There’s no denying false appreciation brought out the brave, arrogant, and opportunistic speculators. It was the age of a Tulip market crisis, only about 400 years later.
Personally I’m glad to see the “easy money makers” leave; it let the crème rise to the top. But, time and a quite roar of rumors softens the memories of a harsh past. “Could real estate be back?” is echoing through counties across America, to the tune of an 11.6 year over year price increase according to the National Association of Realtors. And, inventory levels are back down to pre-apocalypse levels.
So, flipping is becoming sexy again. Truth is, it’s still been around this entire time, the game was just different. According to RealtyTrac, the average profit on a flip in 2012 was $37,375 (as defined as any house bought and sold for a profit in less than 6 months time). What’s normal in your market of course may be different, as this was from a national perspective.
Nonetheless, the majority of the damage has been cleared, and the media is shouting the bust is over. Nothing sells papers, magazines, and homes for that matter more than behavioral economics. Markets don’t happen to people, in my belief…people make markets. Getting off my economist soapbox though, the rules of the Flip Game have changed. Easy money, complete ignorance, and no remodeling/rehab doesn’t cut it anymore.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
#1) Flip in an Area that Makes Sense
The fundamentals have to be in place for your opportunity to be prime, of course. If you live in an area where the foreclosure process can take the better part of a year, demand is low, and costs are high, the chances of you being successful at the business model become diminished. If your area isn’t moving and shaking, investing somewhere else in the country may make more sense.
Researching emerging markets and pockets of the country where price prices are rising, sales are steady, and demand is high can host the ideal spot to purchase, fix, and sell quickly for large profits. If you’re unsure of if your market is ripe or not, it’s better to pick a small area to research and start small. Talk to agents, other investors, and read online about the local economics there. It’s one thing to say “Arizona is a good market to buy” vs “Glendale, Arizona, has the specifics I need to have a successful buy and sell business model.” (don’t base any decisions off that statement, by the way. I am mostly in the East valley of Arizona and only used the city as an example).
Thing is, what makes the fundamentals alluring will also create more competition, so your marketing costs and time between deals may be higher.
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#2) Actually Have Money
I say this jokingly, only to shake my head at the fact “investors” were purchasing homes with absolutely no skin in the deal. But, I can’t blame buyers for being opportunistic when the products were being created by seemingly intelligent decision makers.
Regardless, no money down real estate is now going to mean, you’re finding deals and spending your efforts. It may take a money partner (or three) to fund the deal and share in the profits, but gone are the days where you’re purchasing a home with little more than a signature and a smile.
Hard money lenders are going to require at least 20% of the purchase price from you, plus potentially a personal guarantee, if not other collateral. Plus, you will have to fund rehab costs, interest payments on the loan, and other related expenses.
If you’re planning on purchasing homes to fix and sell quickly on traditional loans, it is going to make you much less competitive. Not to say it can’t be done, but if the Seller’s home is in foreclosure and other buyers are aware of the opportunity, cash will be king. If you don’t have any, find someone who does until you earn enough to start pitching in. Until then, you’re a professional bird dog or partner.
#3) Hone in on Your Rehab and Budgeting
With a shortage of inventory and rising prices, it may be hard to get a decent discount on a property unless it’s in pretty bad shape. This alone may be enough to scare off those new to the business.
Ceilings caving in, additions that may or may not be permitted, and a host of other non-cosmetic problems are not for the faint of heart, or the undereducated in construction. If you’re relying on your friendly Big Name Fix Up Store to hire contractors to fix all the problems, say hello to a hellacious mark-up on labor and costs. You don’t know what you don’t know, but hope is not a strategy now, folks. Knowledge and budgeting, are.
The least of what needs to be done could be:
- Kitchen remodel with new appliances and similar upgrades as other homes in the area
- Fresh paint
- Low E windows and features
- New high-end looking flooring
- Making sure electrical, plumbing, heating, AC and roofing are repaired and up to code
- Creating curb appeal
- Professional photos & staging
Measure twice and cut once; research other retail homes in the area that have sold in the last few months and stick with improving the same they did. Don’t fall in love with what would look “SO good in here!” – this isn’t your home! Budget, budget, monitor, and budget. Soon you’ll learn to gauge the neighborhoods and area and find cost effective products and labor to bring your expenses down. But if you want to get and stay in the game, these elements are critical to your staying power.
There’s always opportunity in real estate for the risk takers and hard workers. One thing I love about this business is that there’s a 100 ways to slice it, and it’s ever changing. What makes it challenging though also makes it rewarding, monetarily and otherwise.
If you’re getting into the Buying & Selling game, the world is still your oyster. But, preconceived notions and stories from 2007 on how much profits so and so made back then need to be forgotten.
This year could be a game changer for you, so long as you adapt to the new rules of the game. Being the ambitious and keen reader I know you are, you’ll happily embrace the now and take control of your own destiny. Here’s to your success!
What other rules do you see now for flipping houses?
Photo Credit: Mariano Kamp