fix 'em and flip 'em

[mopinko]

anyone do this? a very good friend has asked me to consider going into this with him. i am wondering if anyone has done this, and what they think the pitfalls might be.
i am flattered to be asked, but not sure that my health will hold up. i can see this being easier to juggle than a job job, tho, since i will have more control over when and how much i work. also, i have 2 sons that i would like to provide for, and have in business with me. my oldest will only be self sufficient with some sort of help from us. long story.
i have been trying to get a career in art going, but i just don't think i will ever make any real money at it. so...
between the 2 of us, we have lots of skill and knowledge. lots of tools. 2 good trucks. 2 great credit scores. some change to invest. decent cash flow. he has a lot of contacts, both to acquire foreclosed properties, and to sub out some of the more braun than brains jobs.
he has done most of the work on a couple of flips for other people. he is selling a condo and buying a house, and looking to take some of those proceeds to get started. i have about $10k.
he is also about the most decent, honest, caring guy i know. steady as a rock. we have worked together on quite a few jobs around my house. it is always great to work with him.
so, what can go wrong?

[NMDemDist2]

1. plenty

http://www.usatoday.com/money/economy/housing/2006-10-22-young-flipper-usat_x.htm

the housing market is declining an average of 4% a year

unless you're in one of the rare places where it's still on the upswing (Albuerquerque comes to mind) you could lose your shirt

[mopinko]

3. housing market around here remains very strong.

continues 2-3% growth predicted. chicago's local economy is pretty strong.
this is sort of my worry, tho, since i think any kind of apocylpse is possible with these criminals in charge.
but we also would have the option of renting them out is we can't sell them.

[Warpy]

11. Houses have lost about 15% here

if those real estate shows are correct. That's how far the asking price has dropped on comparable houses from last year.

Plus, they're starting to advertise "3 years young! Never lived in!" meaning speculators are starting to dump them before they lose their shirts.

Don't believe all the chirpy good news you read in the paper.

[wildeyed]

2. Be very careful.

It is easy to get in too deep and lose you shirt. Also a lot of work. I contracted my own kitchen remodel last summer and was amazed at how much time that took.

I know people who do this and have been tempted myself. It comes down to really knowing the market. In my city, there are various neighborhoods near the city center that are gentrifying. Our population is growing quickly, and we had no bubble, so prices continue to rise steadily. It is a matter of betting on which neighborhoods are going to pop next. I also know people who bet wrong and end up with a shiny pretty house that they can't sell for what it cost to do the work in a decaying neighborhood.

Another thing a few of my friends do is flip condo options on buildings near downtown. They buy up options early in a project, then sell right before the project completes. Some are keeping units, renting and will sell later. Again, know the market. If I was flipping condo options, I would probably stop now because there are so many new buildings in production. The market will be flooded in a few years.

[mopinko]

4. the condo market around here is nuts

you would be hard pressed to find a tiny unit for $200k. new single family homes, if you can find them, are $600k-1m.
we are both long time chicagoans, and know the city well. and there are plenty of neighborhoods that are coming up. barring bushco chaos, i think there is money to be made out there.

[wildeyed]

5. Maybe try a small project to start, see where that leads you.

Start with an amount of money you can afford to lose, too, that way, if things go wrong you won't be out on the street. If it is a short project and you hate doing it, or your health deteriorates, you can get done fast.

A word about partnerships. I own a small business with my husband. We used to have other partners, but we don't anymore. We bought them out amicably, but it was stressful there at the end with one of them. The deal we did before that almost ended in court. I know you trust this guy, but be careful and be sure you have the expectations and financial clearly documented before you get going. Might save you headaches down the line. I am also a big fan of business plans, even if you are self-financing and don't need one to raise money. It is good to ask the hard question ahead of time.

Good luck. Hope it works out for you :hi:

[mopinko]

6. yup, i think try one and see is a good idea.

i would hate to lose a friend, especially this guy. but i am thinking that doing one then decide if it is worthwhile.

[Kingshakabobo]

7. The trick is buying the property right and not over-developing.

I'm a mortgage broker and I have a few clients that are flippers so I have a little insight.

The "good" neighborhoods in Chicago are tough because the initial acquisition costs are so high. In other words, I wouldn't want to get in to a 500k house and expect to turn it in to an 700k house with 100k in remodel fees. The carrying costs are high and the potential downside is high. Higher-end homes are sitting on the market right now.

I have a client stuck with a "flip" in the suburbs that she owes 450k ,,,,,she had it on the market for 515k and as low as 475k....6 months and no takers. She finally leased it for 1600/month but her mortgage payment is over 3k.......


I've been in the market for the last year looking for that "right" deal in a neighborhood I'm familiar with.....that's the tricky part. I know Chicago but I would probably feel more comfortable in one of the burbs.

My co-worker just did a project in Maywood:

105k acquisition
40k in construction
190k sale price
45k profit minus commissions/fees/carrying costs

This was an estate sale that was handled through a judge. My co-worker says initial acquisition should, ideally, be close to 60-65% of end retail.... but that's a "lay-up" if you can get your hands on one. There are a lot of players in the business snatching up and bidding up the prices.

I think the lower end homes are a safer bet for the beginner. At least that's what I'm shooting for.

[mopinko]

8. lower end is what we would be looking at for sure.

my friend has a broker that goes to the forclosure auctions. that's what started the whole ball rolling.
as far as neighborhoods, we would for sure be looking at the ones in the path of the gentry.
avoiding going too far is my big worry. i am not good at that.

so, since you are a broker, what kind of financing is available for this kind of thing?

[Kingshakabobo]

10. There is plenty of financing available.........

From conventional/investment 10% down payment loans......... to "B" or "ALT A" paper 100% investment financing.

I'm assuming you won't live in it while you are rehabbing so you will have to mortgage it as an "investment" property. Rates and terms will be better if you can legitimately do it as an owner occupied property......that might be tricky if you have a partner and you both own other properties/mortgages.

True "construction loans" are available if you need the rehab money but that gets tricky because the banks will want plans and specs as well as an experienced general contractor/manager.

My plan is to do 100% financing and keep my cash for rehab money.

[mopinko]

13. yeah, no living there. we both have families.

although, he is looking for a house himself, and might be able to make a case of some sort. we are assuming that we would hang it out there with a nothing down, make those payments as small as possible sort of thing.
DH has a bonus coming the end of the month. they play a lot of cat and mouse about them, so we have no idea how much that will be. but we are hoping to flip the current 401k loan, and that will leave us with access to a pretty fair chunk of change. could be enough to get this off the ground a little, even after paybacks.

what kind of terms do you get on a construction loan, assuming you have all the paper that they want?

[Warpy]

9. What can go wrong? The market has STALLED

and unless you get a house that needs only cosmetic work and you get it for at a rock bottom price, unless you don't run into structural problems, unless the subs show up on time, unless the inspections all go well, you are likely to get hosed in this market.

A house two doors down from me was rehabbed last spring. The guys who did it sold the house in June for WAY under the market value. Two real estate companies in succession have bought the place and listed it at its valuation, hoping to flip it for a quick profit. It's been vacant since rehab was completed in early June. NOTHING is selling here.

If you go the slightest bit over budget, you're sunk. If you run into unforeseen problems, you're sunk. A couple of years ago, rehabbers could just hold the property off the market if they went over budget until it appreciated enough to give them a profit. Those days are OVER.

If you're determined to do this, budget twice as much time as you think it will take, budget twice as much money as you think it will take, and don't forget to include a couple of extra months of mortgage payments on the place in your figures. Realize you are not going to get anything out of it if you run into serious structural problems and realize you're going to have to offer it well under the local comps if you want it to sell.

The market has changed drastically within the last year. Make sure your friend realizes this. You can still make money at rehabbing houses, but you're going to need a lot of luck as well as ability.

Oh, and don't skip that inspection before you buy. Home inspectors can turn up a lot of problems the rest of us don't see.

[mopinko]

12. my fear for the economy is my #1 problem with this idea.

the way everything in this country has been hollowed out from the inside keeps me up some nights. but, if a catastrophic collapse occurs, we will all be fucked, anyway.

prices around here are a little bubbly. but there is still a strong business engine in this area. real jobs, good jobs, decent public services. decent schools. i think that we will have a pretty easy time finding places that are cheap enough to make it go.

and this guy has been in remodeling since he was a little kid going around with his gramps, who was a contractor. i think if you need to pay for a house inspection, you got no business getting into something like this.

but then again, my fears for the economy put me a little on the plus side of the whole idea. right now our whole retirement/savings is in pieces of paper whose value could completely evaporate. even the pieces that are supposed to be safe. so, the thing about real estate is that it is real. even if the market goes bad, we will be holding something whose value will return some day. (though, we will be looking at elevation maps to see what will be up above the water when greenland melts. seriously.)

[Warpy]

14. WARNING, Mopkino

I know a lot of people who thought they were competent remodelers who missed something an inspector would have picked up on immediately. That made the difference between a hefty profit and barely breaking even.

My advice stands. Get an experienced inspector to come out and go over the place.

Where remodeling experience comes in is in budgeting what you'll need to do, knowing prices and likely need for everything from studs to concrete to sheetrock to countertops and budgeting the time to do it well. Experienced remodelers will also know how not to overdo for a given area.

You'll also need to work with a real estate agent, someone who will tell you what to list for to sell as quickly as possible, as you'll be paying a mortgage on top of the remodeling costs.

If you do this, good luck. Oh, and it's normal to want to kill each other during the process. That usually ends when you get a check in your hands.

[mopinko]

15. i'm still just kicking it around at this point, but

i would like to make some money some day. i don't think art is ever going to do it.
he has been working with a broker that he knows that watches the foreclosures. she works with several flippers that he knows. she has done a good job.

if this was anyone else, including my DH, i would not even be thinking about it. i have known the guy for over 20 years, and never seen him get pissed. or lie.

[Quakerfriend]

16. Mopinko, I know it is a somewhat questionable time to jump

in. But, there is always money to be made. I can just share with you my own experience.

Living NW of Philly (~5 miles) things are much different than the MSM would have you believe. I sold three properties in the past year. All three sold for 25% below the asking price which was not at all over inflated. We did not suffer any losses as all three were owned for many years. One was a rental and two were ones that we lived in.

I also have many family members who have been buying and flipping for several years. According to all of them things have come to a real halt in the past 4 months- In San Diego, Philly, and the coast of Maine.

Another tid bit for you: Agents are now buying homes that have been foreclosed on as "short sales", ie, realtors and others are approaching banks that hold foreclosed properties and buying these properties for less than the amt owed on the mortgage. The banks need to cut their losses as you can imagine.

Good luck, dear. Do let us know how things work out for you.

[On the Road]

17. I Agree That the Lower End is the Way to Go

The key is getting cheap properties. If you can do that and control renovation costs, it's a good business.

I got two small townhouses in Baltimore in Mar 05 from a broker for $33k and $38k. I rented them both out, but have had some problems and have just evicted one tenant. I decided to flip it and am putting $20k in. The neighborhood has just started to gentrify and hopefully, it will fetch $90-100k.

That's kind of a hard deal to duplicate. The real estate trends really scare me -- the runup has been so great in the last five years. But there's nothing fundamentally wrong with it. I do it part time and would probably find it difficult to make a full time living out of it.

The other option is if you find the right properties to keep them and rent. I am renting two townhouses out on a single-room basis, which usually allows you to get twice the normal rent. But that has its own pitfalls.

[Stinky The Clown]

18. Where in Baltimore?

I have a rowhouse in South Baltimore and one in Catonsville.

The one in Catonsville is solid and will skyrocket. The one in SoBo we got cheap enough three years ago and have had my older son in it. I get a remarkable number of unsolicited offers for well more than twice what I paid. And there are fresh rehabs in what seems like every other house in the neighborhood.

[On the Road]

19. I Have Five Rowhouses in Brooklyn

bought 2-4 years ago when prices were a lot cheaper. Property values there haven't rocketed like, for example, Patterson Park or Federal Hill, but they're slowly increasing. All the waterfront is going to attract development long term, and it's pretty close to downtown.

I am flipping one and mostly renting the others out by the room. Have a local maintenance person which helps. Would like to hold on to them a little longer.

I have heard that Pigtown has seen some spikes in property values. Where are your places?

[Stinky The Clown]

20. The one in Catonsville is stable, but the one in South Baltimore has done real well

The Catonsville one is in very nice shape and was when we bought it. We're partners in it with my younger son, who actually lives there. Its gone up about $25 K in 18 months, based on actual sales in the area of essentially the same house.

The one in South Baltimore has gone up more than $100K in the 3 years we've had that. And it appears the area is continuing to rise, but not quite as fast. My older son was living there till the middle of December. He was just a tenant, not a partner. It is now vacant and we're in the early stages of a modest fix-up (to rental standards, not resale). We want to rent it for a few more years and then rehab it fully for a sale.

They're getting ready to build condos right across the street from us and they're going to be in the $400 to $600K range, so that helps us, too. They just finished a set of new rowhouses (about twice as big as ours) a block away and they're selling between $500 and $650K.