xepherys

Hey all...

I'm thinking about flipping houses when I come home. My main goal would be to sit on my capital at first until "perfect deals" came along, such as houses going into foreclosure where the balance on the mortgage is at least $100k less than the value of the home. Has anyone had experience with this? Any tips?

Thanks...

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analog

From everything I've ever seen, heard, or read, you'd better be really handy at pretty much everything... because ANY service you have to farm out (like a plumber or electrician) takes a HUGE cut out of your end.

Also: I hope you like physical labor.

Mister Coaster

Now might not be the perfect time to be buying properties as investments, unless you are able to purchase for WAY under market value. And yeah, like Analog says, its a lot of work and you better know all about building codes, permits and crap like that.

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soma

It seems like the housing market is kind of tanking right now. I'm no expert, but I'd stay away. Especially for a short term strategy like yours.

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pig

i've got a buddy doing this right now in atlanta. he's taken the classes to be a certified building/housing inspector. his gig is to go in with people he knows (his family) to buy houses on foreclosure that he's inspected. live in the house for a year or so and fix it up himself. resell and move. we'll see how he does at it. and analog is exactly correct; you've pretty much got to do the work yourself and be pretty good at it.

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Glory's Sun

Those shows that make flipping look easy give a false sense. Right now the market isn't quite right for investment property. Sometimes you can find decent prices from contractors but you're better off doing it yourself.

The other thing is that you have to develop an equation for you. I have one that I use (of course I can't share that info with you)

If you do that right, you'll make money on the front end as well as the back end..

Do your homework, be prepared and take some classes; just know that no matter what you do, there is always going to be a surprise or two that you hadn't planned on.

DDDDave

My advice as RE guy for 25 years: Go in as a partner with someone who has done it before. The learning curve is very steep. Having the skills to do the fix up is only a small part of the whole process. The other people 'playing this game' have done it before and will know the shortcuts to the best deals. You must have a very grass roots understanding of the market where you intend to operate. RE is a local market. What appears to be good deal in one town will clean your clock in another. There are lots of good foreclosures in the Rust Belt, but guess what, there are few buyers.

" ....houses going into foreclosure where the balance on the mortgage is at least $100k less than the value of the home. Has anyone had experience with this? " This basically doesn't happen. No one walks away from 100K. Most of the deals you find, the people are in fact 'upside down'. I know that is not what the late-night real estate gurus tell you but it is the truth.

Good Luck.

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abaya

My stepdad is doing this, but he's been a carpenter/plumber/contractor his whole life (over 30 years in the trades) and it's STILL a shit-ton of work to do. He barely has enough time to sleep, let alone work on his house and pay the bills with his regular job. He does almost ALL of the work himself, but it's exhausting. Just a thought.

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ngdawg

Depending on what area you're looking at, it could work; on the east coast(mid-atlantic), it wouldn't.
I have seen those shows where people do it and I'm very leery about what goes on. First off, they're buying dumps-small houses that need serious upgrading and the neighborhoods don't look so fantastic most times. They use family members and friends to get the houses to sellable condition and who knows how good the work actually is? Passing inspection doesn't mean the goods are quality.
Second, (and this is just my outlook on it) this trend seems to push the real estate values to unrealistic heights. Granted, the market will only bear what buyers are willing to shell out, but it just seems an inflationary tactic that will and might already be backfiring.
Had I money to invest in real estate, I'd buy lots, not houses and hold onto them for a couple years. House values can and do fall, but land values themselves don't. Buy something that would only be valuable if the house were to be torn down, then maybe you'd have a decent investment. Just my .02.

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woohog1

Another thing, should you decide to go ahead with this idea, sometimes the little things can add more value than you might realize. For instance adding track lighting, or new countertops, or even new carpet can have a mighty big return in the long run. Also fromt the people that I have talked to say that sometimes, you have to be in it for the long haul. It may be hard to sell the house once you fix it up, and you might have to sit on it. If you choose to go this route, keep us posted as to what you find out and the success you have, I wish you all the best.

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Glory's Sun

Land values rise and fall just as often as housing values. Ask anyone in a real estate company and they'll tell you that selling lots is crap. They can't make shit. Again, it's all dependent on where you are as each town has it's own market, but don't fool yourself into thinking buying land is a safe choice.

ngdawg

Well, again, guess that has to do with the area...up here, land is like diamonds...or gasoline Prices may drop a little, but you'll get at least your money back and, more than likely, then some. Developers fight over land up here, probably causing false rises in the value of it. (If you saw what I live in for an appraised value of over $350k, you'd drop over!)
It's a popular practice here to buy large lots with older homes, tear down the homes and build one, two, sometimes 3 new ones, rather than fix them up for a turn-around. And we're not talking acreage, we're talking square footage!!

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eribrav

Sounds like something we might have heard said in Tokyo 20 years ago.

Land values there proceeded to fall for something like 15 consecutive years.

It can happen.

xepherys

To bounce a few of these questions and dig a little deeper, let me respond to some of this:

Being handy: Yes, but this isn't a huge problem. A lot of houses, especially when people aren't selling, but being forced out by the bank, don't really NEED much work. Most people take decent care of their houses, despite what you might see on HGTV.

"No one walks away from 100k"? If they are upside-down, as you put it, many people have no choice. My plan is to move back to the Detroit area and start my business there. A large number of people are being laid off in the area, and lots of people are losing their houses. However, people DO still purchase homes. If I have to sit on a house for a few months and take the capital gains hit, it's not ideal, but it's still profitable.

Planning/simple: If it was simple, I wouldn't be interested. If it was simple, EVERYONE would do it. I'm happy to put in the work I need to, both labor-wise and footwork. I have a few contacts in RE and more than a few friends in labor (roofers, painters, carpenters, concrete guys).

"It's a popular practice here to buy large lots with older homes, tear down the homes and build one, two, sometimes 3 new ones, rather than fix them up for a turn-around.": That sounds like SE Michigan. It might be tough to get in front of the developers, but they don't get EVERY property out there. They are, however, almost ALWAYS willing to buy it from you.

guccilvr: Not sure what you mean by formula, but assuming we're on the same page, I have explicit ideas about my margins, buy-in maximums and percentages for contracting and other "fix up" items needed. I'm also looking in rather specific areas (i.e.- some cities and not others) where people are more likely to move in and less likely to move out.

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Glory's Sun

Don't kid yourself. The houses you are going to find that you can walk into and make some decent money will need repairs. If you buy older houses you have to inspect for asbestos and everything else that is updated. I'll give you an example.. I found a half million dollar house on forclosure.. I go to look at the house and the people had torn the house to shit so the bank would lose money. It would have taken about $150-200k to repair it back to build date status.. I wasn't willing to take that kind of repair on.

Sure you'll find some that you can just slap a little paint on and get your money, but don't get a false sense of security because houses can and will bite you in the ass.

Ilow

From what i hear Detroit sounds like a rather poor place to try to do this. I know there will be lots of properties available, but it sounds like there are few buyers.

Houses cheaper than cars in Detroit
Mon Mar 19, 2007 11:48AM EDT
By Kevin Krolicki
DETROIT (Reuters) - With bidding stalled on some of the least desirable residences in Detroit's collapsing housing market, even the fast-talking auctioneer was feeling the stress.
"Folks, the ground underneath the house goes with it. You do know that, right?" he offered.
After selling house after house in the Motor City for less than the $29,000 it costs to buy the average new car, the auctioneer tried a new line: "The lumber in the house is worth more than that!"As Detroit reels from job losses in the U.S. auto industry, the depressed city has emerged as a boomtown in one area: foreclosed property.
It also stands as a case study in the economic pain from a housing bust as analysts consider whether a developing crisis in mortgages to high-risk borrowers will trigger a slowdown in the broader U.S. economy.
The rising cost of mortgage financing for Detroit borrowers with weak credit has added to the downdraft from a slumping local economy to send home values plunging faster than many investors anticipated a few months ago.
At a weekend sale of about 300 Detroit-area houses by Texas-based auction firm Hudson & Marshall, the mood was marked more by fear than greed.
"These people are investors and they know the difficulty of finding financing. They know the difficulty of finding good tenants. They're cautious," said realtor Stanley Wegrzynowicz, who attended the auction.
HOW LOW IS LOW?
The city, which has lost more than half its population in the past 30 years and struggled with rising crime, failing schools and other social problems, largely missed out on the housing boom that swept much of the country in recent years.
Prices have gained less than 2 percent per year in the five years since 2001, when the auto industry entered a renewed slump.
Steve Izairi, 32, who re-financed his own house in suburban Dearborn and sold his restaurant to begin buying rental properties in Detroit two years, was concerned that houses he thought were bargains at $70,000 two years ago were now selling for just $35,000.
At least 16 Detroit houses up for sale on Sunday sold for $30,000 or less.
A boarded-up bungalow on the city's west side brought $1,300. A four-bedroom house near the original Motown recording studio sold for $7,000.
"You can't buy a used car for that," said Izairi. "It's a gamble, and you have to wonder how low it's going to get."
Detroit, where unemployment runs near 14 percent and a third of the population lives in poverty, leads the nation in new foreclosure filings, according to tracking service RealtyTrac.
With large swaths of the city now abandoned, banks are reclaiming and reselling Detroit homes from buyers who can no longer afford payments at seven times the national rate.
Michigan was the only state to see home prices fall in 2006. The national average price rose almost 6 percent but prices slipped 0.4 percent here, according to a federal study.
The state's jobless rate of 7.1 percent in January was also the second highest in the nation, behind only Mississippi.
HOW MUCH CAN YOU BUY FOR $1 MILLION?
Mayor Kwame Kilpatrick was greeted with applause when he announced last week that
But investors, including some from out of state, proved far more cautious at Sunday's auction.
In the most spirited bidding of the day, a sprawling, four-bedroom mansion from Detroit's boom days with an ornate stone entrance fetched just $135,000.
Dave Webb, principal at Hudson & Marshall, said Michigan had become a "heavy volume" market for his auction firm in recent years, although bigger-money deals were waiting in California, a market he said was ready for the first such auctions of repossessed property in years.
"These people that are buying have got to look at holding on for five to seven years," he said. "The key is holding power."
Even with the steep discounts on Detroit-area properties, some buyers handed over their deposits with a wince.
I'm not sure it's congratulations," said Kirk Neal, a 55-year-old auto body shop worker who bought a ranch in the suburb of Oak Park for $34,000. "My wife is going to kill me."
Realtor Ron Walraven had a three-bedroom house in the suburb of Bloomfield Hills that had listed for $525,000 sell for just $130,000 at the auction.
"Once we've seen the last person leave Michigan, then I think we'll be able to say we've seen the bottom," he said.

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DDDDave

Good article, llow.

Xeph, I admire your drive but listen to the folks who have done this before. Take some courses. I always advise people to take a course on RE Appraising. It will give you a lot of knowledge about the factors that go into value, including analyzing particular markets. I obviously don't know your personal situation, but if I was able to start from scratch, I would start right where you are now, Arizona. There are several good local markets there right now and it is a place people are moving into, not out of.

""If I have to sit on a house for a few months and take the capital gains hit, it's not ideal, but it's still profitable."" I'm not sure what you mean by this. You do understand that the only way you can get by with paying 'no' tax is to live in the house, right? Which basically means you can only do one at a time and your family will have to move often and live in a 'constantly being fixed up' house. If you do one a year, you will pay 15% capital gains tax on your profit. If you buy, fix up, and sell within one year you will pay ordinary income rates and will be categorized by the IRS as a 'dealer'. Depending on lots of other factors, your tax rate will be in the 28% to 35% range.

Once again, good luck. It is a great business but one that you must go into with your eyes open and with an abundance of caution.

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I am just a simple man trying to make my way in the universe...

"Go confidently in the direction of your dreams. Live the life you have imagined." - Thoreau

"Nothing great was ever accomplished without enthusiasm" - Emerson

gar1976

The IRS will consider this self-employment income if you do it consistently (rule of thumb is more than 2-3 a year for several years). This will subject your income to self-employment taxes (additional 15% tax on income up to $100k, 3% after that). Look into setting up an S Corporation to help reduce this tax exposure.....see a professional before you get started.

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xepherys

llow: That article is talking about the actual city of Detroit, a place I would stay FAR away from. I would be working in the suburbs, which aren't quite the same.

DDDDave/gar1976: I'm not sure I agree. Real estate is no liquid, nor are the profits on sale of real estate <30 days after the date of sale. If you reinvest your earning from a home sale into other real estate, your funds are never liquid and are not taxable.

As for everyone, thank you all for the advice. I'm not going into this blindly. I have friends in RE that have talked me through some of it. My father-in-law is an attorney with a great deal of tax knowledge. I understand the risks involved and know that nothing is going to just fall into my lap.

guccilvr - your half million dollar home example. What exactly are you trying to say? I certainly wouldn't buy a home without getting it looked at first. I would NEVER buy a home that required more than 10% of the value in repairs. Like i said, I have explicit numbers in mind for profit, max initial investment, fees and the like. I know it's not easy, I know there's a lot of effort to put in.

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The prospect of achieving a peace agreement with the extremist group of MILF is almost impossible...
-- Emmanuel Pinol, Governor of Cotobato

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DDDDave

Not to be a smartass, but I don't care if you agree or not. Gar is a practicing CPA and I have been in commercial RE for 25 years. Your profits certainly are taxable. There are ways to DEFER these taxes (an IRC 1031 Starker Exchange is one way..) but the key word is defer. There are also very strict rules that must be followed to complete a tax-deferred exchange transaction. These rules are hard to comply with in small residential transactions and require using an exchange intermediary which adds additional costs.

Like I said, take a few classes. That really is the best way to get started in any new business.

Good Luck.

__________________
I am just a simple man trying to make my way in the universe...

"Go confidently in the direction of your dreams. Live the life you have imagined." - Thoreau

"Nothing great was ever accomplished without enthusiasm" - Emerson

yellowmac

I can't speak from personal experience. All I know is that I have a friend in Baltimore currently on his first house as a flipper, and I think it's put a lot of un-necessary stress on him. Just be prepared for all of the consquences.

Also, don't make the same mistakes that this kid did:

http://www.usatoday.com/money/econom...per-usat_x.htm