Michalski, 1 Honors Senior Thesis
Flipping Houses
Elena Michalski
Dr. Montoya
Honors Senior Thesis
Spring 2018
Michalski, 2 Honors Senior Thesis
Abstract
The concept of “flipping” houses is a trend that has increased in popularity as a source of income in the United States. History shows that owning property means security, status and stability. This principle is still considered to be true today provided the market remains strong.
This paper will discuss the housing market, as well as the current industry related to “flipping” houses. Included will be the basic definitions of terms used in the industry, as well as several interviews conducted from experienced house flippers in Colorado. This paper will conclude with a hypothetical market plan of what would be needed to begin a career in property management, specifically to “flip” homes.
Michalski, 3 Honors Senior Thesis
History of the Housing Market
The housing market is one of the most unique markets in the United States. From the early times of the establishment of the colonies, owning land was a sign of power and status. In the early 1800s only the wealthy owned property. As J.D. Roth explains in his article A Short
History of the U.S. Housing Market, owning a home was the exception, rather than the rule
(Roth). Land was owned by farmers and generated revenue due to the necessity of agriculture production that provided food for many. With the Industrial Revolution, homeownership expanded more to populated and urban areas. Still, only half of all Americans were home owners up to the 1940s (Roth). According to Roth, homeownership did not increase to include more than half of all American’s until the 1950s. By 2010, that number increased to 66.5% of Americans being homeowners (Roth).
Every decade had different factors that contributed to the development or lack of development of the housing market. Initially during the 1800s, people did not have money or the means necessary to purchase a home. The banks were very selective with whom they would lend money to for the purchase of a home. The National Bank Acts of the 1860s stabilized the United
States banking system, and introduced the concept of mortgages (Roth). This allowed banks to begin experimenting with money-lending strategies, and although these strategies were not developed into the mortgage concept we are familiar with today, they became popular across the
United states by the 1890s. The factors that go into mortgage and loan payments will be explained in greater depth later in this document, but the general essence of how a mortgage works is as follows: The money is loaned with interest payments and a set schedule for how the loan will be paid back. This allows the lender to make money as there is interest charged on these payments, while still collecting the initial payment. There are stipulations and Michalski, 4 Honors Senior Thesis consequences for people who do not make the payments at the correct times or who default on payments by not making them at all.
A typical mortgage in the early 1900s had a five-year term with a 50% down payment made on the property at the time of the initial purchase. This loan was designed to be paid back in full of the accumulated interest in 5 years. There was also the feature that allowed borrowers to renegotiate their loan every year with the lender or bank. Modern mortgages are typically a
30-year term with a down payment requirement, generally between 5 percent and 20 percent.
Early mortgages were well structured until the Great Depression, when the banks ran out of money to lend. At that time the average borrower had no money, either, which meant most borrowers defaulted on their loans. This resulted in 10% of all homes being in foreclosure in the
1930s (Roth).
After this economic downturn, the United States Government developed the Home
Owners’ Loan Corporation in 1933, the Federal Housing Administration in 1934, and the Federal
National Mortgage Association in 1938 (Roth). These changes in administrative overseers led to an increase in the strict monitoring of housing crashes, and to large increases in homeownership in the United States.
The next big development was the Servicemen’s Readjustment Act of 1944, also known as the G.I. Bill, providing subsidized mortgages for World War II veterans, which would change the housing industry and the American economy (Roth). The G.I. Bill was a law that provided benefits for returning veterans. It was designed by the American Legion, with intention to provide immediate rewards for World War II veterans. It also avoided the postponed “cash bonus” payout for World War I veterans, which had caused political turmoil (Altschuler and
Blumin). According to Roth, “the G.I. Bill’s mortgage subsidies led to an escalated demand for Michalski, 5 Honors Senior Thesis housing and the development of suburbs. One-fifth of all single-family homes built in the 20 years following World War II were financed with help from the G.I. Bill’s loan guarantee program, symbolizing the emergence of a new middle class” (Roth). These additions would eventually shape what we know today as the middle class, laying the foundation for the emergence of suburb living.
Following the inception of the G.I. Bill, home buying in the United States became more common. The National Association of Real Estate Boards, established the term Realtor in 1916.
The real-estate profession grew along with the housing market boom throughout the 1940s and
1950s (Roth). The stabilized economy of the 1950s in the United States allowed over 50% of
Americans to own their own homes. Because the demand for houses was rising, like any market in a thriving economy, this increased the price of homes. Information drawn from Yale economics professor Robert Shiller shows the tracking of U.S. home prices from 1890 to January of 2016 shows a slight dip in home values in the 1930s into the 1940s and then a sharp increase in the years following, only to continue to increase into the market today (Roth). This increase is due to the development and advancement of the organizations that oversee mortgages, which increases the demand to buy homes, which in turn, leads to the increase in home prices.
In the early 2000’s there was a sharp increase in loans and home purchases, creating a large bubble of lending and home ownership. This bubble saw home prices rising with more
Americans having home loans. In 2008 there was a drastic market crash. Roth believes this bubble came from loose lending standards, lack of government oversight, possible real-estate speculations, or American propensity for consumption (Roth). After the market crash, home prices decreased dramatically, but have slowly started rising again in the years following, showing an economic recovery from the recession. Michalski, 6 Honors Senior Thesis
As the house prices generally increased, excluding the market crash, this lead to increased ownership rates and increased mortgages. Long-term mortgages became much more common and are now the standard in the United States. This then lead to the debt relative to income within a house to increase dramatically. As people began acquiring higher mortgages and principal payment loans, the debt relative to total income in the average household rose from
20% to 73% (Roth). With the expected economic trends changing and the demand for home ownership increasing, this debt increase has been exponential. This debt increase has come in part from the increase in house prices as well as the house sizes increasing dramatically. The
U.S. Census Bureau estimates the median size for a new home built in 1973 was 1,525 square feet. In 2014, the size jumped to 2,453 square feet (Roth). The number of square feet per person on average in each home has jumped from 525 to 982 square feet per person in the respective years. This calls to question if homeowners are considering the costs when they choose to buy bigger homes, and whether this is part of the reason people end up defaulting on their mortgage payments.
Finally, after reviewing the history of the housing market and the peaks and valleys that the market has been through to establish its prominent position in today’s economy, Roth analyzes the cost efficiency that the average household could use to help lower household costs.
The Consumer Expenditure Survey, as expressed by Roth, reveals the American family spends close to $1500 on house-related expenses, which is shown to be more than food, clothing, healthcare, and entertainment combined. Becoming established in the housing market means assessing these values and reducing these costs. It looks at understanding how these numbers work in your favor and how particular numbers can be a detriment to your business. Buying and selling houses, after all, is a business that has only grown over time, excessively more so as the Michalski, 7 Honors Senior Thesis market has increased and prices have increased. There are many factors that go into becoming established in this current real-estate market, and many things must be considered before getting involved with buying and selling properties. The housing market has changed over the years, but owning property is still viewed in society as a source of affluence and power. Although not viewed as unattainable as it was in earlier years, it is still a factor that influences how we view one another in society. This paper will discuss the strategies on how to successfully become established in the real-estate industry, and what significant aspects will need to be addressed.
I gathered most of these sources and articles from the world wide web. There are many areas of this industry that Americans are uneducated about, resulting in the defaulting of loans, incurring unsurmountable debt, being foreclosed and ending up with legal battles they are unable to win or afford. As my desire is to become a homeowner someday, I would love to become established in the housing market by owning several properties. I realize I need to learn the intricacies of the housing market, what pitfalls to avoid and what successes can be learned in today’s competitive market. This document will describe aspects of this process that should be known by people in the market, whether that be homeowners, lenders, or realtors. Developing an in-depth amount of information related to the real-estate industry can help reveal all aspects of the market that might otherwise be overlooked.
What is a Mortgage?
The definition of a mortgage is “a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt” (Merriam-Webster).
JD Esajian discusses the features of a mortgage in his article Breaking Down the 5 Aspects of a Michalski, 8 Honors Senior Thesis
Mortgage Payment. The principal of a mortgage payment is the repayment of your loan amount.
This payment is used to reduce the balance owed on the original debt (Esajian). A fixed interest rate option sets the principal repayment to be the same amount for the life of the loan. The amortization schedule documents each payment for the length of the term. The way the mortgage payments are structured will lead the principal payments during the second half of the loan so that the lender can earn their interest payments before the payments start reducing the principal.
This helps banks protect themselves in the event of a default (Esajian). Defaulting a loan means you stop making payments on the loan. Justin Pritchard explains the consequences of defaulting on a loan in his article What Happens when you Default on a Loan. The first consequence when defaulting on a loan is your credit score will suffer, 30 days after the payment is due (Pritchard).
After this amount of time has passed, the information gets reported to the credit bureaus which will negatively impact your credit score. This makes it harder to get loans in the future. This can impact your ability to purchase a car, find employment, receive utilities, or phone services, and securing necessary insurance (Pritchard). Unpaid debts then can get sent to collections which can eventually lead to legal action. Different types of loans can impact the degree of consequences associated with the default. An unsecured loan is a loan that is not linked to any collateral and has the least extreme ramifications for defaulting. A lender can only attempt to damage your credit score, and then attempt to collect the unpaid balance through legal actions (Pritchard).
When taking out loans on homes and automobiles, the consequences can be worse.
Flipping Houses How-To
Throughout my extensive research, I have found that most of the useful information has come from people who have actual experience with the housing market. These are people who Michalski, 9 Honors Senior Thesis have risked their investments, their labor hours, and their energy into houses and learned the ins and outs of the market through trial and error. I conducted an interview with local Pueblo realtor, homeowner, and house-flipper Robyn Mason. Other interviews I conducted were with Colorado
State University-Pueblo professor and experienced house-flipper, Justin Holman, and experienced contractor and house-flipper, Steve French.
Do You Need to Be a Realtor?
Mason is particularly advanced in the market, not only with several of her own properties that she has flipped successfully, but also because she does all her own buying and selling as a realtor. When I asked Robyn if that was advantageous to the process of flipping a house, she stated that most of the initial market research will come directly from the realtor; “they will help their investors in buying and selling and setting the price on the house” (Mason). She also indicated that bank listings of properties and availability is common knowledge to the public, however it is more advantageous to a realtor because they are already familiar with how to operate with the banks and often have personal connections with bank-owned properties
(Mason).
Neither Holman nor French are realtors and they had different opinions on the benefits and drawbacks of having a realtor’s license during this process. Holman states that it is not necessary, but he says it is the most useful in the selling. He explains “there are pros and cons.
There are advantages of going with someone who is a seller, agent, and has a broad network, yet on the other hand, you pay the bill for the commission to the real estate agent” (Holman). French also explains that it is not necessary. He describes: “I do not have a real estate license. A realtor is a very small part of the equation, but it depends on the scale of your business. If you can move Michalski, 10 Honors Senior Thesis multiple properties simultaneously, a real estate license is worth maintaining. If not, a realtor you can work with on reduced commission is probably preferable” (French).
Although it is helpful to have a real estate license in the house flipping industry, it is not required. Provided the person flipping the houses is educated on the process and familiar with the terminology and the resources they need to use to successfully work with a realtor, becoming a realtor is not required.
Becoming a Realtor
I researched the requirements to become a licensed real-estate agent as part of this project. In an article published by Brightwood College in July 2017, they discuss the requirements for this process. The major requirements include: age, formal education, professional real estate education, examination, broker affiliation, and additional state level requirements (College). The age requirements include that the person is at least 18 years old. The formal education requirements include a high school diploma, which varies in some states. Some states do not require a diploma although they still monitor the age requirements. The real estate education requirements include pre-licensing requirements which include substantial required hours and course curriculum that will dictate the approval for the state licensing exam. Next, there are post-licensing requirements that will put the license status from probationary to full licensure. This education is likely a class or series of classes to gain full licensure (College).
Examination requirements are a state-administered licensing examination prior to getting the license, which includes information from the national level to the state level (College). Once a license is obtained, a broker must be chosen that the license is represented with, indicating the company that the realtor is associated with. This includes support for running a smooth business, as well as an affiliation with a known brand (College). Lastly there are several different state Michalski, 11 Honors Senior Thesis requirements that might be included in the final process of obtaining a real estate license. This information is readily available online, through any accredited real estate school.
Developing a Proper Education
The first step in the process to be able to “flip” a house is to become educated. According to Brandon Turner’s article Flipping Houses: The Ultimate Step by Step Guide, someone can become educated in this industry by using the extensive resources that are available. Whether that be through reading books, talking with experienced veterans in the industry, it is all very important for the initial entry into flipping. Turner’s article suggests that the most important first step it to understand the math that is associated with flipping a house. If someone pursuing a house-flipping career does not truly understand the numbers they need to generate to return a profit on the property, the undertaking will quickly become a negative one.
Although Mason states that a realtor would do most of the initial research for the investor, it is always encouraged to be as educated as possible on the property of interest. When I asked Mason what the most important aspect in buying a house is, she replied “the neighborhood is the most important aspect. What you do is pick the neighborhood that you think would have a good resale value, and then you go and do a comparable, looking at what has sold in the last three months in that neighborhood so you know what the resale value is. Then you target that price, even the lowest price is a good one because you are going to put more money into the house than what you thought, from my experience. The lowest value is still a good target because with modifications and improvements, you are going to increase the resale value and still be at a good selling price for that targeted neighborhood” (Mason). When conducting market research,
Turner suggests considering these questions: “How much are average homes selling for, how much are bank Real-Estate Owned (REO) selling for, how fast are properties selling, what areas Michalski, 12 Honors Senior Thesis seem to be selling the fastest, and what property types/size/layouts seem to be selling the fastest?” (Turner). Holman also insists on “doing your homework” before initiating any forward movement. He asserts “you have to make more offers to get deals with a good market, you have to make an offer that will make you the most money, for the right deal” (Holman). Basically what Holman is saying is. . . . After developing a solid educational foundation for the market and discovering potential properties, the next step is to set up the finances.
Obtaining Financial Support
Financing the first flip is one of the most important parts in the process. Ideally, the money returned from the first flipped property will finance the next one, and that one will finance the one after that, and so on, while continuing to generate a profit with which to live on.
The easiest financial solution for the flip is if someone can pay in cash. This is not usually the case, in which case different loan options need to be considered. Turner lists different types of financial options and discusses the stipulations on a home equity loan. This means “if you have a large amount of equity in your personal home, you may be able to tap into this equity in the form of a loan” (Turner). In Turner’s opinion, the best form of loan comes from what he refers to as
“hard money lenders.” This is a person who is a private individual or company that lends money on high risk loans, then charge high fees and interest to get the money returned. They are ideal because they typically only have a one year or less maturity date (Turner).
Holman explains “There is a lot to be gained by being able to pay cash. People would disagree, but if you can come in with cash, the savings you are likely to get on the buy would more than make up the return on investment. Going in with cash can get a much steeper discount, which can be much better than working with the bank” (Holman). He explains this to eliminate any possible conflicts that can come with banks, as well as dodging interest rates. He Michalski, 13 Honors Senior Thesis expresses how financing will look better, the numbers will look bigger, but the hassle will be less, and the discounts and the savings from interest would outweigh the financial plan
(Holman).
French also agrees that paying cash can be very valuable, as he generally buys from private sales on cash basis so his money is not tied up for too long (French). His financial planning comes from the property. He states “This is totally property dependent. A good general contractor on staff can look at a project and quickly determine what it will take to make it saleable. Again, a faster sale with less investment is always preferable to doing a lot of work and holding a property for the right buyer to come along” (French). He also does portions of his own contracting, so if efficiency and effectiveness are the major priorities, the financial planning and return can be the focus.
Getting into a House
Mason suggests that after the financial plan is in place, do whatever is possible to get inside the house before purchase. She claims: “most bank-owned homes won’t let you turn on the water or utilities until you buy, so doing as much initial assessment as possible to hopefully determine the state of the house” (Mason). This will help eliminate any unknown costs that might be acquired after the sale, but might have been a major influence on the budget of the house.
Before buying, if you do not have a real estate license, it’s to your advantage to find a very good realtor. The realtor’s job is to write up offers, get comparable sales, and help in advisement on property purchases. Realtors are important because it is a free resource to the buyer, as the seller pays the realtor’s fees. If you use the realtor who is selling the house, their Michalski, 14 Honors Senior Thesis legal obligation to the seller is to sell the house for the highest possible value, so doing external research is highly encouraged (Turner).
There are situations however, in which you might not need a realtor. There are cases that are rent-to-buy, or for-sale-by-owner situations. In this case it is important to get in contact with the landlord or owner about the purchase.
Property Analysis
The next important step is to clearly write out multiple analyses on different properties.
The goal in this industry is to make money, and it is a high-risk, high-reward industry, meaning if the proper care and patience is not taken, there is potential to lose vast amounts of money. In this step it is important to find many different properties of all types and locations and write out the numbers that are associated with each property.
In this step you align the values marked with the houses, and then the values you associate with your budget. This allows for a large sample of houses to choose from and different options to weigh in your purchasing decision. This next step is very important: physically look at the house. Ask questions and do whatever is necessary to get inside the house and do inspections and analysis (Turner). Mason heavily emphasizes this piece of the puzzle, because with bank- owned homes that haven’t been utilized in years, the external appearance might be very misleading in comparison to what the internal appearance might hold. However, Holman explains several situations where it is good to look at houses that deter other people. He describes how easy it can be to take on a mid-major project, and get discounted values on a property, simply because people turned away from the project (Holman).
Michalski, 15 Honors Senior Thesis
Making an Offer
The next step is making an offer on the property. Much of this step is handled if there is a realtor involved, and it is suggested that for this step work with a realtor, even if most of the other steps were completed without one. This is where paperwork is filed and agreements and payments are set. Without background knowledge and the proper paperwork, this step can be very risky. This is also where contingencies are included. Contingencies are the parts of a legal offer that are “escape clauses.” The contingencies Turner suggests including are “appraisal contingency, inspection, and financing” (Turner). Turner explains that a contingency is important because “if you can’t get an appraisal on the property that is at least as high as the purchase price, you can back out of the deal; or ask the seller to drop the price. If they refuse, you can back out of the deal” (Turner). The inspection contingency allows you to hire an inspector to do an in-depth analysis of the condition of the home to uncover any hidden problems. If there are any unforeseen problems, it allows you to back out of the deal. The financing contingency means the buyer can back out of the deal and get their earnest money back if they cannot obtain financing.
Earnest Money and Inspection
Once the offer is finally accepted you pay the “earnest money” to the title and escrow company, who are responsible for closing the deal. In this stage it is important to have a professional inspector to come inspect the property. Turner emphasizes this stage and the importance of getting it done right so you do not miss something after you legally are tied to the property. Any issues that come up may be negotiable, or there might be possible credits that can be given to account for the issues, so finding things to be fixed can be beneficial to the buyer. Michalski, 16 Honors Senior Thesis
Any drastic, major changes that are needed that could completely engulf your finances might be an instance where you reject the condition and walk away from the property (Turner).
A contrasting explanation comes from French, as he claims “You need to be able to do your own inspection. Home inspectors are at best unreliable and at worst totally incompetent to discover any actual problems with the property. You will not be able to make money, from our experience unless you have sufficient funds on hand to come in with a straight cash offer so you can do a quick closing. Try to forget the traditional real estate process because it will take too long and eat up too large a percentage of the profit margin” (French). It should be noted, however, that French’s advice comes from someone who has been a construction contractor and is very skilled at doing his own modifications and is very experienced in doing an inspection, understanding exactly what to look for.
Following the property inspection is the time to develop a list of all the things that might need fixing or updating to get the property ready to sell. This is a good opportunity to have an experienced contractor with you; this way you understand the expenses in place of the repairs, so you are not in the house before you realize how expensive some of the repairs or changes might cost. A good contractor is very important in the entire process. Mason states “I like having a licensed contractor, because he ends up saving money. Some people who do it [the construction] themselves, they think they’re saving money, but in the long run, I find they aren’t saving. They end up over-improving because they’re so excited and they want to fix everything up and they end up putting too much money into it” (Mason). Having a professional contractor is very useful and important for any construction in the house.
Holman expressed his eye for challenge. His ideal house is one that has something that will scare away the other buyers. He explains this is not only for the deals that he can establish Michalski, 17 Honors Senior Thesis and discounts that he can get because no one is interested in the property, but he also has someone who can come in and assess the problem, explain to you how much it will cost to fix, and if it is in your budget, it will usually deter all other buyers and are typically easier than people tend to think, with a better deal (Holman).
French however, explains that in doing all his own modifications and contracting, he can save money (French). He also advises against the riskier projects and that the best houses need simple cosmetic adjustments before a resell. The important part is to find the best system for your expertise and make sure the job gets done correctly, to save costs in the future.
Due Diligence
The next step is to “finish your due diligence” (Turner). Turner explains this is a list of tasks that will want to be completed during this time. “Make sure utilities have been paid and there are no outstanding debts, sign various disclosure documents from the Title and Escrow company as they are sent to you, open up a checking account and order checks, purchase property hazard insurance and flood insurance, schedule contractors to get started” (Turner). This is a very important part for scheduling, as with any project, it is important to keep the project running smoothly by having a project schedule, managing the project resources and funding, and to ensure that you are not over budget.
Closing
Next, comes the time to close on the property. This is where the Title and Escrow company will arrange for paperwork to be signed and the money will be directly wired to the appropriate party, ensuring that everyone gets paid their proper amount. Then the deed will be sent to the county to record the ownership, and then passed the new owner (Turner). At this phase, provided the “due diligence” phase gets done correctly, the contractor should be set to go Michalski, 18 Honors Senior Thesis on day one to get going on the tasks for the resale. Unless there is a property manager involved, the new owner’s job is to ensure the schedule for the contractor is upheld and tasks are getting completed as they are assigned and scheduled (Turner). During this phase Mason says, “what I do is I have my heating guy who checks and cleans the furnace and AC (after remodeling). Then a plumber comes in, usually when I go to turn on the water, because in bank-owned properties, the water can be turned off for a really long time and you wouldn’t know what to expect”
(Mason). This piece is important as well, in case anything is missed during inspection once the house is completely on, it is important to have the right staff members near. During all phases from here until the resale of the house, it is important to also keep up with paying the bills and paying the labor fees. It is important to keep record of all expenses whether they be raw materials or overhead fees, no expense should go unrecorded. To generate profit on the project, it is essential that the expenses paid is recorded and monitored.
Pre-Sale Inspection
Once the contractors finish their work, the owner goes into the home and pays attention to the small details that might have been overlooked or need to be completed and the correct amounts for the contractors need to be paid. It is important that money only goes to the contractor after all the promised tasks are completed. This phase is where owners often consider staging the house. The term “staging” refers to bringing in furniture, wall art, lighting features, plants, curtains etc. that make the house look lived in. Statistically speaking, houses sell faster and for more money when they are staged (Turner).
Listing the Home
After the property is completely fixed and the modifications that the owner wants to make, are made, the next step is to re-list the home for sale. While it is possible to list the house Michalski, 19 Honors Senior Thesis as “for-sale-by-owner,” most use a real estate agent to gain maximum exposure on the property.
The listing agent will outline “the sale price, the agent commission, how long the listing will last, and several other details” (Turner). This stage is important to be persistent with the agent, ensuring that your property is at the top of the priority list. This is a stage where it is very beneficial to have a real estate license because now the owner does not have to pay the agent’s commission; all the money would go right back to the owner for the work. This is where having a real-estate license is helpful for Mason because she can be as persistent with her property as she so chooses and can personally ensure that her property is the number one on the list.
Offers, Negotiation, Documents, Closing
The next few steps, found in Turner’s how-to guide, all run together as the house comes to a selling point. This stage is where the new buyer comes in and assess the property and decides if it is right for them. An offer will be made, negotiation of a fair price will be presented, the buyers will do their due diligence, and consider the deals presented. If other issues are found, then price negotiations may be in order, but it is important here to try to keep the deal alive.
The last step is to close on the sale. The closing documents will need to be signed at the
Title and Escrow company, which will also handle the payment procedure in the closing process.
A good tip in this phase is to ensure you have a tax professional before selling the flipped house, to avoid being taxed at the highest possible level. There are ways to avoid portions of the taxes, so it is necessary to have this plan implemented prior to the sale (Turner).
The last step is to take the profit. The profit can either be used for the next flip, or purchase rental properties, or buy real estate notes, but Turner stresses the idea that flipping is what’s known as “active” income, so to generate real wealth, flipping is not designed to be a sole means of income. It is important to build up passive income to establish real wealth (Turner). Michalski, 20 Honors Senior Thesis
Conclusion
Flipping houses is a very intense and exciting way to make money. The goal in all of this is to turn a profit on the property. A common misconception in the flipping industry is that the initial investor should be rich and have money to start. Although this is very helpful, there are ways to help the financial process and still generate a profit, even though the initial payment does not come directly from your own cash.
The tips for saving money include: gathering enough initial information in order to make the best offer for the best possible property of those listed; establishing a good financial plan with a reliable money-lender (whichever loan choice the investor may make); establishing good connections with inspectors, contractors, plumbers, and all other third party workers that might have an influence on the property, and keeping track of expenses and ensuring that you are not in over your head (Mason). It seems common in this industry that many people decide quickly that they are going to fix absolutely everything on the list that shows up from the inspection and, because most of these people are not doing the labor themselves, they end up paying a very large amount to the contractor that might not have been an absolute must fix (Mason). Holman suggests avoiding chasing a property (Holman). He advises against any emotional attachment to the deal, because this can quickly add to the expenses of the house, and the “headaches” that come with this (Holman).
Having a not-so-reliable contractor costs more for simple tasks that you may not be familiar with. It is extremely important to ask questions and pay attention to the details. There can be large differences in expenses if you are undereducated in any area of this process without any prior knowledge on the topic. Michalski, 21 Honors Senior Thesis
A common misconception is that flipping is a good way to generate a single source of income. It is imperative in this industry to understand that with patience and educated decisions, this is a viable way to make a secondary income, while still bringing in a primary income in the early stages (Holman). The end goal is to establish a house-flipping routine that brings in enough money to allow it to be a primary source of income, because you have done your due diligence on each of your houses (Turner).
French offers words of caution and helpful tips. He states: “Actually buying and flipping a house is much different than what is depicted on reality TV shows. Without a sponsored cast and crew and plenty of network capitalization those projects would never really work. My ideal is to buy a house that is sound but ugly. Start with exterior paint and landscaping. Put the house on the market then work on inside: painting, carpeting, and whatever else it takes to make the house saleable. The landscaping and exterior appearance are really the key to a quick turnover”
(French). House flipping is not for everyone, but there are strategies that will allow for success, and a proper education, tenacity and passion for each house is crucial.
In conclusion, the real-estate industry related to flipping houses can be tricky if not handled properly; it is essential to be educated and organized during the entire process for success in this field. While keeping in mind this is a risky business, there must be willingness to take the risk. A mind that is willing to take calculated risks and be persistent, patient, dedicated, and educated will be the one that is most successful in this field. Holman states “you can’t let fear guide your decision-making process. If you’re always thinking about the worst-case scenarios, you’ll miss out on the best opportunities. You don’t want to be foolhardy, but if you get to the edge, it can be scary; but if you’ve done your homework and the numbers look good, you can’t let fear keep you from pulling the trigger” (Holman). Michalski, 22 Honors Senior Thesis
Works Cited
Altschuler, Glenn C. and Stuart M. Blumin. The GI Bill: A New Deal for Veterans. New York:
Oxford University Press, 2009.
College, Brightwood. "Requirements to get a Real Estate License." 27 July 2017. Brightwood
Real Estate Education. Brightwood College. 2 March 2018.
Esajian, JD. Breaking Down the 5 Aspects of a Mortgage Payment. 2017. FortuneBuilders.
payment/>. Holman, Justin. Flipping Houses Elena Michalski. 19 April 2018. Mason, Robyn. Flipping Houses Elena Michalski. 1 February 2018. Merriam-Webster. Definition of MORTGAGE. 2017. Merriam-Webster. webster.com/dictionary/mortgage>. Pritchard, Justin. The Balance Banking and Loans. 5 August 2016. The Balance. Roth, J.D. A Short History of the U.S. Housing Market. 25 April 2016. Money Boss. Turner, Brandon. "Flipping Houses: The Ultimate Step by Step Guide." Bigger Pockets (2014).