Is this even a sound business plan or proposition?

Question

I am soon moving to Tampa and want to start what I want to make my REI career there.  I have been looking for deals on-line, dealt with several RE agents who after a while give up helping me.

I read articles about creative REI ideas, listen to all the BP podcasts, read business books, RE books, etc and I want to start now.  I have been watching the game from the benches for too long and I will start here by asking for advice on a business idea I have been thinking about to help jump start my journey.

The idea:

To find a person who flips houses.  Propose to that person that I will buy houses from him/her with the condition that we will help each other grow.  I will buy houses flipped by that person at a price for which he/she will make a profit from the transaction and I in turn would hold and rent the properties and be able to create enough cash flow to reinvest in his/her projects.  That way his/her business and passion to flip grows and so does my portfolio.  Win-win proposal.

I have not read or heard about a business proposal like this and would like anyone with enough experience to advice me if this is something that is even sound in the Real Estate Investment World.

Any advice or comments are greatly appreciated.

Joe Villeneuve · Answer

What you are describing is a combination Wholesaling relationship and Flipping Partnership...and sorry, it's not a workable plan.  You are missing way too many pieces to even attempt to mention here, but I will mention the highlights:

• If you are both looking to learn, who do you learn from in your "partnership" scenario?
• What market(s) are you investing in?  This is the most critical question.
• If your flipper partner is already flipping, why do they need you?  What are you offering that the flipper doesn't already have?  
• If your flipper partner is already flipping, and making a profit, where does your profit come from...without the existing flipper having to share their profit with you, or adding your profit to the flip price making the property overpriced?
• If you are buying the properties from the flipper, and the flipper is pricing their sales at market ARV, then you are probably not going to be able to cash flow. (see @Mike Hanneman).
• How are you going to buy these properties from the "flipper" anyway?  Do you have a continuous stream of cash for this?  Do you have the ability to access loans, based on your credit score and your debt/income ratio to  qualify for enough total dollars in loans...and number of loans, to do this?  If so, do you know what your limits are for Total Dollars & Total # of Loans?
• It appears as though you have described a typical Buyer (you) - Seller (flipper) relationship, but are asking the existing flipper to take less so you can buy the property low enough to cash flow it.  If the flipper is currently successful, why would they want to do that?  If they are not, why would you want to partner with them?

I understand your desire to get into REI.  What you need to do is ask yourself the following questions:

• What do I have to offer?
• What are my strengths?
• What are my weaknesses?  This is where partners come into play.
• What are my goals?  These should be specific and financial...not "I want to flip # of houses, and buy # rentals per year".  Those are NOT goals, that is NOT a plan.  That could be a summary of what you did, but not what you intend to do...unless it is based on achieving your specific financial goals.

Shannon K. · Answer

@Damian S., why are you thinking its a mistake to make the place the best around? You don't want to stand out among your competition?

We flip in A & B-class area suburbs so its rather difficult to "over-improve" in these neighborhoods for flips because these homes garner top of the line finishes, SS appliances, granite/quartz, staging, etc... Given this parameter, I always want my houses to look the best on the block.

Its very obvious which homes on the market are "flips" here in Buffalo compared to the older dated interiors of the other houses listed. These flips are always head over heels better looking than the other homes in the neighborhood and always sell much quicker and for much more than the average-looking homes of similar size/bed/bath go for... And that's what we're going for here :)

Jon Miller · Answer

I think this is a great idea for a single company. If you operate as two separate investors working together, I think you end up spending extra money buying from the flipper (taxes, closing costs, etc) and the flipper loses out on the opportunity for a homerun property. As a buy-and-hold investor you want to buy homes with built-in equity (the more the merrier). As a flipper, your partner wants to sell houses right around market value to get the most profit per flip. If the flipper has a property that won't sell, and is willing to offload it to you at a discount, I'd go for it.

If you two form one company that buys at a discount, rehabs, then rent out the properties (BRRR method) I think it'll work great. Unless you have a lot of cash to invest, I'm not sure a flipper would be willing to lose profits on their flips to start up a rental operation, or they'd be a landlord and not a flipper.

Damian S. · Answer

@Shannon K. Basically you still want your investment to be comparable to other properties in the area but most of the time there is really no need to go over board. That's what I wanted to stress.

Damian S. · Answer

@Shannon K. My first mistake was to make the place be the best around but you should not over invest, since the average will always guide what your able to get in the end :)

Shannon K. · Answer

I'll have to agree with most of the posts here... As a flipper, if I spend 2 months fixing a house with my team, its gonna be the nicest looking house on the block. I'm going to expect to sell it for more than the average-looking rest of the houses listed on the block that are not updated with a complete remodel like mine is. I certainly wouldn't expect to sell it at a discount when there's 10 other people looking at my flip on the first day I've listed it.

I think you have an innovative idea, but I do wonder what else could you bring to the table so flippers wouldn't be losing out on bigger paydays partnering with you?

German Buendia · Answer

@Joe Villeneuve thanks for the advice.  I've learned my share of leassons particularly by doing exactly what you are telling me not to do.  Thanks for your time and I am glad your Saturday is going well.

Right now I am trying to figure out how to go about all this as I am not willing to fail again because I rushed things.

For now I think I will start be utilizing my VA loan smarty and get more involved in the subject by participating in forums like this and asking more questions.

The participation from all of you about my question was great and made me realize people really have an interest to help.  So I will ask questions more often.

Have a pleasant weekend.

Joe Villeneuve · Answer

First, if you put "@" in front of the names, those members you are referring to will know you mentioned them and can reply.  If you don't, you may ask a direct question and never get an answer since the person you are asking has no idea you're asking. (Say that 5 times fast).

Now, here is the basic criteria for a partnership, and the basic profile (common mistake) for NOT forming a partnership.  I'll start with the ladder and make my way up.  (It's Saturday and I'm in a good mood).

Never form a Partnership based on friendship, relationships, or any reason where both (all) partners have the same strengths and weaknesses.  This is a common mistake made starting out, mainly because the partnership is formed by individuals that are friends because they have the same strengths and weaknesses.  What happens is a redundancy in both strengths and weaknesses, which means the strength income is split, and the weakness income is spent on filling the weaknesses.

Always form partnerships based on one of three reasons.  The Partner can do what you:

• "Can't do"
• Don't "Want to do", and the most important one...
• "Shouldn't do"...just because you can, doesn't mean you should.

German Buendia · Answer

Wow I wasn't expecting to wake up to so many posts.  This is great and exactly what I was looking for.  Thank you all for the insights and advice.  Joe Villeneuve thanks for expanding with all the questions I should ask myself that was awesome.  My homework for the next couple of days will be to reflect on those and try to answer them.  Peter Lee thank you for the encoded encouragement to be open minded.  Jon Miller, thank you for your response, you have a great point (extra unnecessary costs).

Would I be wrong to assume, as some of you mentioned, that the idea is not all that insane?

If tailored correctly would this concept work with a start-up flipper?  someone who is not already a successful professional but instead is more interested and motivated in getting the wheel turned?

You all have a great day!

Peter Lee from New Port Richey, Florida

Javier Marchena · Answer

Yes, I would agree with most of the answers here. Flippers will try to sell at Market values.

You as an investor want to buy way low under market value. Right there there will be a disconnect. Now you can try finding a contractor that can do a rehab for a price. You find the houses, give him a budget and get the house at the price is going to work for you. Make sure you add some contingency.

Is this even a sound business plan or proposition?

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