Flipping properties, or turning them over quickly with or without renovations, appeals to investors who want to realize their profits without delay. The concept of flipping is simple to understand at first glance: get a property under contract or buy a property cheaper than you sell it, including the cost of renovations. It may sound easy and straightforward, but each of these steps can be complicated and there are key things you should know before you use this real estate technique.
If the property you are interested in is an REO (real estate owned), or in other words owned by a bank, then there are certain rules that may apply. If the property is owned by Fannie Mae, Freddie Mac or HUD, there will most likely be deed restrictions, forbidding the property to be sold for greater than 10% of it’s purchased value within 90 days of it’s purchase date or a restriction of the deed being transferred within 90 days of purchase. Some of these rules may be changing, but as of this writing, that is how it stands. Although there are still techniques to get around these restrictions, they are way beyond the scope of this post and not for beginning investors. For the beginner, properties like these, although sometimes quite undervalued in a market, are not ideal for wholesaling. In wholesaling, the objective is to pass the property off of your hands as quickly as possible before there are any ongoing costs to owning or controlling the property (like the mortgage). With the 90-day restriction, the profits you can make from wholesaling REOs are very limited without using advanced techniques.
However, REO properties do make great candidates for rehabs. Renovations generally take anywhere from four to eight weeks, so by the time renovations are completed, the deed restrictions are very close to the end of their limitations. The only limit to the sale price then is what the buyer will pay. In addition, you have demonstrated increased value by the renovations completed forcing the value of the property upward. When dealing with REO’s, make sure to get a reputable home inspector to inspect the home, chances are the former owners did not maintain the upkeep of the property. Furthermore, if the house has been vacant for some time, many items may have fallen into disrepair.
Another key consideration when dealing with quick turnover is that your profits are VERY dependent on the initial price you pay for the house. Before negotiating with a bank or other seller, work the numbers to determine the absolute amount you would spend to purchase. During the negotiations, do not let the seller pressure you into spending more than that number. It will eat into your profits and may make the ordeal not worth your time. If you cannot get the house at a price that makes sense to you, walk away. If you’ve accurately run your numbers, then the unfortunate investor to buy that house will not get an adequate profit out of it either. Keep those things in mind and flipping an REO will be a smoother and more pleasant process.
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Based out of Indiana, Jay Redding is a real estate entrepreneur, with experience in single family and multi-family investing.
