It’s no secret that the house flipping industry is booming. We at Rehab Financial Group and others of our ilk have had a front row seat for all of it. We’ve had a front row seat to the hidden gem success stories, the “sure-thing” disaster projects, and everything in between. Sometimes there is no telling what can happen when flipping a project, but like all good investors of any field, mitigating your risk as much as humanly possible should be priority number one and you can start by asking a question which echoes in the offices of conventional, hard, and private lenders around the nation, “How do I get started?”
The first step before contacting anyone is to evaluate yourself. Develop a business plan which asks questions about yourself, your surroundings, your network or team, legalities in your state, county, and city. Do your strengths translate well in the flipping business? Can your weaknesses be brought up to speed with your strengths? Can a partner make up for what you lack and if so, is it worth bringing one on monetarily? What’s your location and how does it benefit or hinder you in your real estate endeavors. Some may think business planning to be a trivial task while the real estate world is snatching up property after property, turning profit after profit, but it is a vital building block in maximizing your earning potential. Plan for challenges along the way and develop plan B’s, C’s, and even D’s because some unforeseen problems will surely materialize along your hopeful path to success. All of this can be done before dialing any lender.
Pre-Approval and Assembling Your Team
Pre-Approval is a great way to start. Most lenders can approve you financially before you have even looked at a single property to ensure that when you do indeed start looking, you know you have financial backing and what the monetary ceiling is. Of course, some lenders are better than others, but some are just objectively better to use with certain properties. If you have limited cash but a healthy income, it may be worth taking on higher interest rates with no pre-pay penalties to obtain 100% of your purchase and rehab. If cash is the least of your worries and you can afford the down payment some lenders require, it may be worth a search for 80% of purchase and 100% of rehab programs. You can now see why knowing yourself and business planning in the beginning is so important. Research the programs you find online or at real estate meetings and pick the ones that fit your financial situation and business vision.
Business vision is a good segue into assembling your team. Your team should, at the very least, consist of a realtor, contractor, and lender, unless you are one or all of these. As you grow, you’ll have teams of contractors, multiple lenders that are best for certain projects that you choose, and a plethora of realtors ready to do your bidding. For now though, you’ll aim small and miss small, as the old adage goes. It should go without saying, but research anyone you plan on bringing aboard. Ask for references for all positions, get bids and average time per project from each contractor, and make certain your realtor specializes in REO. Research all lenders and be sure they are legitimate. You may not be experienced in any of these fields, but a team that fits your vision can be the remedy for any deficiencies you have.
Searching for and Evaluating Properties
There’s really no checklist to go off of when searching for properties. You may stumble across one walking down the street. You may meet a wholesaler at a REI Group meeting who has a great deal for you. Starting out, you should be in constant communication with your realtor to get the latest on neighborhoods you plan on investing in. You should attend real estate group meetings whenever you can in hopes of getting in contact with wholesalers or various other people looking to make a quick buck by tipping you off on a good property. Also, start with the free internet sites. With today’s media vehicles, it is becoming much more convenient to find listings that would make profitable house flipping projects. BankForeclosedListings.com, ClassicProperties.com, and BankForeclosureSale.com are just a few of the many available to an investor. Finally, if you really want to be old-school about it, simply drive around the neighborhood you want to buy in. Look for the run down homes and then search land records to identify the owners of the property and reach out to them by mail or telephone with an offer to purchase the property. Our customers have reported that all of the above mentioned styles of searching for properties have had an above average rate of success.
The next step, of course, is whether the property is worth investing in. This depends on your financial position, which lending program you decide on, which exit strategy you choose, and much more, but let’s keep it simple with calculating After Repaired Value. Simply defined, the After Repaired Value (ARV) is what a property will be worth when the rehab is complete. Location, amenities, finishes, and upgrades can all have an effect on the ARV. Some of the most popular ways one can go about finding out this information is: order an appraisal, check out websites like Zillow.com or Realtor.com, or asking a realtor for a Comparative Market Analysis (CMA). The latter two are most commonly the very first step in determining ARV. When using the sites, find three similar sold properties as close as possible to your property. Try to find properties that have the same proximity to things like public transportation, shopping, and schools as the property you are considering. Determine the average price of the three properties and the average square footage of each property. Then divide the average price by the average square footage to determine the average selling price per square foot.
Next, multiply this price per square foot by the square footage of your property, to determine its value based on the square footage of the property. Basically, you’re calculating how much a square foot is worth in the neighborhood. Ordering an appraisal will cost you money and a CMA is done by a realtor so we won’t touch on them as much, but know that they are viable options. Remember that flipping a house is a business and nothing will impact your profits more than understanding and maximizing the gap between your investment (purchase and rehab costs) and the ARV.
While the real estate investment industry is growing and many people just like you are making healthy profits, the logistics of it all should not be taken for granted. Investors are making money because they are planning ahead and reading article such as this to ensure that they are on the right path. Starting out in any business is always difficult, no matter the nature of the business. You assume a ton of risk and liquidate funds that have been hard earned. But let it be known that if you do the research, you’ll put yourself in the best position to succeed in this booming industry.
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