Fix and Flip Total Plan
Fix and Flip Requirements:
A. You must dedicate appropriate time for Flip and Fix activity and
B. You need to have your own money or somebody else's money, as a partner, before you start. The amount of cash needed is determined by the size and nature of the property and other factors . Having "all cash" is optimum, it will enable you to outbid and buy properties which get multiple offers. On every purchase offer and especially on fixers the sellers always prefer an "all-cash" offer over any other similar offers that is not "all cash".
C. Experience in real estate and/or in constructions are not essential but are very beneficial. If you do not have it you must find a very experienced real estate and a veteran contractor that you can trust.
Fix and Flip Total Plan
Step one: Decide that you will make money buying fixing and selling real estate.
Step one is simple but vital. It all starts with a decision. You can decide it right now or you can first check and advise with family and friends and talk to people who have done in the past and or read a book or research this subject on the internet before you make your decision.
Step two: Find a territory that you are familiar with and check that real estate prices in that area are stable.
The very acceptable truism about real estate Location Location Location hold true. Since FixN'Flip is a business and as such a time consuming activity it is best that you select an area that you can easily control and reach in short driving time. e.g. if you live in Los Angeles do not look for a territory in Sun Diego unless you plan on moving there. Location is important but so is trimming and it is really truer that Real Estate is all about Timing, Timing, Timing . If the market is going up you can make all the mistakes in the world including mistakes on location and still come up a winner. On the other hand when the market is going down, no matter how smart you are and how careful you are in executing your plan - you will probably lose money. Real estate prices over a long period of time goes up. Although the overall trend is up the market is fluctuating every few years up and down. For the purpose of Fix and Flip you must avoid the down times and and buy only when the market is at the bottom close to the bottom or on the way up.
Step 3: Plan how you are going to pay for the property.
Most sellers will not allow loan contingencies on really bad fixers because 1. The seller knows that conventional lenders will not finance non owner occupied fixer. 2. Any loan contingency on a fixer will delay the closing by months and the seller intention is to move inventory as fast as possible. If you have cash in saving you can use it to buy the fixer or you can look for hard money lender to help with a loan.
What are the requirements for a Hard Money Loan (HML)? The HML is based on equity the lender is concern only that in the event of default he can sell the property in foreclosure and get his principal and interest without too much sweat.
Most hard money lenders lend up to 60% of the selling price. very few will go as high as 80% or even 90% or more if the LTV as long as the future LTV which is based on After Repair Value (ARV) is under 65%. There are other consideration that affect the lenders decision in regard to max LTV among them is the area, the Income the nature of the repair and financial strength of the buyers. Click here to contact the best Hard Money Lenders in your city.
In addition to the down payment you must have the cash reserve to complete the fix up of the property and enough cash reserve for contingency in the event that you cannot flip it quick enough or rent it to cover up your monthly loan payment taxes insurances and other expenses.
Although absolute are unobtainable it is almost certain that no HML lender will lend money to somebody who does not have some cash of his own (Blood in the deal). Cash is a must and if you do not have it there is no sense to continue with the other steps of this plan unless you come up with an alternative solution to your own cash. If you are really strong minded about making profit with Fix and Flip and you have no liquid cash you can still 2 options; A. use equity that you have in another property or B. Get a partner who either have cash or equity in residential or commercial real estate .
Step 4: Survey the selling prices of conventional closing in that territory.
There are many websites where you can get Free information on real estate prices. You should also advise with real estate agents in the territory you selected to help you with that. You must understand the difference between conventional sell and distress sell. A conventional sell is done on a property in good condition and normally with conventional or FHA bank loan. A distress sell is done on properties that need minor or major fix up, REOS, sometimes short sale transactions. (But not all short sale are necessarily fixers so get a real estate agent advise on this).
Step 5: Find properties that are fixers and are selling in the the territory
You can do it on your own but also get help from an agent. Work together with a good agent or with several none exclusive agents until you find a property that fits your needs.
Step 6: Conduct preliminary inspection of the property you found and calculate the maximum price you can offer based on the formula:
Estimated Selling Price - (Buying Price + Buying closing costs + Repair costs + Holding cost + Selling cost+ Contingencies)= Profit
Step 7: Make an offer.
In order of having a fair chance to become a successful buyer your offer should be "clean" without any contingencies that will cause the seller to reject the offer. There are many books written on "How to write a real estate offer" . An experience real agent can save you a lot of time writing a good offer. In a very hot market you must offer "all cash" or at least "no loan contingency", in order for the seller to consider your offers among others.
Step 8 : Negotiate the offers and get it accepted
Step 9: Make a thorough inspection to ensure that the repair costs are inline with your original prediction.
Now that your offer is accepted you are in driver sit. You should bring a professional inspector and or contractors to inspect the property and give you written estimates on all the items. You also need to check with the city about the property to find if there are any violation or restriction. Based on accurate data recalculate your potential profit and decide to continue with purchase, or to decline the purchase and cancel the escrow. If you decide to cancel try to negotiate the purchase with the seller prior too cancelation . You may be successful if you show written estimates from contractors and especially if the estimates disclosed problems that were unknown to the seller prior to open escrow. An experience real estate agent can be very valuable in this type of negotiation.
Important note on fix up: unless you yourself are in the business, you must get professional advise from contractors and get actual bids and reverences on on the contractors. Repair cost of property can mushroom quickly and may end up costing you twice or three time the original estimates. Also an extended time of repair can eat into the budgets. It is almost "normal" for cost and time of repair to exceed the original estimates there should be no problem with that as long as you factor it into your profit formula.
Step 10: (Optional in case that you do not have "all cash") -Get the loan approved and documents.
In step 3 you made inquiries to lenders to have a general idea on the loan availability. Now that you have the purchase contract signed by the seller the lender may request an appraisal done and other document review before final decision on the loan amount and terms is being made. At this step you may may need to renegotiate the terms with lender or find new Hard Money Lender.
Step 11: Get bids from contractors and schedule the repair. Time is of the essence you do not need to wait for the escrow to close schedule most or all of the work.
Step 12: Close Escrow
Step 13: Fix up the property
Step 14: Put the property on the market for immediate sell or rent it to tenant.
Rent or lease if you believe that properties in your area are going to increase in value and if you can readily rent the fixed up residential or commercial property in such a way that you do not have a negative cash flow.
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