Updated: Sep 16, 2021
Please read all the way to the end because you will learn how to find your first real estate property that you can fix and flip for big profits, and at the same time learn how to avoid some of the risky things that come with flipping properties.
Before starting in real estate investing as a career or part-time though, you should ask yourself many questions, and one of them should be whether you are sincerely committed to making real estate investing work for you.
There are several ways in which you can make money with real estate investing. For example, you could wholesale real estate. Basically, the process involves you finding a seller who is willing to sell his home at a discounted price for any reason, put it under contract, and then you sell that contract to a cash buyer.
For example, you sign a contract to purchase a real estate property from a seller for $80K, and then you sell or assign the contract for $100K to a cash buyer, and then at closing, the title company cuts a check for $20K to you, and the difference to the seller.
Or you could buy a residence or commercial property to rent for passive income and let it appreciate while you own the property, then refinance or sell it for a good profit margin or spread when the time is right.
But for the purpose of this video, we will discuss real estate investing doing fix and flips.
So What Are The Benefits of Flipping Real Estate?
Big profits are the most evident benefit of flipping real estate.
Most people come into this business for one reason: to make money, but most successful real estate investors will say that money should not be the only reason to do it because real estate investing is hard work, many people start out excited about making millions of dollars, but the reality is that you have to love real estate with passion, and have the desire to help other people which in turn will inspire the newcomers to stay the course, learn all the time, stay consistent and have a strong reason why for getting into real estate investing.
If you do your own repairs, the labor can be demanding, and the days can be long and hard. However, once you've completed the work and your property is ready to sell, another benefit that you'll find very rewarding is to be able to sell your fix and flip for big profits.
If for some reason you can’t sell the property right away, there's always the option of leasing the property to own it, or rent it out, this way you can sustain your investment while it is time to sell it. The financial rewards in these instances are a bit slower, but they can help you avoid the financial catastrophe that would come if you are not able to sell the property fast enough.
Other benefits include experiencing a good feeling of helping other people during the buying and selling process of real estate properties. You will find out the different ways you can go about finding properties that will definitely impact that seller, the buyer, the community, and even yourself. In a few moments, you will learn the extra benefits you can experience in the form of the satisfaction that will bring you as you find these properties along the way.
So let’s talk about How we can Find Discounted Real Estate Properties
There are several ways to find properties that you can fix and flip. The following are a few strategies you can use to help you find your first property by doing some research online and offline. Online you can visit many of the website listings such as Zillow, Trulia, and even the website of your local county. You can also subscribe to other paid websites like propstream that many real estate investors utilize to find properties to buy.
Offline, you can drive around in your area and search for houses that look like they are in distress such as high grass or any visible damages, jot down the addresses and find as many as you can, and then skip trace them to contact the owners and see if they are interested in selling their property.
By researching and using online resources to look for fix and flips, you can search for the following types of properties that fall into the categories of pre-probate, and probates, pre-foreclosure and foreclosure, and code violations.
There is a lot to learn in each of these categories, but let us briefly discuss each of these types of leads to give you a good idea about them.
Let’s start with Pre-probates and probates. Pre-probates and probates happen when the owner of a property passes away but the ownership of the assets has not been transferred to anyone in the family, so the probate is there to help facilitate this process, but to avoid probate court, attorney's fees, delays, and litigation fees, properties are transferred to a trust.
Most of the time a family member becomes the trustee of the property and can sell the property at a discounted price to get rid of it as soon as possible if so they desire.
As you can see, in many cases the family of the deceased are not interested in keeping the property and would like to part ways with it as soon as possible, by buying one of these properties you are helping the family to liquidate their unwanted real estate asset.
But if it goes from pre-probate to probate
The probate process is handled in court. Often family members hire a probate attorney to help them with the details and paperwork of probating a will. In this case, the real estate investor can negotiate a purchase price with whoever is the executor of the will if they are interested in selling the property.
Next, we have Pre-foreclosures and foreclosures.
As you know a Pre-foreclosure is the initial stage of a legal process that potentially leads to the repossession of a defaulting borrower's property. Because the borrower has gone over the stipulated timeframe for missing payments, the lender files a notice of default on the property in pre-foreclosure.
This is a good way to help a seller avoid foreclosure and all the stress that is associated with it including further damage to the seller’s credit, and other issues.
But when the owner of a property can’t keep up with the mortgage payments, it sadly has to be foreclosed. Foreclosures are houses that the creditors have repossessed because the former owner could not keep up with the mortgage payments. Foreclosed homes are usually vacant for some time before being sold. The foreclosure homes for sale at any given moment are likely to be in some state of deterioration.
The deteriorating state of many of these properties is one of the factors that help to buy a home at a low price. Another aspect is that lenders are attempting to reclaim as much of their property investment as possible. As a result, they're often ready to accept less than the property's market value. In this case, by buying a foreclosed property, you are actually helping the lender to recoup some of their investment.
And then we have Code Violations
Housing must meet minimal requirements in terms of safety, sanitation, and suitability set by local governments. A code violation is issued when a housing inspector discovers a home that does not meet certain basic standards, one easy-to-spot violation is tall grass or any visible damages to the property that violate housing codes. As you can see, by buying one of these properties you are also contributing to society. Once you fix and flip that property, it will no longer be a sore sight for the neighbors and city county, instead, it will become a family’s home sweet home in the near future.
As you go along you'll come across all types of homes when looking for properties to fix and flip. But to make the most profit from real estate, you might want to look into any of the above home conditions which are often sold for far less than their market worth since they're in various states of distress.
What are some of the Risks or Pitfalls Faced by Property "Flippers"?
First of all, flipping properties is a terrific way to make a significant profit in a short time, especially if you're doing it in a seller's market where buyers will be competing against other buyers.
But one of the pitfalls that property flippers face is underestimating the sell value of the home or ARV meaning “as repaired value.” If the ARV value does not reflect a good return on investment of the total purchase price, your investment which could be a down payment to finance the property, plus the expenses and associated closing costs for selling the house, if could be the early end of your real estate investing career.
While no one will be perfect at estimating ARVs, you need to be in the ballpark sort of speak so your investment is not negatively impacted.
Most real estate investors use the MLS to determine ARV in their market area, for example, if you live in Austin, TX, and found a motivated seller willing to sell his real estate property to you at a discounted price, then search for very similar homes in that same area and see how much they are selling for. Check for homes that look like they are fully renovated, and this will give you an idea of what the ARV should be for the property you want to flip.
I reference a video here that will show you in detail how to estimate the ARV so check it out after you read this article.
Another pitfall that property flippers face is underestimating the cost to rehab the property. If you missed the fact that the house needed some major repairs or renovations such as replacing a roof, replacing an air conditioner, replacing the carpet or floor, or other expensive repairs, that will definitely cut into your profit margins and potentially make you lose money on the overall project.
A good way to be in the ballpark on rehab costs is by calling several contractors to see how much they each charge for the same job, this will give an idea of who is overpricing, and who is underpricing, and who will help you determine the average cost for that job.
There are other factors that can affect fix and flippers such as market conditions, the status of the economy, and pandemics, but since those things affect most industries, let’s just focus on the things we can control and learn from other successful real estate investors who will acknowledge that even though that’s how they made their money, will also admit that they failed and learned many financial lessons along the way.
So, if you don't take the time to carefully analyze the risks and seek to minimize them while developing your property investment strategy, you'll be fighting unprepared which is no fun at all to see your potential profits shrink by the minute.
Another risk or pitfall is overpaying for the property. As a real estate investor, you want to help the seller get rid of his property ASAP, but many times they want full price, so your goal is to buy at the lowest price possible, and in many cases, you will need to negotiate with the seller, and justify why the best offer you can give him is 20% lower than what he is asking for as an example. Justifications could include repairs and renovations needed to make the house saleable. It will also help a lot if you develop a good rapport with the seller at this stage of the buying process.
Overestimating your own capacity to undertake the project by yourself could also work against you.
If you are still working full-time, will you have plenty of time to work on the property yourself, if not, do you have contractors lined up ready to bid the renovation? To get a good sense of how much to pay for such renovations, get at least three(3) estimates if not more from different contractors, this will give you an idea of how much to pay, and how long it will take to finish the renovation project.
Last but not least in this video is the failure to obtain a proper inspection. Conducting a comprehensive inspection of the property is usually a smart idea. This will allow you to renegotiate the price if serious problems are discovered during the inspection. This will help in de-valuating the property further and renegotiate a lower price with the seller.
So in Summary:
Buy at the lowest price possible using some of the strategies we discussed earlier such as pre-probates and probates, pre-foreclosures and foreclosures, and code violations.
Estimate the most accurate ARV possible, you can do this by going to website listings and compare market price in the same area for similar homes, that usually gives people an idea how much a house might sell for once it is fully renovated.
If the property needs repairs, estimate Renovation costs as accurately as possible during your due diligence period. If you don’t do the repair or renovation work yourself, then hire other people to do the work for you and of course make sure they are reputable.
If you do not have the cash on hand to pay for the property, then you will need to finance the purchase price and rehab cost of the property, but you will need to have a down payment, and have a decent credit score to get your fix and flip investment property funded. To learn more about financing a fix and flip, check out my “How To Finance Real Estate Properties” video embedded in this article.
Once you get your project funded, start to renovate the property, finish the renovation, list it for sale, and sell it for big profits. And after you have fix and flipped your first property, you can start working on the next, but you can also work on multiple projects if you have enough capital to invest. Also, you will realize that you did something good, perhaps you got the seller out of the bind who had an urgency and needed to sell his property right away, or you helped a family find a home sweet home.
So there you have it, if you need a real estate loan, let me know what type of property it is, what the full address is, what the purchase price is, what the rehab cost is, and what the ARV is, you see by having an accurate rehab cost, and ARV, it’ll help you negotiate the lowest price possible and determine if your deal is profitable or not. Knowing how much you can sell for, and what your expenses are, will tell you how much profits you can make.
In conclusion, buy at the lowest price possible, estimate the most accurate ARV and renovation costs, finance the purchase and rehab cost if needed, then renovate the property ASAP, list it on the market, and sell it for big profits.