ArticlesFinding the Top Secret Flipping Formula
If you are a beginner in the real estate investing field, you may be looking for the top secret formula for making money flipping homes. Perhaps a kind of roadmap for success?All you have to do is follow steps 1 through 5 and you are guaranteed a large profit!
The reason it is so difficult to find that formula is not because people are afraid that they will lose money if you learn their secret. On the contrary, most real estate investors are happy to give you tips. All you have to do is ask.
So why hasn't someone created a step-by-step guide outlining the process? The reason I believe most real estate investors won't share this so-called "top secret formula" with you is because it doesn't exist. Each formula for success is customized for that individual investor. Sure, you can find articles that give you guidelines, but you always finish that article looking or more. So while it's true that many investors will share their tips and tricks, very few will tell you exactly how they do it, in a step-by-step manner.
I am happy to share the steps I use to make money in real estate. But you have to realize that these are *my* methods, my formulas, my ways...and although this always works for me, you will *not* be guaranteed success by following these steps.
Since this formula is *my* formula, I feel it is only fair that I also share my investment personality with you first, in hopes that the steps following it will make a little more sense. So if you have an investment personality that is similar to mine, you may find the information in this article very helpful. If you are very different from me, you may think my steps do not make sense. So here it goes.
1) I am extremely conservative.
I do not like to lose money. Never-ever. I am not the gambling type and you will never find me at the casino or buying lottery tickets. I just don't like taking unreasonable risks. But I do realize that there are of course risks involved in investing, which is why you will notice that my back of the envelope calculations always include a cushion.> If this sounds boring, well it's because it is.
2) I am extremely generous.
You might assume from the previous investment personality trait, that I don't like parting with my money. Well that is far from the truth. I love to spend money,I just don't like throwing money away. I would rather give someone a $500 gift than gamble that money an possibly make $5000.
3) I am very analytical.
I love working on the computer because it is so logical. There is no emotion involved whatsoever.
Similarly, my investments decisions are logical decisions, not emotional ones. And although it's true that I am passionate about my work, I rarely fall in love with a property. This lack of emotion has made it possible for me to create a repeatable formula, one which I use *every* time.
4) I like to use my own money.
When I started out investing in real estate, I had to do a lot of borrowing; some of it from family, some from my credit cards (don't ask!), and some from other investors. As a newbie to real estate investing, you too will likely need to borrow some money. That's still smart in my honest opinion. But I like using my own money, putting things in my own name, and I never get involved in wholesaling. Some of my other very smart investor friends say that assigning contracts is the best way for creative investors, other say that is an old-school method and swear by buying and reselling the home. I'll let you decide that on your own, however, my methods apply strictly to the buy and sell method. If you are wholesaling properties, then my steps outlined below may not work for you.
5) I always have a specific buyer in mind for my properties.
What type of buyer is best when you are ready to sell your property?For some people, it's anyone with money. For me, it's a young married couple, who is in the early stages of starting a family. This doesn't mean I wouldn't sell to a single mom. In fact, I have a soft spot in my heart for single moms and I go out of my way to make deals work for those who are trying to get ahead in this world. But when looking at an investment property, I approach it as if I was still young, looking to start a new family. If I was just starting a family again, what would I want to buy? That is what I am always asking myself.
I mention number 5 above because it also says a lot about what I kind of property I am looking for when I am shopping around. I'm not looking for 3 million dollar beach front homes, I'm looking for reasonably priced homes in nice neighborhoods.
Now that you know a little bit about my investment personality, I can share the steps I use in the flipping process (for choosing a home which I intend to hold onto and rent out, I use an entirely different set of steps - and I'll write about that at another time). And please remember that these are *my* steps, and you should always do your homework in determining the best way for you to go about making investment decisions.
1) Research the potential investment area
I want to know as much about the area as possible before investing in real estate in that area. I always tell real estate investing newbies to start close to home because this is the area that they likely know the most about. They probably have friends there that know about the schools or pals who heard there is something like toxic dumping going on up-town. I tell them to ask their friends where they would like to live and why. And they should read the local newspapers to find out what's going on. Before I do any shopping for homes, I always want to know as much as possible about the area.
2) Start shopping for a property
Now that all the research is out of the way, it's time to find an investment home. I already know a lot about the town so I know where I'm looking to buy. I contact a few local realtors and tell them what I am looking for and where. For me, the description sounds like this: "A three bedroom, two bath detached home, located in one of the following neighborhoods". I tell them what my price range is (for my area, it's $150,000 and under), and that I want something that is "sad looking". (Everyone can visualize a "sad looking" house, so this really paints a good picture for the realtor). I also tell them that I am looking for a home that after it is fixed up will be a good starter home for a nice young family. I also mention that if they could help me find a good deal I would be interested in listing it with them when it was ready for sale too. (double commission?They just heard that "cha-ching" sound in their ears. Talk about motivation!)
If the realtor has a lot of properties in mind already and wants more detail, I might tell them I would prefer something built after 1950 or some other details like that, but until recently the properties haven't been sitting on the market long enough for the realtor to have something in mind already.
The "three bedroom, two bath" part may sound a little too specific, but it really is just a guideline for both the realtor and me. I've found that most feisty realtors will find you properties that don't even come close to meeting your criteria.
I used to have all this typed up in a letter that I could mail to the realtors in town, but it just didn't work very well. I found it best to go in person and get friendly with the local realtor who is on desk duty on the weekend. The newer real estate agent is often eager to work with me on this because they don't get all the referrals. The newer agent realizes that since I am an investor, if the job is done well, there will be more business coming his or her way. The older more experienced real estate professionals will often not find this small deal to be worth their time.
After I am done talking to the realtor, I go do it all again at the next realtor's office. I hit all the offices in town and often the ones in the towns nearby too (if there is perhaps only one real estate office in town).
I also spend a lot of time on the Internet looking for homes too. Not at those "foreclosure" sites, but instead at realtor.com and other genuine real estate offices. Sometimes I get lucky and find a property before the realtors do.
And finally I drive around looking for homes in the neighborhood I researched earlier. Sometimes they are just sitting there with a "for sale by owner" sign sitting in the front yard.
3) Run the numbers
Once I have a house in my sights that meets my criteria, I start running some numbers to determine what is a safe investment for me. I break every room down and create individual estimates for each room. When I started out buying properties, I would list every specific detail and cost, but now I am able to walk into a bedroom and look around and say $200 or whatever was a good estimate. For newbie investors, I of course recommend the detailed method. And for beginner real estate investors who are not good with determining what things are needing repair, I highly recommend bringing along an inspector and/or handyman.
When determining what repairs and updating needs to be done to the outside of the house, I try to stay very consistent with others in the neighborhood. If the siding needs work, look to see if all the neighbors have vinyl siding or clapboards and budget accordingly. In the end, I want my investment to blend in with all the others on the block, not stand out. I have made the mistake of making a house "too nice" before and it can be hard to sell.
For the price range I generally am investing in, the regular consumer grade products that you would find at Home Depot or Lowes (although I usually end up buying from a smaller local merchant) are perfect (kitchen faucets, light fixtures, etc.). I don't upgrade things unnecessarily. It isn't until I go above the $350,000 price that I start upgrading certain items. For instance, if the house is going to sell for $200,000 the buyers (in my area anyway) are not expecting granite kitchen countertops. They *are* however pleased when the appliances in the kitchen match in color.
My goal is for things in the home to look new, or gently used. If it looks old or heavily abused, then it has to be replaced or repaired.
After I have the expenses lined up for each of the rooms, I multiply those amounts by 1.3% to get my final estimate for the rehab. I know this sounds like a large amount to pad, but remember, I am extremely conservative...
I then add up all my costs to purchase the property, rehab the property, own the property for that short time (utilities, taxes, etc.) and I multiply that by 1.10%. I know, you think I'm nuts, right?I don't disagree. But this is my final estimate on how much I am going to have to put into the property.
4) Determine how hard it will be to sell
I now know how I want the home to look, how long it will take and how much it is going to cost to get it that way. I now go back to my realtor and ask how much they would list it at, for the approximate date I plan to sell it (my goal is always within 3 months). I of course don't just ask for their opinions, I want them to provide comps of other homes sold in the area.
While the real estate agent is whipping up those numbers, I go online to do my own research. I check town records and use sites like zillow.com to determine the fair market value of the home. I compare my numbers with the real estate agent's numbers and then make one final adjustment to get my final answer. I drop the estimated fair market value by another 25% (yup, you read that correctly).
I then take the adjusted fair market value, subtract the final estimate of how much the property is going to cost me, and if it's greater than $5000, then it's a good deal for me. I of course prefer making more money that that, but $5000 is the minimum I want to make on one single project. (Please don't ask where this number came from. I just made it up one day and it has worked for me ever since!)
If there are other factors which make the property harder to sell ( like an ugly neighbor's house or a nearbye toxic dump), then I'll increase that number, but usually I have eliminated the property already if it has something bad working against it like that...
5) Review and decide
I hate double-checking my own work, but it is a necessary step in the process. I double-check all my estimates and math. My spouse used to double-check my numbers for me, and it was wonderful. But after a while, my better half got bored and stopped doing it. Bummer. Oh yeah, and for the last part of this step, I drive by the property one last time to see if it still gives me the "warm-fuzzies"!
6) Start the paperwork to purchase the property
At this point, I am all smiles. I have done my homework and I am ready to start the paperwork on purchasing the property. I call my real estate agent and have him or her get the ball rolling on the purchase.
7) Start lining up contractors
Once property is under contract, I start lining up the sub-contractors I need. I am a big proponent of supporting the local little guy, so I often look in the newspaper for a local handyman to do the work. I won't go into all the details on how to find a good person to do the work because there are plenty of articles on this topic out there. What I will mention is that I *always* check references, and make sure they are licensed and insured.
8) Let the work begin!
Now that the property is mine, the work begins on the rehabilitation of the home. I prefer to buy homes in the winter when it is more of a buyers market, so often the exterior work (like painting) cannot be done until spring. But there's no reason not to do the interior work!
I visit the property *every* day work is being done. I'm not the "watch over your shoulder" type of guy, so I often leave things at the home that I need to pick up (on purpose). And I make sure I show up at random times too. Sometimes I come in just to measure a room and I say hello to the person doing the work. I'll take notice of what they are drinking (i.e. coffee or Mountain Dew, etc.) and I make sure I bring them a drink the next day I arrive.
Two times, my being extra nice was misinterpreted by sub-contractors as meactuallybeing a pushover. One of the times, the fella doing the interior painting tried convincing me that he needed more money for supplies - more money in advance to even finish the project. Both times I have just reminded them of our agreement and nicely told them that it would not be proper for me to give more money until the job was finished. And a nice "wow, jeez, I hope we don't have to end up in court over this" always helps complete the conversation and gets things back on track.
When I have done my homework properly (i.e. checking references, etc.), I do not have problems like that. Those hard working guys often have been stereotyped as rip-off artists, but I have found them to be some of the nicest, hard working people in the process. They just want honest pay for honest work.
9) List it!
If I had good luck with the real estate agent who helped me find the property, I am sure to use them for listing the property. And since this is *my* money I'm using, I don't mind the home taking a few months to sell (so I can get maximum profit).
When I was just starting out in real estate investing, I was using borrowed money, which meant that I wanted to sell the property as soon as possible because it was costing me interest. I knew I could have gotten more money for the property if I waited. But even in those rushed situations, I still had padded quite a bit of the costs and made a nice profit. And that is one of the major reasons for using my own money.
That's my top secret formula for flipping properties. It's not very exciting, but it has worked quite well for me, through both the ups and downs of the market. I hope this little article will help you figure out what *your* top-secret formula is. Good luck!
(c) Copyright 2007, T.J. Etherton. All rights reserved.
T.J. Etherton, is one of the founders of The Cashflow Crunchers, a web site for Real Estate Investors to share investing tips and other information. For more articles, tips, and free online calculators to help determine if a property is a good investment or not, please visit http://www.cashflowcrunchers.com
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