Banks require a preliminary title report on all real estate transactions. The preliminary title report serves many functions, but one that could cause you to loose a great deal on your next investment is the Chain of Title.

Most lenders require a title company to give them a 24 month chain of title. This simply is an overview of all individuals or entities that have owned the property in the last 24 months. Investors should pay careful attention to the property they are buying and who has owned them previous to the sale.

Some lenders and loan programs only allow one other individual to own the property in the last year. Banks look at the flipping of properties very closely. If a property is flipped too many times they may decline the loan. They could also ask their borrower or loan officer to provide documentation that the transaction is at arms length (the transaction is between unrelated parties).

The reason Banks pay careful attention to the 24 month chain of title is fraud. There are markets that the value of homes have been artificially inflated by properties moving from one borrower to the next with $10,000 to $100,000 added to the purchase price each time. There are reported cases of properties being sold to buyer A, then to buyer B, then to buyer C, then back to buyer A, and then to buyer D. All the parties were related in some manner and this fraudulently drove the price and demand up for the property. Although this generally does not happen in a down market, the flipping of properties is closely scrutinized by both lenders and title companies.

In a down market foreclosures can change hands several times in a short period. Unfortunately there are lenders that only allow a property to change hands 1 or 2 times in a year. If your property has changed hands frequently you may be looking for a new lender.

The good news is there are several lenders that only look at the chain of title and do not hold it against you. A couple things they look for is almost common sense. Are the transactions at arms length and what are the increases in purchase price from buyer to buyer? If the transaction is fraud free it will be no problem.

How do you know which lenders and banks have no issues with chain of title? You don’t. Your loan officer or loan broker better, when interviewing your loan officer this is a question you should ask about. Most loan officers that have a track record with investment properties (and fix and flips) know the challenges and answers to chain of title and at arm length transactions.

If you're new here, you may want to subscribe to our RSS feed or sign up for our real estate social network. Thanks for visiting!

Tags: chain of title, finance, flipping, investment property, loan, mortgage, real estate, real estate investing, title

In previous weeks we discussed rehabbing a home for personal use (Getting Started In Rehab) and rehabbing for use as a rental (Rehabbing a Rental Property). This week we will look at rehabbing with the intention of flipping. This is, by far, the riskiest of the three. However, it can also be the most lucrative if you do it right. The key word here is “if.”

Swimming in a Pool of Sharks

When rehabbing to flip it seems that every problem is magnified. Never mind Murphy’s Law, in rehab it seems as if Murphy has moved in with you. The most pressing problem is usually your holding cost. This is especially true if you are using hard money financing. You also have the risk of the market changing during the course of your rehab. It may not be as easy to sell as you thought or had hoped. You may experience weather-related delays or problems finding the necessary contractors.

Sometimes you can experience something that seems to come from out of the blue. Shortly after Hurricane Katrina hit New Orleans I was rehabbing a house in Nevada. I was nearing completion and I needed about 10 sheets of drywall. I went to the only lumberyard in the area and was told that they don’t have any sheetrock at all. When I asked when they expected to get some in, I was told that a delivery was coming in on Tuesday. I figured that wasn’t too bad since it was Saturday. Then I was informed that the load that was coming in had already been sold. I could reserve some from the next delivery two weeks later! It seems that all available building materials were being diverted to Louisiana to help in their efforts to recover from the storm. I had to drive 250 miles one-way to find the material to complete the project. All told, I lost about three days. That may not be much time when you are working on your own home, but when working on a flip it can be a huge problem.

Time Is Money

Managing a rehab project can drive you crazy enough to think that you are hearing voices in your head. What you should be hearing is a ticking clock, like the one on 60 Minutes. Every tick you hear just cost you money. Contractor doesn’t show up…tick, tick. Failed an inspection…tick, tick, tick. Unexpected problem arises…tick, tick, tick, tick. Project is behind schedule and another mortgage payment is due… tick, tick, tick, tick, tick…BOOM!

Effective management of the rehab is the key to a successful deal. If you do this part poorly you will feel it in your wallet. Some important points are as follows:

Tags: flip real estate, flipping, real estate investing, rehabber, Rehabbing

You want to rehab houses, but where do you start? We see the fix-and-flip “reality” shows that, somehow, manage to have no basis in reality. How hard can it be to buy a house, rehab it, sell it, and retire to a life of luxury on the French Riviera? On TV, it all happens in thirty or sixty minutes. Easy, right?

Before you start it is imperative to have your own financial house in order (See last week’s article. ). Jumping into rehab without a solid foundation will make it very difficult, if not impossible, to succeed.

Choose Your Weapon

Rehabs fall into three basic categories: personal use, rental, or flip. Each type carries a different level of risk. My recommendation for most people is to start by rehabbing a house for their own personal use. It carries the least amount of risk since you will not have the added carrying cost of a second property. If you live in the house while you are renovating it, you just have your regular living expenses.

There are other advantages to living is a house while rehabbing it. You do not have the same time pressure. When you are rehabbing a property with the intention of flipping it, you are losing a little piece of your profit everyday. Holding costs are a ticking clock, time is money. When you experience a delay, you lose money. If the market makes a quick sale difficult, you lose money. The risks associated with flipping are enormous. The current real estate market conditions just make it worse.

Make It Your Own

When you are renovating a house with the intention of flipping, you need to keep the end user in mind. This usually means making conservative choices that will appeal to the widest number of potential buyers. If the house is going to be your residence you have the ability to incorporate your own personal taste. If you want purple walls with a pink ceiling, then go for it. Rehabbing a house for your own use allows you to create a home that fits the way you live.

You still need to keep resale in mind if you have any intention of selling in the near future. Determine what you resale timeframe might be and work with that in mind. If it is going to be a long-term hold you should do whatever makes you happy and fits your lifestyle.

Learn As You Go

No matter how much you study and prepare, first time rehabbers will make a lot of mistakes. It’s much easier to learn from those mistakes if you are not under the constant pressure of having to complete a flip. My first rehab was a major learning experience. I had the luxury of time. I was able to take the lessons learned and carry that knowledge forward into future projects. If that first rehab was intended to be a flip I would have lost a lot of money and it probably would have been my last project.

Instead of trying to earn a bazzillion dollars on your first deal, look for one that can propel you to future success. Start small and keep the project within your ability. With each success you can move into bigger and tougher projects. As your ability grows, your profits will increase and your profits will soar.

Happy rehabbing!

I honestly think it is better to be a failure at something you love than to be a success at something you hate. - George Burns

rehab, houses, flip, rehabbing, renovating, home

Tags: flipping, investment real estate, Rehabbing

In the last few years it seems society has gone house-flipping mad. Every time I turn on the TV there is yet another show illustrating the ease in which anyone with a heartbeat can make a fortune buying a beat-up house and turning it into a beautiful modern-day wonder.

Often at the end of these shows they hold an open house and with great ease procure a buyer and close the show by sticking a SOLD sign in front of it. Then of course they do a cost breakdown for you and show you the huge amount of cash they made in just a few weeks. The speed at which some of the homes are turned from trash to treasure can be nothing less than amazing at times. Personally I wouldn’t want a home that’s been overhauled in a race against the clock, but that’s just me.

Unfortunately, as with most reality shows, there’s just not a lot of reality to it. They omit financial burdens such as interest rates, excise taxes, escrow fee’s, and of course commissions paid to any real estate agent that may procure a buyer. These costs can easily cut the “profit” in half for most of the homes I’ve seen flipped on these shows. I recently had a client call me to proudly tell me about a home they found that they felt (based on watching these shows) would turn them a 40k profit when completed. Once I went through and explained the additional cost they would incur in selling it, they said “well shoot there’s no money at all in it”.

My philosophy is that if there isn’t at least an obvious 100k profit to be made before taxes, fee’s and commissions, you’re working for free at best, and losing money at worst. With today’s sluggish sales, it’s a real crap shoot. Do not make the mistake of believing you can replicate the results seen on TV. Much of what’s shown is pure trickery.

A&E recently pulled all re-runs of Flip This House that feature Atlanta businessman Sam Leccima, who stands accused of fraud regarding the homes he “flips”. Buyers claimed his fixes to the homes were temporary patch jobs and he is also accused of having friends pose as potential buyers so he could slap a ‘Sold’ sign on his flipped homes, some of which he apparently didn’t even own.

Finding Flips at Trustee Auctions

I’ve also had many clients in recent months ask me how they can buy foreclosed homes at Trustee auctions, because they feel that’s a great opportunity to flip a house at maximum profit. My answer is quite simple; if you want to buy a home you haven’t walked through, haven’t had inspected or appraised, and you want to pay cash for it, that’s the best way to do it.

Many such homes being sold at Trustee auctions weren’t simply lost to the bank by hard working honest people that got down on their luck. Often (more times than you think) these homes were part of straw mortgage scams and were intentionally abandoned. In a straw mortgage the buyer secures a FSBO (for sale by owner) property, then gets an unscrupulous appraiser to “push value” and borrow over and above the purchase price, pocket the difference, then walk away from the home.

The home you think your getting at 80% of the purchase price is actually worth about 70% of what was loaned on it, thus your already paying 10% more than its worth before you even begin repairing it. Therefore, before any of you jump into the house flipping business with delusions of easy money, beware of the pitfalls lying-in-wait for you. Anything that has the potential to make you a fortune has the potential to lose you a fortune. Don’t believe everything you see on TV, and don’t believe all of those homes sitting on Trustee’s web sites were truthfully bought for the amount financed.

I would suggest you practice by remodeling your own home first and get hands-on experience, and if you can’t afford to lose the money you would be required to invest, then you need to walk away.

Don’t let your Flip, become your Flop.

Tags: flipping, house-flipping, real estate, real estate investing, remodel

Those crazy guys at Flipper Nation premiered the latest episode of their web comedy.

Check out:

Flipper Nation: Episode 3: The Flippin’ Fight

If you liked this episode, check out Episode 2!

Tags: David, David-Kimball, episode, estate, flipper, flipper-nation, flipping, itunes, Kimball, Nation, partnership, partnerships, podcast, real, real estate, realestate, Richie, Richie-Tatum, Tatum, web_comedy