Flip This House. Flip or Flop. Flipping Vegas.
You’ve seen them all. And it looks like a good idea. Sure, there’s always a glitch in the deal or a repair that takes too long—but that’s what makes for a good TV show, and the stars of these shows always seem to come out ahead in the end. In reality, house flipping is a good business. But, it requires a lot more elbow grease than a seasonal series can cover. That’s why, at HomeVestors®, we prefer to call it what it is: smart real estate investing.
Now, that’s a big term that covers a lot of territory, so let’s break it down a little. If this is your first time considering real estate investing or even if you have already dabbled in it, go ahead and fill your coffee cup so you’re ready to settle in for a good read. I’m going to give you the expert tips and techniques that you won’t see on television.
1. Find an opportunity.
You can’t buy a house until you find a house for sale. This is trickier than it sounds. Sure, you can spend days, even weeks, hunting down leads and running down rabbit holes. Lead lists, FSBOs on Craigslist, rubbing shoulders with the local real estate agent—it all takes a lot of time and energy to sort the good from the bad.
You could try to buy a property from an auction. In Chicago, you can buy houses cheap from the Cook County Land Bank Authority’s (CCLBA) sale. Chicago was hit hard by the housing crisis and still has lots of properties to offload. The titles are cleared of all liens and you can close escrow in as little as five days. Sounds great! That is, until you read the fine print.
You see, CCLBA places a “soft mortgage” on all title transfers. That means, if you don’t meet the deadline for completing the house rehab to their expectations, they take the property back. This is bad news for new investors who may not have experience managing complicated renovation projects and are bound to run into some difficulties or delays.
So, how do you get leads that are worth the time? Well, I’ll tell you this much—the real estate investors I know who get the most quality leads are HomeVestors® franchisees. A franchise? Yep. Getting those leads takes marketing. And when it comes to marketing, size matters. Regional HomeVestors’® franchisees pitch in together to leverage the nationally trusted “We Buy Ugly Houses®” marketing campaign on radio, television, and billboards. As a result, distressed home sellers actually come to them.
2. Convince the home seller.
Once you find an opportunity, you need to have the communication skills to close the deal. Distressed homeowners are feeling a range of emotions and you need to be careful not to make the situation worse with an ill-fated suggestion that you are preying on their bad luck.
You will find lots of scripts online about how to approach distressed homeowners facing foreclosure. Let me be frank with you. Most of these scripts are a cheap sell. They cover the basics in terms of getting the information you need to know from the other party, but they do little to actually convert the lead.
To be successful, you will need to add a human element to the conversation. Get to know the seller’s motivations. What got them into a sticky financial situation and how can you help?
3. Make sure the numbers add up.
A house may look like a good deal from the outset, but you are going to need the appropriate tools to evaluate the real estate deal. Some old-school investors still scratch the details out on paper or perhaps Excel. Others use some kind of real estate investor software application like ValueChek™. Whichever method you choose, make sure to include all the details. Overlooking the costs of just one piece of the renovation can cost you.
In addition, you will want to see it in black and white so that you can be sure to make a good real estate investment and not a risky emotional decision to buy. It’s easy to get caught up in the excitement of an investment opportunity—especially if you are feeling impatient after a long property search.
4. Renovate smartly.
There will be some obvious things that need to be done, perhaps replacing an aging HVAC unit or an electrical problem, but you are going to need to do more—with your target home buyer in mind. Remember, too, that you will want to adhere to your budget for staging the investment property or you will not see optimal returns when you sell.
Everyone says that kitchens and bathrooms sell houses. It’s true. So, those are the first places you will want to start. Sometimes all it takes is fresh paint and new appliances, but some older homes can have quirky layouts. To meet today’s buyer expectations, you may need to actually knock down a wall and rearrange the space to create a more open layout.
The bottom-line is that you should be strategic with your investment property renovation. Keep your buyer’s needs in mind without overspending.
5. Shop for a real estate agent.
To get the most buyer exposure for your property, you will need to have it listed on the Multiple Listing Service, or MLS. This takes a real estate agent. You might be thinking of the cost involved—indeed, it’s a good chunk of change. But, you have more options than ever before. The commission for real estate agents at full-service brokerages for selling investment property is coming down and increased competition from different brokerage models is making them more open to negotiation about their fees.
If you feel that you already have a handle on the necessary contracts and proceedings, you may consider hiring a fee-for-service or flat-fee brokerage. A fee-for-service brokerage does what it takes to see the deal through on an a la carte basis. Beware, however, that it’s easy to find yourself overspending as, in the midst of a deal, it’s easy to tell the agent to just take care of a detail for you. Before you know it, these small items add up to a big brokerage bill. Flat-fee brokerages give you the peace of mind of knowing what the costs involved will be. However, they often offer only limited services (regardless of what they advertise!).
Phew—you’ve made it this far and, finally, sold your investment property. It feels pretty good to put that money in the bank, doesn’t it? But, the Internal Revenue Service is not going to let you celebrate too long before they come knocking on your door for their share.
Capital gains taxes are a reality that every investor has to deal with. The good news is that numerous federal tax deductions for real estate investments are available when a property is sold. Of course, you’ll want to consult with your tax advisor about your particular circumstances, but here are some of the types of deductions that investors can take when they sell a property:
- Interest on a mortgage, home equity line of credit, or other secured debt
- Local property taxes
- State taxes
- Home improvement costs
- Real estate agent fees
- Depreciation (if you hold the property long enough)
Many real estate investors avoid the immediate burden of capital gains taxes altogether by rolling their profits into another investment through a 1031 exchange. To do this, you will currently need to find another investment property within 45 days and complete the transaction within 180 days.
Find the Next House to Flip
Once you’ve had a successful sale, you’ll want to leverage the cash by finding another real estate investment opportunity. In effect, you’re back to square one—finding leads again. Remember my #1 advice above: The most powerful lead generation strategy is pooling marketing dollars with other regional independently owned and operated HomeVestors® franchisees and relying on the nationally-recognized and trusted “We Buy Ugly Houses®” brand. You’ll reach homeowners at the top of the sales funnel; they are ready to sell—and fast—so they can call you.
Stop chasing your tail trying to find and convert leads all on your own. Get in touch with HomeVestors today!
Each franchise office is independently owned and operated.