House Flipping 101: Our weekly 7 step process to buying great rentals

For some reason (maybe I was inspired by the Hal Elrod interview in Podcast 157), I had a particularly productive week last week. It was just one of those weeks where everybody seemed to answer their phones and the systems we have been tweaking for ages finally started falling into place. 

Last week alone, I analysed 50 different homes, 19 of which we personally inspected. We followed up those visits with nine cash offers and had two of them accepted. This article describes what was involved in getting through all that, including the software and apps (most of them free) that we use to get things done efficiently. 

I´m a fan of breaking things down, so I have summarised our weekly routine into the seven steps we take every week to source, analyse, purchase and renovate homes throughout the Tampa Bay area in Florida (although they would apply to any area). 

The aim of this article is to really drill down into the nuts and bolts of buying and owning real estate. While the day to day reality is far less glamorous than the depictions of the popular tv shows, purchasing your own rental properties has the potential to transform your life in more ways than any other investment I know of. 

I want this blog to provide some useful insights to BiggerPockets fans keen to make a living from the real estate business. This article probably describes what many of us actually do every day, including all the number crunching, the hundreds of miles of driving and the financial risks taken in the weeks and months before we present turnkey properties to our end buyers. 

Step 1: Finding and analyzing potential houses

When you first start looking at properties for sale, it is very easy to get overwhelmed by the sheer volume of options out there (see local map above listing more than 1,000 homes currently available in our target areas!). That´s why it´s important to focus on very specific property types, price ranges and locations. It can and should take time before you figure out your buying criteria - it isn´t something you can decide over a coffee on a Monday morning.

Last week (1-5 February) I carefully studied 50 potential single family homes listed for sale in the northern suburbs of Tampa Florida. That included the MLS, Zillow, Craigslist and several online auction sites such as hubzu.com and auction.com. We also get calls every week from local property owners who receive yellowletters from us asking them to call if they are interested in selling their property for cash.

By “carefully studying” I don´t mean reading the listing information and looking at the photos a couple of times. In our office it means inputting details into an in-house designed spreadsheet, which contains more than 70 rows of data on each property. As you´d expect, this includes the basics such as beds, baths, sq ft, year built, asking price and market rent. It also includes fields for outstanding permits, liens, rehab estimates, contingencies, holding costs, closing costs, running costs, map links and much else besides.

Step 2: Visiting the properties

After the initial numbers were crunched, the initial list of 50 properties was whittled down to a shortlist of 19 that were to be personally inspected. After visiting hundreds of them you get pretty efficient at this and we can usually get in and out in less than 45 minutes per door. We use an app called Simple Note to list properties for inspection every day and Google maps to plan our trips as efficiently as possible. Using Google Maps is also helpful to see where prospective properties are located in relation to others we have already purchased.

Draft renovation budgets are quickly calculated during these initial inspections, which usually includes a new kitchen, floors, roof, paint and bathroom vanities. Feedback is provided to me using Viber (either written of voice notes) which also includes observations on the local area. These observations can either be positive (neighbors with nice gardens and clean cars) or negative (neighbors with pit bull terriers and gardens full of junk). My spreadsheets are updated accordingly and 9 of the 19 properties inspected last week were given green lights to make offers.

Step 3: Making an offer

I am not a big fan of verbal offers – I prefer to send a signed document with a proof of funds to the seller or their representative. It shows that we are serious and ready to move quickly. When I first started submitting offers I found the process very tedious and time consuming. You can get very good at it with practice though, particularly if you are using software like Authentisign or Docusign. 

We don´t wait around to make offers either – I will usually send a contract to the seller the same day we visit the properties. The best opportunities are rarely available for more than a couple of days. 

Many of the sellers we deal with are banks, which have their own online systems for submitting offers. As you´d expect from a bank, most are pointlessly inefficient and almost seem to be designed to discourage people from making offers in the first place!

Step 4: Offers accepted

Of the 9 offers made last week, 2 of them were accepted, which is actually higher than average (about 1 in 10 would be the norm). Once the sellers returned the signed purchase agreements, I immediately ordered property inspections from a licensed professional.

We have been working with the same property inspector for a couple of years and he knows we need them quickly. If I order one on a Monday morning, he usually visits the property that same afternoon and emails me the official report the following morning.

These reports (which cost $68 each) contain the following information:

- Dwelling (observations, comments and concerns on the exterior structure)
- HVAC (heating, ventilation and air conditioning details)
- Plumbing system (age of pipes, water heater, valves and condition of appliances)
- Electrical (condition of electrical panels, types of wiring present)
- Roof (type – shingle, tile etc, roof age, estimated remaining life, signs of damage)

The important thing to note about property inspections is that they focus on the non-cosmetic stuff that can actually cost you a lot of money. Anybody can see that a kitchen needs upgraded and you will know the cost in advance. On the other hand, a roof, water heater or air conditioning unit on their last legs could cost you many thousands of dollars. Serious issues with the structure, the foundations or a buried septic tank could cost you tens of thousands to repair.

Of the two inspection reports ordered last week, one of them came back with a clean bill of health. The report on the second property (see image opposite) mentioned that there was aluminium wiring in the house, which will probably mean spending an extra $1,500 on alumi conn fuses to bring them up to code (learned that the hard way on a previous deal!). There were also some damaged water valves spotted.

A layman (even one who buys properties for a living) would probably not have noticed either of these items. As you can appreciate, these are issues that need to be identified quickly – ideally before your purchase deposit becomes non-refundable!

Today we will have to get a professional estimate to address the aluminium wiring and the damaged valves. If the seller is unwilling to renegotiate the price accordingly, we will mostly likely cancel our contract, request a refund of our deposit and move on.

Either way, as we had two offers accepted, we will be visiting both of them again early this week with a general contractor and will spend about an hour with them in each home designing a detailed renovation scope of works, which is inputted online in real time. Again, I will adjust our calculations accordingly.

Step 5: Purchasing the house

Now that our due diligence on the house has been completed and we have a detailed renovation scope of works, it is up to our title company to make sure that clean title is transferred on the day of closing.

If any unpaid utility bills or taxes are found during their searches, they will have to be paid by the seller before the closing date. This sometimes causes needless delays – a property I was supposed to buy on 18th January closed yesterday (8th February) because of an unpaid $150 water bill. 

As usual, the owner (a bank) and the utility company did their level best to make this as complicated as possible. In the end we just lost patience and visited the water company ourselves, wrote them a check, got a receipt, sent it to the seller and told them to get on with it.

Sometimes liens are placed on the property – which is more serious. I recently had a purchase delayed by 6 weeks because the seller (who was broke and going through a short sale) had an unpaid $1,800 credit card bill. Mastercard were able to hold up the sale until the poor guy convinced his mother to pay the bill for him. You´ll also see liens placed by local tax authorities, local municipal authorities, home ownership associations, mortgage companies and even child support authorities.

As you can probably guess, this is an important part of the process and not the time to take your eye off the ball. 

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Side Note
The most high risk way to purchase a property is at a public auction as you will not have any time for any formal title checks or title insurance. You might think you got a bargain for $60,000 only to find that you are on the hook for a $70,000 second mortgage that came with the property. It happens all the time. Professionals can spot the second mortgage in the public records before the bidding starts. Newbies often don´t know where to look.

Starting your property investment career by purchasing at a public auction is a little bit like heading straight for the advanced black rated slopes on your first day skiing - probably not a good idea. You´d be better off starting with the REO auctions that come with the liens already cleared. Then move onto the public ones.
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Step 6: Getting the property rent ready and tenanted
Before I go any further, thanks for reading this far! I´m not going to go into much detail about how to renovate a property as far more qualified people than me have already written about it extensively on the blogs and forums here.  

I will simply summarize by saying that we do whatever is necessary to present the property to our buyers (who are mostly investors) and their future tenants to a higher than average standard. When we list our properties for rent, the quality of the kitchens (usually with new cabinets and granite counter tops), bathrooms, flooring, paint and landscaping are all higher than average for the local area.

To be clear, that doesn´t mean they are nicer than your $400,000 house, just better than the other $90,000 properties in this particular area. Over renovating is a tried and trusted method of losing money on a rehab! 

Anyway, the upshot of our renovation policy is that we get lots of inquiries and the properties are quickly rented. For example, we finished two big renovations in late December and our property manager was able to place tenants in both homes by the 7th of January. Pretty quick right? We are lucky in that demand in these neighborhoods is naturally high. When we advertise a renovated home with great photos and a decent description it will always generate plenty of interest.

Step 7: Selling turnkey to our clients

The whole point of this entire process (the sourcing, the number crunching, the property visits, the negotiations with sellers, spending money on houses in disrepair, dealing with contractors and title agents) is to enable us to provide great turnkey rental homes to our buyers. 

If we keep them happy, then we earn enough to keep the lights on and add a few homes to our own portfolios. That creates passive income, which is what this game is all about.

This isn´t an easy business, so it is important you figure out why you are doing all this work to stay motivated. Keep your eyes on the prize.

Conclusion

Buying rental properties is the best way I know to protect and grow your wealth without subjecting yourself to the volatility of the stock markets and the unacceptably low returns from bank deposits and government bonds.

Right now, we have four properties under renovation and another three under contract. Once I get another two under contract, I´ll take a "break" until we sell a few of them. 

Finally, just to prove to you folks in New York and San Francisco that you can build a real estate business from anywhere - I have been doing all this from the comfort of a home office in Madrid (in Spain) for the past 7 years.

You need local partners, but don´t let a little geography get in your way of making things happen.

Good luck!