In trying to finance this time of career change, until my passion for holistic animal healing becomes a paycheck, my husband and I needed to find a creative way to supplement our household finances. (That is the nice way of saying that I was no longer bringing in steady income….. ok, ANY income). My time was busy trying to build the structure of my new endeavor, but unfortunately no one appears offering you cash because you are TRYING so well.
On the other side was my husband who already works full time as a computer software architect. He’s the big picture guy who invents new things his company could do, and then builds a system to make it happen (he likes to call it PFM….. “pure f ‘n magic” (to keep it PG, let’s say his ‘f’ stands for ‘flippin’). He is also someone who has always wanted to start his own business, for now something in addition to the sure thing of his current salary. (We can’t have 2 hippy dreamers in one house at any given time!)
Now bring in the third variable – our year long obsession with the idea of real estate investing – specifically flipping houses. I prefer to call it, “rehabbing” houses since that is closer to what you are actually doing. Taking abandoned houses that are in such rough shape no one wants to live there anymore, spending some time with them to see their potential, and then coming up with a sequential plan to bring that house back to its highest potential. The goal – for that house to become a functional home again (my human rehab background definitely colors my perspective).
Our go-to binge show had been Flip-or-Flop. Tarek and Christina out in sunny California, buying houses for cash, remodeling them within a few weeks, and most often selling them right after the open house. Sounded like a great plan! I could wear cute outfits and my husband would be supportive of every choice I made. If they could happily complete a project in a 30 minute show, how long could it really take in real life? What could go wrong? (Cue sarcastic laugh in background.)
So here is my summary for someone thinking about getting into it. It won’t contain every detail, but hopefully it can guide you on your initial path. Sometimes the best advice comes from someone who has just tried something for the first time because the steep learning curve is still fresh. Think of this as the prerequisite course to the beginner’s course. I will try to keep it organized so you can use it as a checklist as you go. Remember the four “F’s” = find, fund, fix, and flip. I’ll break it into 2 blogs to keep the length user-friendly. (You’re welcome.)
Step 1 = Find It.
First, you must find the right property for your financial situation. Only realtors have access to the MLS (the official source for listing what properties are for sale) but anyone can search around in Realtor.com, Zillow.com and Trulia.com.. The main idea is looking for houses being sold at a low price but showing a large gap with a much higher estimated value price. Things to remember are that the lower the price, the worse shape it is in and the more work you will need to do to it. The other side of that coin though is you need that gap to be large enough to allow a comfortable buffer so you can feel relatively confident you won’t lose money once you spend to buy it and fix it up.
Look through the description and the online pictures and start to estimate the cost of that rehab process. First are the closing costs when you first purchase it. Now add in holding costs – like the monthly loan payment, taxes, heating and electricity. Once you’ve added up those expenses, how much profit would that give you if it sold for its estimated value price? (Only you know how much profit you would need to make the whole process worth it). In the beginning, it’s safest to give yourself a large buffer, and not get involved with anything with margins too close. Things will always take longer and be more expensive than you plan for – so don’t get into one unless you are reasonably sure you will benefit financially in the end.
Once it looks good on paper, do a drive-by. Is what you see in person similar to what you imagined from seeing it online? Online pics can crop out aspects that might make the house harder to fix up and sell than you anticipated. (Think dating websites. Is every date you meet exactly what you expected from their picture? Don’t you wish you had the option of an initial drive-by before meeting that person from match.com?)
If you are still interested, that’s when you contact a realtor to take a tour inside. This is the chance to adjust your approximated rehab expenses, seeing up close without the advertisement’s selfie filter. How much would it really cost to turn it into, at minimum, average livable conditions? If you do this process diligently it could take you months to find the right deal. Patience is key! The only way this will be successful for you is if you wait for the deal that will absolutely work for you, even if everything went wrong during your rehab….. because it usually does!
Step 2 = Fund it.
This part will also be different for each person depending on how much you can put down and how easy it is for you to qualify for a loan. Banks don’t like to give typical mortgage loans to rehabbers because the house is not yet in move-in condition at initial closing. Plus, you need more than just the cost of the house to cover your rehab process. Both of these result in a greater risk for a lender.
An easier route may be to try private money lenders. They work more often with rehabbers and most have good processes already in place for it. The drawback here is much higher interest rates. (For us, it was 15%, as opposed to 4-5% at a bank.) This is doable if you turn the house around quickly, but it will never go as quickly as you plan.
The private money lender will send someone out to do an informal appraisal of the house’s current value as well as the estimated value once a basic rehab has been performed. Then they will give you a loan for the amount to purchase the house plus the amount the appraiser figures the rehab should cost. You get the amount you need to purchase the house at closing, and then portions of the rehab costs along the way as the inspector comes back to check things off the list that have been completed. (For us that was three times.) He reports back to the lender and the lender then sends you the money for the portion of the work done so far. As you can infer, this avenue requires you to front a lot of the rehab costs on your own (with credit cards for example) and then get reimbursed as tasks are completed. By the end, you have finally gotten the full amount of the loan.
Once you sell the home, you then pay off that loan with the money from the sale. (If you have trouble selling it quickly, you can consider refinancing it through a regular bank at that point to keep your monthly costs more manageable.)
Ok…. that’s enough for one day. Take a breath and process it all. For me, the first two steps were painful to my brain and I wasn’t yet experiencing the thirty minute high I usually felt after watching it done on television. Stay tuned to see if steps three and four can lure me back in!