I Want To Learn About Investing And Flipping Properties
While many Las Vegas real estate investors have chosen to purchase and hold their properties over the past few years to wait for values to come back, there has been a surge in “flipping” activity in the local market.
For my clients who are interested in the short-term gain through the process of buying and rehabbing properties to re-sell, I have a provided a quick overview of this particular real estate investment strategy below based on my experience.
A Few Rules Of Investing In Short Term Real Estate
1) This rule is very important! Do NOT involve emotion!
Many investors will pass on certain opportunities for reasons like:
-I do not like that area of town
-The floor plan does not work for me
-The property is too close to a freeway/business etc..
I personally try to not visit the property before I buy it for these reasons. If the percentage of return is acceptable, I will move forward with a project. Remember, you generally will not make a good profit on a property that has all the great features buyers LOVE (location, size, pool, etc) because your competition at acquisition will be greater, forcing the price up. The trick is to find a property other investors wont want.
2) Do not micro manage your project.
Spending too much time at your project can hurt your deal. Your contractors will become frustrated with an investor hanging over their shoulder and critiquing their work before it is finished.
3) Do not style the home.
Potential buyers will do these things when they move in. Your $$ will be better spent elsewhere, buy a refrigerator instead of blinds for example.
How To Acquire A Property To Flip
There are a 4 main ways to acquire a home to flip in which the investor will be profitable, listed in order.
1) Auction – This requires cash at your local daily county bank sale. Properties will almost always have liens attached in which the investor is responsible for. The interior will not be available for viewing before purchase, however there are services offered by drivers that will provide pictures around and sometimes inside the home the morning of the auction.
2) Short Sale- These properties will almost always be sold for a 5-10 percent discount and sometimes more depending on condition. The issue with short sales are they take time, anywhere from 2-12 months usually.
3) Foreclosure – When the bank sells a foreclosed home in bad condition, they will do so at a discount, these are your targeted foreclosures. There are programs (Homepath) the bank uses to improve homes in order to yield market value; obviously these are not profitable target flips. There will be no liens attached to these properties and the investor will be able to view the property before purchase.
4) Traditional- Purchased directly from the seller, unless under distress, this will most likely be a very rare situation.
About The Auction Process
Time and Location- The auction takes place Monday-Friday from 10am-3pm (9am Friday) and 4th st and Charleston Blvd. Monday-Thursday are the slower days with less properties available and a smaller amount of competition.
The banks will release double the amount of properties on Friday, this attracts larger crowds of bidders.
Auction Companies- Due to the amount of investigation an investor will need to know and time devoted, they often choose to use an action company. The company will provide information about every lien, pictures of the property and will bid on your behalf.
On any particular day, properties are auctioned at random and can be postponed or be bid up too high. For this reason, the service of companies being present at the auction on your behalf can be very valuable.
The fees are $500-$2500, the more expensive company is the one you want to use as they represent more clients, this will end up costing more money in the long run if you don’t use them as they most likely will be bidding against. A single company representing 2 clients on 1 property will give the sale to the higher bidder but will not bid them against each other.
Below are some liens you can expect when purchasing properties at auction.
HOA – If located within a homeowner association, there will most likely be a lien attached due to non-payment by the previous owner. This lien will be costly, typically $2000-$10,000. The lien holder by law can only charge 9 months back (called a 9 month super priority), also included will be a long list of charges such as lawyer fees, notice of default, late fees, intent to lien etc.
Trash/Sewer – These 2 liens can be expected if the HOA does not include trash pickup and sewer as they would be wrapped into the above lien. Trash and sewer charges are fixed regardless of occupancy and are typically $250-$2000.
Taxes – If the taxes go delinquent for a long period of time, the county can send the property to a tax sale and take priority over the note. The bank will usually pay the taxes to prevent this, sometimes not. More often than not, you can expect the taxes to be current.
What About Occupancy Concerns?
Many investors will try to acquire the property vacant for obvious reasons but purchasing occupied can be more profitable/cheaper. If occupied, you will need to approach the occupant and negotiate a deal for them to vacate, this will be known as “cash for keys”. The goal is to get the occupant(s) out quickly and with as little damage as possible.
A typical amount paid is $1000 for 30 days and a guarantee on condition. If the occupant is a tenant, they must provide a lease which must be honored by law. In some cases, the occupant will choose to ignore the new owner forcing an eviction, this is a $700-$1000 and 3 month process.
The Rehab Process
The more money invested into the property, the higher it will sell for. The trick to rehabbing is not to become emotionally involved, stay with neutral colors and no decorative features. Budget in the following items, they will yield the most profit.
Flooring – Replace all carpet, even if the current is very clean it will provide a pleasant smell, and you can advertise “all new carpet”. In the wet areas, if tile is not laid down and budget permitting, replace with new standard tile.
Paint – Almost always repaint the whole property, unless it happens to have a near flawless paint job already. New paint gives you 2 advantages: Nice smell and a neutral 2 tone look, taupe on walls-white ceiling, doors and trim.
Appliances – Budget permitting, a new set of appliances including refrigerator will go a LONG way in selling the property. Expect around $3000 for a mid-range stainless steel set.
Fixtures- Typically this category will fall after the previous 3 in importance, also budget permitting obviously. If possible, install ceiling fans, new kitchen sink and faucet, and lighting fixtures.
Repairs – A thorough check of the property will reveal standard repairs that need to be made for example: Leaking toilets, light bulbs, garbage disposal, A/C, leaking faucets and smoke detectors.
Pricing A Property
The sale price will have many determining factors:
1. Amount of available listings in the development
2. Amount of vacant, in good condition listings
3. The current state of the real estate market
A good rule of thumb is to find your best comp, and price the property slightly below that. Your home should be the nicest listing in the neighborhood due to the condition and the fact that it is vacant and ready to move into.
If a turn-key property is produced, slightly below market value, the goal is to receive and accept an offer in 15 days or less.
Price Point and Profits
When trying to decide acquisition cost, use the below formula:
(comp (minus) rehab & fees (minus) closing costs-7.5 percent (minus) 8 percent of comp)
For example: Subject property is potentially worth $170,000
Rehab & fees (liens)- $13,000
8 percent of comp (projected profit)-$13,600
Acquisition cost $130,900
Depending on current state of the market, an Investor should realistically expect to make around 7-8 percent return on your money in a 40-50 day period.