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Flips and Rehabs
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 Getting Started in Real Estate Investing
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 Money in Mold
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 The Gut Rehab
 Quality vs. Quantity
 Hard Money Lenders - 1
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 Overcoming No Money Jitters
 9 Tips for New Investors
 Finding Deals in a Hot Market

Wikipedia defines flipping as "the practice of buying an asset and quickly reselling it for profit. The term is often applied to the practice of buying real estate at below market value, making improvements to it, and reselling it for a higher price (generally near market value), thus making a profit."

In the real estate investor circles this is normally referred to as rehabbing or retailing. The term "flipping" has been made popular by recent onslaught of tv series such as Flip this House and Property Ladder. To most experienced investors, "flipping" refers to reassigning a contract or "flipping the paper". In any case, we'll refer to the act of fixing up and selling a property as "rehabbing."

Here are few real-life tips for investors interested in rehabbing in the DFW market:

1. Buy Cheap, Cheap, Cheap...

The most common mistake for first-time flippers pay too much for the property. If you purchase a property from the retail market (MLS) and rehab then sell it retail, you'll almost certainly lose money. Retail (Realtors and MLS) properties are generally discounted by the exact amount of the rehab, which leaves no room for profit. You must purchase your property on the wholesale market or directly from a motivated seller to have enough margin for profit.

Generally, you should be purchasing properties at 60%-70% of the ARV (after repair value) minus repairs to profit on a rehab. Here is an example purchase price calculation:

  After Repair Value (what you'll sell it for on mls)
  ARV minus Repairs
  Purchase Price (70% LTV)

You can then reverse those calculations to determine the profit potential.

  Purchase Price
  Total Investment
  Sales Price
  Potential Profit

2. Estimate Expenses

Obviously, estimating the repairs for a rehab is very important to the net profit. The only way to learn to estimate rehab costs accurately is through experience. We suggest starting with an easy "paint and carpet" rehab as these are easy to estimate. You won't make a killing but your risk will be much lower. Also, don't forget to estimate the closing costs, carrying costs, insurance and sales expenses.

3. Finance the Deal

There are several options for financing a rehab, each with advantages and disadvantages.

  • Cash - Paying cash for properties is clearly the least risky and least expensive since there are no loan closing costs or carrying expenses, but this is clearly out of reach for most new investors. Using cash can also create a constraint on the number of simultaneous deals, based the cash available.

  • Conventional Loan - Utilizing a conventional loan for a rehab project will present challenges. First, you won't likely find a loan that will pay for the property and the rehab so you'll need to cover the rehab expenses with cash. Second, you may have difficulty finding a loan on a property that requires extensive rehabs as lenders will not lend on "uninhabitable" properties. It can also be a challenge for your buyer to get a new loan on the property (when you sell it) since your loan has not been "seasoned" for a year. That said, there are exceptions to all these generalities and conventional loans work well if you pay cash for the rehab and keep the property as a rental.

  • Hard Money Lenders - Hard money lenders specialize on lending to investors for rehabs. They are "asset based lenders" so they lend based on the deal more than the investor and credit. Typically, they'll only lend 60%-70% of the ARV for both the purchase and the rehab. They can also be picky about the areas and they'll estimate the ARV conservatively. You'll likely pay 2-4 points down and roughly 1.5% per month. The loans are generally 6-12 months and require interest payments monthly.

4. Find Cheap Labor

Of course the cheapest labor you'll find is yourself. If you do the work then the profit potential is much greater but you can obviously only rehab one property at a time. Also consider that it'll take longer to complete your rehab so your carrying costs will be higher.

If you use contractors start by getting a ton of bids. This is a great opportunity to learn what needs to be done as they'll all have a different perspective. When you find good contractors ask if they know a good ... foundation guy, roofer, carpet guy etc.. It'll take some time but eventually you can find good, cheap contractors.

5. Don't Get Greedy

Many times, novice rehabbers increase the asking price of their property as they get more emotionally attached. Before you know it, they've blown their budget with high-end enhancements and overpriced the property. Your goal is to make a decent profit by being the first house to sell. Don't let it sit for 6 months because you are asking too much since you installed granite countertops in a $100k house.

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