for in an offer.
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1) Proof of Financing. The best form of payment is always cash.
However, have them get a letter from their bank to be sure they really have
the funds to purchase in cash. If they can’t pay entirely in cash the next
best thing is preapproval from a lender. This means that the lender has
already evaluated all of their assets and deemed them worthy of a loan.
Have them get a letter from their loan officer as proof of preapproval.
Getting these letters is good practice because it proves that you have a
serious buyer and not someone just wasting your time.
2) Earnest Money. Earnest money shows how interested a buyer is
because if they back out all the earnest money is forfeited. So, the larger
the earnest money deposit, the more serious the buyer is, and the less likely
the deal is to fall through.
3) The Buyer’s Existing Home Must Sell First. You don’t want the
sale of your house totally dependent upon the sale of someone else’s house.
If they made a reasonable offer, try countering their offer with one that
keeps your house on the market but provides them with a two week notice
before you sell to someone else. If you receive another offer the buyer
with the original offer will have two weeks to sell their house and match
the other offer you received. Another option is to trade houses with the
buyer. If someone is interested in purchasing a house you fixed up they’re
most likely upgrading. Thus, their house could be a great candidate for
your next flip. To pull this off you need to get the banks, title Company,
real estate agents, lawyers, and anyone else involved on the same page.
There are a lot of things to negotiate in a deal like this, but I have seen it
work with both parties happy in the end.
4) Other Potential Factors. The buyer can also negotiate things like
property tax proration, payment of closing costs, closing date, possession at
closing, appliances, and anything else they may desire. Weigh the cost of
these things against the price they’re offering to determine if it’s reasonable.
When Your Flip Won’t Sell
What should you do if your house has been on the market for a while and the
asking price has been reduced to the point where you would lose money if it sold? One
choice is to lower the price until it eventually sells, but this is a horrible option. Try
renting the property first. This relieves the financial burden of owning an empty house
and can potentially cover all holding costs. In general, real estate prices rise over time.
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35
If you can rent property through a slump its value will climb back to where is once was.
When this happens, place it back on the market.
Closing
So, you’ve found a buyer, agreed to a sale price, and are ready to close the deal.
The closing process is pretty much the same working with or without an agent. First,
you need a title company. A title company examines the title deed (the document that
gives someone ownership of the property) and looks for things such as disputed
ownership, liens against the property, or any other possible issues. If the title is clear,
they give title insurance which guarantees against any loss that comes from unseen
problem with the title.
Next, contact your lawyer or a lawyer who specializes in real estate. Hopefully,
one has already been involved if you signed a contract with a real estate agent. Have
them draw up a contract of sale that specifies details such as the final sale price, any
contingencies due to inspection, the down payment amount, the closing date, the date of
possession, and so on. This helps the closing go smoothly and makes sure you’re fully
covered, legally speaking. Your agent, lawyer, and title company will help you with most
of the paperwork. Common forms that need to be prepared are a purchase agreement,
mortgage payoff statement, settlement statement, homestead exemption update, bill of
sale, 1099-S report, and the deed to the property. After the papers are signed it’s a done
deal. Hopefully you feel like celebrating because everything went according to plan. By
the way, don’t forget to get the utilities out of your name.
Again, this ebook is free and intended to be shared. So, if you like this ebook
please feel free to pass it along to your friends and family. In fact, I would appreciate it
if you could post the link to this ebook (found here) to Facebook or Twitter to help get
the word out. This is easy to do and only takes a second. Visit my blog at
www.frugalhomediy.com for more tips and tricks pertaining to home improvement,
saving money, and anything else I think is interesting at the moment. If you have any
suggestions or changes that you feel need to be made to this ebook feel free to contact
me through my BLOG.
frugalhomediy.com
36
Additional Resources
All books written by Mike Holmes are easy to read and contain a ton of helpful
information like what building materials are best to ensure you get the most bang for
your buck. Click here to get more information on books written by Mike Holmes.
Black and Decker has a great series of home improvement books on a wide range of
topics. They’re well written with clear step-by-step instructions that won’t overwhelm
the reader with detail. Click here to get more information on books by Black and
Decker.
frugalhomediy.com
37
House Evaluation Checklist
Item
Roof
Chimney
Soffit/Fascia
Gutters
Brick Work
Siding
Windows
Skylight Windows
Exterior Doors
Decks/Patio
Porches
Lot Size
General Curb Appeal
Heating
AC/Heat pump/Geo
Plumbing Water Lines
Plumbing Drains
Electrical Service
Wire Type
Electrical Plugs, Fixtures,
etc.
Carpet Floors
Hardwood Floors
Vinyl Floors
Tile Floors
Walls and Ceilings
Bathrooms
Kitchen Cabinets
Kitchen Counters
Kitchen Appliances
Fireplace
Foundation
Basement
Attic
Trim
Other (appliances)
Notes
Great
OK
Poor
x
x
x
Time/days
Cost
Wood or Vinyl
Wood, Vinyl, or Aluminum
Age:
Material:
Type:
Age:
Type:
Age:
Type: Copper, Galvanized, Pex, PVC
Type: Cast Iron, PVC, other
Type: 60, 100, 200 amp
Drywall, Plaster, Wood Paneling, Paint,
Wallpaper
Type:
Field Rock, Cinderblock, Poured Concrete
Is it Finished? Are there Dampness problems
Wood Finish or Painted
Total x (1.2)
x
Warning: This list is not to be used as a substitute for a professional home inspection.
Multiply the total time and cost by 1.2. This adds 20% to the total to account for sales
tax and unknown expenses. Things that might come in handy when evaluating houses
are a flash light, ladder, digital camera, tape measure, and a screwdriver (both Philips
and Flathead).
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The Whole Package
The first step in evaluating a house is to examine it as a whole. Have there been
significant modifications to the exterior? If so, how’s the workmanship? Does the
house have any unique style? Does the house curb appeal? Is the neighborhood
desirable? Are the surrounding houses in good condition? Is the street quiet?
Exterior
Start at the exterior front of the house and work your way around. Start your visual
inspection at the top of the structure and work your way down. As an example, you
would start at the front and note the roof, gutters, fascia, and soffit. Then the brick,
siding, exterior wood, windows, doors, etc. Examine any porches or decks down to
the foundation. Even examine the grade or slope of the lot to be sure it’s sloping away
from the house. Move closer to the house to examine any details which attracted your
attention.
Interior
On the interior, begin your inspection in the basement and follow the systems
(heating/cooling, electrical, plumbing) throughout each floor. Carefully check the
utility room in the basement. The foundation walls are probably visible here. Inspect
the furnace, hot water heater, electrical panel, plumbing, etc.
Possible Problems
The following are typical problems to look for in the major components and
systems of the home…
Roof
Is the ridge (peak) showing sag or is it straight? Is the roof sagging between the rafters
or trusses? Do the shingles show any sign of deterioration such as curling, warping,
broken edges, or rounded corners? Is there any loose flashing at the chimney or roofto-wall connections? Does the wooden roof deck appear rotten under the last row of
shingles? Are there any signs of water damage in the attic or ceilings of the home?
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39
Chimney
Is the chimney leaning? Is the masonry cap cracked or broken? Are any bricks flaking
or cracked?
Soffit and Fascia
Note whether the soffit and fascia are wood, aluminum, or vinyl. Are there any loose
or missing sections? If wood, is the paint in good condition? Any visible rot?
Gutters and Downspouts
Ensure gutters slope toward downspouts. Any rust or peeling paint? Are there any
apparent leaks or loose/sagging sections? Are the downspouts extended away from
the foundation?
Exterior Walls
For masonry, what condition is it in? Are there any cracks or missing mortar? For
siding, determine if it is vinyl, aluminum, or wood. Look for loose, missing, or rotten
pieces.
Windows and Doors
Are the windows new or old? Do they appear to be original? If the windows are
wooden, look for problems with paint, caulking, and rot. If they’re newer, check to
see if they’re insulated double pain. Open and close a few to ensure they work
properly.
Porches and Decks
Note any settling or separation from the house. Inspect the underside if accessible. Is
the wood in good shape?
Foundation
Check for damaged masonry. Note any water markings and efflorescence (whitish,
chalky substance). Is there any bowing, bulging, or other irregularities? Is the mortar
soft?
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Lot Area
Does the grade slope away from the house? Are there any settled/low areas next to
the foundation? Are the sidewalks and driveway in good condition? Is the property
lower than the street or neighboring properties where drainage might be an issue?
Basement
Note any evidence of water problems such as stains, mildew/odors, and efflorescence.
Floors
Are the floors sloping or sagging? Do the carpets need to be cleaned or replaced? Is
the hardwood, linoleum, or tile in good condition?
Ceilings
Check for cracks or loose plaster/drywall. Look for stains that would indicate water
damage.
Bathrooms and Kitchens
Is the tub/shower area in good condition? Are the faucets working? Do they leak? Is
there sufficient water pressure? Is there staining or rot under the countertops? Do the
cabinet doors and drawers work properly?
Electrical and Mechanical
Record the type, style, and age of the heating & cooling system. When was it last
inspected or serviced? What’s the expected energy efficiency? What type of water and
drain pipes are used? Is there any visible rust or corrosion? What’s the size and age of
the electrical service? Are the outlets grounded? Is the visible wiring in good
condition? Are the wires run in a neat and orderly fashion? What upgrades, if any,
have been done?
frugalhomediy.com
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OLD NEW The Frugal Home Flipper

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