The Art of Flipping Houses Part 4
Due diligence, some call it disclosure, is the right you have to inspect the character by professionals. Leave no stone unturned at this phase. Unless you are a contractor or home inspector yourself, I strongly suggest that you to seek the help of a specialized. A certified home inspector is a specialized who looks at every conceivable area in your home to insure your protection. They will troubleshoot your electrical system, plumbing, foundation, windows, doors, furnace, HVAC, gas piping, and on and on. You, as a buyer, will be responsible to pay for his sets, but it is an investment that truly will give you peace of mind. You should make yourself obtainable to walk by the home with your inspector. They have a wealth of knowledge, and will point out any possible problems that may arise.
A character may look great, but may have problems that you are not trained to look for. Later in this chapter, I will compile a list of things to look for in the first stages, before you already put an offer together. This might help you decide if the character is worthy of your consideration.
Ask your agent what the standard is for inspecting your character. In my area it is 15 to 17 days. It depends on your individual counties. That method you have 15 to 17 days to do all of your inspections, and to decide if this is the right character for you. If the character has real problems, you may decide that the cost of repairs will be too much, and you may, within that timeframe, back out of the offer without losing your earnest money.
This is also the time that you will choose which mortgage company you want to work with. There are many, many factors in choosing your mortgage company, and we will devote a complete chapter to tell you about them.
Your termite inspection will also be due at this time. As a rule, the seller pays for this, but may add a clause into the offer. For example, “seller will pay a maximum of $2000 dollars for termite inspection and damage”. If you do have termites, depending on the extent of the damage, the $2000 may not cover the costs. The termite inspector will also include any dry decay and fungal, (fungus) infestation in his report.
When all of the inspections have been finished, it is now time to decide if you want the deal to go by as is, or if you want the seller to pay to have some things repaired. I suggest that you not be nit picky at this point. If there is a major problem with the home, it is wise to have the seller pay for it, but if there are minor problems, you may want to let that slide. A minor problem might include settling fractures around doors. These are pretty normal, and I’m sure your going to want to patch and paint anyway. Your home inspector will help you choose which items are of concern, and which are unimportant.
There are many times the home will be sold, “as is”, meaning that the seller has no plans to repair what may be wrong in the home. You have to weigh the pros and cons on this one. It nevertheless never hurts to ask, as they may surprise you and say yes. It all depends on how badly they want to sell.
I promised you at the beginning of the chapter a checklist that will help you in the initial inspection of a home. This is just a guideline, and in no way should be construed as a complete inspection. This kind of inspection is also non-intrusive for the sellers.
1. General turn up of the home. observe the wood or stucco siding. Is it in good shape? Check the fascia, or trim and observe if the wood is dry and twisted, and in need of substitute. Does the home need a paint job? Check the foundation, and observe whether it is a concrete slab. Do you notice any large fractures in the slab? If it has a crawlspace, look underneath and notice if it is dry. 2. Drainage of the yard. Does the yard have a slope, and if so, does it slope toward or away from the home? If it slopes toward the home, you will have to consider the cost of re-landscaping. 3. Plant overgrowth is another consideration. Are there large trees too close to the home? Depending on the tree, this could cause foundation problems in the future. 4. How does the roof look? Are the shingles in good shape? Also notice if it has a chimney, and check out the materials used. Are there any missing bricks for example? 5. If the home has a pool or spa, take a look at the general condition. Does it have any fractures? 6. As you go into the home, notice the general condition of the walls to assure there are no holes. Look at the ceilings in every room, especially the closets. Make sure there are no water stains. A seller may have recently painted, but many times forget the closet, so it is a good place to check. 7. observe the floors, and what condition. Are they carpet, or tile? Will you have to replace them? 8. The kitchen area is the center of many homes. Are the cabinets old and dated? Are the appliances in good shape? Make sure you ask what appliances are included in the sale price. Check the sink in the kitchen. Are there chips in the finish, or rusty? Are the countertops permissible, or will you have to replace them? Ask the seller if the plumbing is copper or galvanized. This is important because in time, galvanized plumbing will build up mineral deposits and restrict water flow. It will ultimately have to be replaced. 9. Check the bathrooms for missing tile. Check for surface mold in the tub and shower areas. Look at the grouting to see if it is old and cracked. 10. As you walk by, always observe the condition of doors. Are there holes in the doors? Do they close properly, or has settling caused them to stick?
As I said in the beginning, this is just a guideline. Your home inspector will give you a much more detailed report. It is best to go into a home with your eyes wide open. If you do this inspection first, and notice that too many things have to be repaired, then you may not want to make an offer, and save the inspection fees. Let’s say that you go into a house and just look at the layout, and then make an offer. Your home inspector may come back with a horrendous report, and you decide not to buy the house. You could have saved the money for the inspector by doing your own mini inspection.
Would you like to lose money on your very first flip? Of course you wouldn’t. But that is exactly what will happen if you miss this VERY important step. You may have heard this before. “You make money on the buy, not on the sale”. If you pay too much for a house, it doesn’t matter what you do to it…you will lose money!! Let me stress that once again…YOU WILL LOSE MONEY!!!! I am not in the business to lose money…and neither are you. I know that I use old sayings a lot, but they are true. Another one is, “You have to kiss a lot of toads before you find a prince”. It’s the same way with real estate. You will look at a LOT of similarities, before you will find one that fits you. This is a good thing. It’s all the law of averages. You get a lot of no’s before you’ll get a yes. But then maybe you’ll get a few yeses in a row. It happens all the time. Know the area you are contemplating buying in. Find out what home prices are doing in that area. Know the schools, and parks. You may not care, but your prospective buyer may have totally different priorities than you do. Now that you have done that, let’s look for a home. It is best to find the worst house on the best block. Maybe a neighborhood where people care about what their yards look like, with no old rusty cars in the driveway. Look for a nice family neighborhood, ones without bars in the windows, or graffiti covered walls. Take notice of how traffic is. If people are using the street as a speedway, you might want to re-estimate the home.
Real Estate professionals can be very helpful to you in your search. We will be talking about realtors later. Let them know exactly what you are looking for in a fixer. There are some that will just say, “You can’t find those anymore”. Bull! It would be time to find another agent. One that wants to work with you, and will bust their humps to find you the similarities you need. You may have to go by a few to find the right one, but in the long run, it will be worth it.
This is where it gets to be fun. You have looked at all the toads, and a Prince shoots up out of nowhere. Now is the time to start your budget, and always keep in mind, not only dollars, but time. Figure out how long it is going to take you to complete each task. Add them up. Add about 2 weeks to your total. Not always necessary, but nice to have a buffer if you need it. Buffers are not built in for procrastination. It is there for your protection. Then figure out the dollars it will take. Add 25% to that total. This is for the unexpected, and again for your protection. It may not be needed, but again, cover your fanny. Then, and only then, can you make an informed decision about whether you want to make an offer. Remember, you do not need to make a killing on your first flip. If it is worth your time, and money, then by all method, go for it. Everyone has a different idea about what GOOD money is on a flip. Let’s say that you have worked for 8 weeks, bringing it all together, and your net profit, (after all is paid), is $10,000 dollars. That is $1,250.00 a week. Not too bad for spare time money. We, of course, wouldn’t want to settle for that. It’s a small example, and it is quite possible to make many times more than that. It’s all in how you buy the character. It also depends on how much money you put into renovations. Remember, this is not your house. This is a business. Getting too attached to it, and putting money into it that is not necessary, is just pulling money out of your pocket. Do not use more than the market warrants.
There are numerous ways to buy distressed similarities, and that is what we are looking for. Distressed is another way of saying that it is in need of some TLC. Some distressed homes will only need some paint, maybe some landscaping, carpets cleaned, etc. Others will need a total overhaul. Decide which ones you would be comfortable in dealing with. Remember though, the greater the risk, the bigger the profits in most situations.
You will probably notice in the Real Estate section of your local newspaper, ads for homes that have REO attached to them. This stands for real estate owned…similarities that are owned by the bank. This happens when an owner defaults on a loan, and the bank has no choice but to take the home back, (a repossession), and try to get their money back out of it. edges are not in the business of selling real estate. They don’t want the home, they want their money. This is a real chance for you to cash in and make some serious dollars. As a rule, the bank will sell a home “as is”. This method that everything that is wrong with the house is your baby, your responsibility, so be aware. It would be wise to take some back-up on your inspection. A friend who is a contractor, or a home inspector would be a great asset. If you don’t have such a friend, pay a home inspector to come with you. Pay me now, or pay me later comes into mind. If you pay a small amount now, it may save you having to pay a large amount later. Knowledge is strength! When you know what is wrong with the house, you can take that to the bank and explain why you should pay so much less for it. They understand dollars.
We have already spoken a bit about Real Estate agents. They are great in the respect that they can tell you how long a character has been on the market, and how motivated a seller might be. If a seller, for example, is relocated by the company they work for, and the house is vacant, chances are they are extremely motivated. Having to pay for two mortgages is no fun. This is an excellent chance to get a home for a good price. This may sound like you are taking advantage of a bad situation. The fact is that you are helping the sellers get out of a very stressful situation, and somebody is going to get a great deal on this home…so why not you?
Foreclosures in record numbers are coming our way. This is unfortunate, and yes, already sad, but it is what it is. I’m sure there is someone to blame for it, but where do you start, and where does it end? It is a part of everyday life, and we go on. Foreclosures can also be very lucrative, but be careful. Sometimes a home is not a good candidate for a flip. It will depend on what the bank is willing to take as a loss. Just because you see a foreclosure sign, doesn’t make it a good deal necessarily.
There are also Pre-foreclosures. A homeowner has gone into default. They have most likely just fallen on hard times for one reason or another. The owner is now facing foreclosure. This can be a winwinwin situation for everyone. It will make little difference to the owner in most situations, what kind of an offer you make on the home. They are losing the home, and losing their credit worthiness to boot. You can, in a lot of situations buy the home for what is owed on it, plus a little for the family to move and get resituated. You are helping this family save their credit, the bank is happy because they don’t want to deal with the foreclosure, and you have made a substantial buy that should net you a pretty nice paycheck. See, winwinwin.