We have all probably watched an infomercial about becoming a real estate entrepreneur/investor to make a ton of money, right? Or maybe you've seen those signs on freeway ramps "looking for investor apprentices". Now we can't even watch our favorite Youtube playlist without being interrupted by some real estate guru who taunts us with his "proven system" to make money in real estate. Not to mention all those HGTV shows about home flippers!
Just to make sure we are on the same page, a flipper is someone who buys property and resells it as soon as possible for a profit.
Well, here's my take on becoming a flipper.
Flippers try to buy homes for a price below market value. They usually aim to pay no more than 70% of the home’s fair market value typically from financially distressed sellers. In a hot real estate market they may go over this formula as they hope that the improvements they do to the property and the rising market will yield a profit.
Well funded flippers may pay cash for properties at trustee sales. Trustee sales are foreclosed homes being sold at a public auction usually at a courthouse’s steps and investors most times have not seen the interior of these homes.
This is a very simplistic explanation of how most investors operate and it’s not intended to be an in depth discussion about how flippers operate.
Now let’s move onto those investors’ offers to teach you how to become an investor.
Be very careful before you spend your hard earned money on one of those "proven systems".
I'd bet most of these are just a waste of your time and money. Just use common sense. If this is such a good program why is this person willing to share it with everyone who is willing to pay a large dollar amount for their materials? Maybe that's how he/she will be making the money.
Educate yourself first.
Before you invest a single dollar in a property, do your due diligence in learning all you can about the local real estate market, acquisition costs, rehab (repair) costs, holding costs, and selling costs. Research also tax liability on any potential profits. One of my employing brokers who did well with his flips once told me "Ignorance and greed is what pop people the most, and when combined it's even worst". Which brings me to the next point.
Don't be greedy.
Greed can cause us to make irrational decisions. Re-read the previous point and remember "a fool and his money are soon parted".
Understand that this endeavor takes a lot of time and commitment on your part. It will take time to find a good property to invest in specially now that the market has softened. It will takes time and money to rehab a home and it is usually more than budgeted for as something always seems to come up during a rehab. If you have a full time job, ask yourself who will oversee the work being done? Who will contract the person(s) to do the work? What will the cost of repairs and upgrades be?
You still want to do this?
If you still want to get involved in flips I’d suggest you hook up with a real estate agent who has either done flips or represented investors in the past. This could be one of your most important allegiances in your endeavor. Not only will an experienced realtor be instrumental in guiding you to avoid potential pitfalls but also in helping you save thousands of dollars in costs and in selling expenses over the long run and make sure all legalities are covered.
I have personally done only one flip which had very cosmetic repairs and no upgrades were done. There was just a little profit in a couple of months and it was a good experience. I do not look for flips for the reasons mentioned above and another very important one; as a realtor I have a fiduciary duty to any person that consults me and not only would it be a violation of this duty if I elected to buy a property at a substantial discount from a person, but also very unethical.
There have been a couple of instances where I tell clients in financial distress that they can, and will, get a lot more profit if they list the property for sale instead of selling to an investor who “is trying to help them out” by offering them a quick cash sale or cash for equity type of deal.
I hope that this makes you think carefully about getting involved in flips and you do your due diligence and spend a lot of time doing the research and work required before you spend your hard earned money on one of those “proven systems” or worse yet, that you get involved in a bad transaction.