No Experience, No Problem!
Don't worry if you have no construction or maintenance background, you can still buy and sell houses without having to do any major repairs yourself which allows you to make good money quickly in the real estate market. No experience, no problem.
To understand what risks an investor takes, let me first explain what they are doing. There are basically two ways to flip (wholesale) a property. First, is the fix and flip method which typically involves more extensive remodeling to take place before the house can be sold to an end buyer who will actually live in the property.
This strategy is what is typically portrayed in all of the reality shows that have become popular in the past couple of years such as Flip This House, Flip That House, Property Ladder, etc.
Behind The Scenes - What Really Happens?
What the reality shows fail to share with viewers is the behind the scenes action which takes place in order to actually find a profitable deal in the first place. Most of the so-called 'investors' portrayed on TV usually like to throw out figures which represent their purchase price, expected fix up costs and anticipated sale price but they never seem to disclose how they actually found the deal.
Viewers are left in the dark and only see various phases of the remodel and then the investor concludes the show by stating how much profit they think they'll make. These excluded details leave the viewer thinking that they can easily do the same as seen on TV. Typically, this is not a good idea.
Okay, the second method of wholesaling (flipping) a house is the preferred strategy for seasoned investors as well as novices who want to only focus on finding deals and moving on to the next one quickly, not getting bogged down with expensive remodels that often take months to complete and a ton of cash reserves.
Breaking It Down - Step By Step
Okay, here's a basic primer on the behind the scenes of wholesaling or flipping a house.
An investor finds a property s/he can buy and resell for a profit quickly using various search strategies. Once the property has been located and a deal has been made with the seller (homeowner), the investor then offers the property for sale to either another investor (in the case of a complete junker property) or to an end buyer if the house only needs light cosmetic work or can be sold in its as-is condition to a hopeful homeowner.
Investors can usually find a buyer in a timely manner or already have someone in mind that is looking for that particular type of property. This simultaneous transaction can oftentimes be accomplished by a double closing through a title company who understands these types of deals.
The Nitty Gritty Of It - A Case Study
These are usually properties in pre-foreclosure status but not necessarily. The home owner is motivated to sell for whatever reason and needs to get out from under the mortgage to save his or her credit, etc. The buyer is offered the home at a little (or a lot) below market value to generate a fast sale.
The investor is then basically a middle man at this point, simply locating a seller who wants to sell and a buyer who wants to buy but remains a principle in the transaction to avoid being mistaken for brokering without a license. She or he then gets paid the difference between the asking price of the original seller and the selling price of the new owner. For example, a house has a retail value of $200,000 and the investor agrees to buy the property for $120,000 because of the seller being highly motivated to sell.
The seller agrees to this price because he has to get out from under the mortgage before the bank forecloses. The investor then markets the property for maybe $130,000 and finds a new buyer willing to pay that price. If the investor agrees, the deals are closed with the investor pocketing $10,000 for doing nothing more than knowing what to do and setting the deal in motion. There are other fees and out of pocket expenses, but in the long run, the investor has made a nice, quick profit using none of their own cash or credit in the process.
Not So fast!
That's how it is supposed to work in a perfect transaction. In reality, when an investor is flipping real estate, there are complications which can surface costing quite a bit of money. For example, the seller may not have disclosed a tax lien, second mortgage, or equity line of credit. At that point, the cost of the house just went up. Your buyer may not have good enough credit to obtain the loan as it was originally quoted. You did check ahead of time, right?
The investor may be forced to pay points to lower the interest rate for the mortgage to be accessible to the new buyer. At that point, the selling price just went down. Then there is the problem with the lender or title company not being willing to do a double closing. Unfortunately, the deal just crumbled before your eyes.
In the real estate investing game, it's important to remember that when an investor wants to start flipping real estate, the best way is the old way. Buy the vacant house. Fix it up and find a buyer quickly. Then put it on the market for a reasonable price. Pocket the difference.
This is a more stable way of doing things when investing in real estate if you have a firm understanding of remodels or a basic construction background. However, rules were made to be broken and you may be willing to do just that if the potential profit is high enough.
Remember The Boy Scout Motto - Be Prepared!
In closing, remember that you should always be prepared for any crisis when it comes to investing in real estate. Understand that houses can be vacant, which means you are responsible for the payments, taxes, and insurance until you sell the house if that's what you promised the seller.
The key to profiting in real estate is to put as little into the house as possible and sell it for the highest price available - quickly. The danger comes when you try to over price a house in an area that will not support it. When it comes to flipping houses, common sense and a clear understanding are the best insights to profits.
