Some questions on starting house flipping

[Shalom Wininger]

Hi,
My name is Shalom Wininger. I am new to real estate and am trying to start off by doing fix and flips. I did  research into it and am very familiar with it and how it works. I just have no experience at all. I am living in New Jersey and am looking into real estate  here as well. I had a few questions that perhaps someone can advise me on. 1) I was told to get a real estate agent to help, I have been trying to get an agent to help me, but most of them never get back to me and the ones that do, and I tell them what I am interested in doing, they never follow up with me and it is hard to keep chasing them, any advice as to what I should do about this? 2) I would try to do deals myself but I don't know how to do that, I have no contracts and I have no clue how to make and write an offer to even start anything off, the only way I can think of making any offers is with an agent, but that will cost the seller an agent fee and will minimize my chances of getting any deals, what should I do about this? 3) Is it best to try to get a partner, someone who is already experienced? I have tried that as well but no one is really interested, how do I go about this? 4) Even the distressed houses are only offering to be sold for a max $100,000 lower then regular asking price, which can't turn any profit, is it due to the market today? Is it even worth it to try to do flipping in todays market? Any help and advice is greatly appreciated, thanks to all.

[Randall Alan]

@Shalom Wininger

We own 37 rentals and have flipped 6 houses in the last 5 years. The one MUST in flipping houses a a REALLY good margin between your buy price and your ARV. Our "line in the sand" is that we have to expect to NET $50,000 for it to be worth our time. That's a personal number, and many may have a lower one... But when you factor in things like:

1.  You have to close twice... once to buy it, and once to sell it. (and sometimes your seller will want to do a double close... so that's actually 3 times!). That translates to 2 - 6% of the price EACH TIME you close between realtor fees, transfer costs, and other closing costs).  So on $100,000 house that will sell for $200,000 you are probably talking at least $15,000 in transaction fees before you start to talk about fixing the house.

2.  You are a beginner... and you are going to miss things.  Maybe it's termites, maybe it's a foundation issue, maybe it's the engineering costs you didn't factor in because you thought you didn't need to do engineering to 'just replace the windows'... but once you are in the middle of the flip, you have no choice but to finish it.  5 of our 6 flips went off without a hitch.  The last one (a 1925 house we completely renovated) we ran about $50,000 over budget because the windows had to be brought up to 2022 code, which required metal straps to be installed in various places on the window framing, and all the framing rules have changed since 1925!  1925 houses have A TON of windows... ours had about 25 of them.. the worst part was that we had already almost completed the interior remodel... so now the framer had to try and not destroy the work that was already done inside.  Cost us over $1,000 a window (not including the cost of the window itself... Big OOPS!).  But we had a $100,000 expected profit... so we still made out fine... but if you went in thinking that it would be a $20,000 repair job, and suddenly it's a $60,000 repair job... you could be really screwed.  

3.  You always find more stuff you didn't think about once you dig into things.  It just happens!  Some of that large margin is "cushion" for missing things, or the unexpected... just like our $50,000 cost overrun.  With big numbers come pretty big risks.  The rewards are awesome... but don't neglect the inherent risk of what you are thinking about taking on.

So being a beginner, realtors may not think you are a serious player. If you don't have the money, the knowledge, the experience... can you blame them? (not accusing you of any of those things necessarily). The challenge with Flips is not only do you need to buy the property, you need the money to put the house back together. ANY lender is going to expect you to have your own money in on a deal. Hard money, or traditional lender, expect them to want you to have at least 20% of your own money in. Is it a rule? No... but no one wants to be left holding the bag if you suddenly become a ghost and all they have is a gutted shell of a building that now THEY have to deal with. And DSCR loans aren't going to work on a flip because they aren't cash flowing when you buy them.

My best advice is to get connected to someone doing what you want to do in your local area.  Check out the local real estate investment clubs in your town.  Just by surrounding yourself with people doing what you want to do, you will start to learn the ropes and develop some of that street credibility to be taken seriously down the road.  Volunteer to come swing a hammer or whatever on one of their flips.  It's sweat equity to earn your education.  If you connect in a great way, maybe you partner with your new people and you split the profit on a deal... suddenly you now have some money to work with and you will inch your way towards doing your own deal down the line.  You can't.. or maybe better said 'shouldn't' try to fly before you crawl and walk.  Flips can eat you alive if you don't know what you are doing.  Ask yourself this:  If you even did get your hands on a flip, who is going to fix it up?  You?  Do you know how to replace doors, flooring, install cabinets, replace a window, etc, etc?  After 5 years of doing it, I have learned quite a bit from the contractors / handymen that have helped us restore our houses... but I don't know if I could do it on my own even still.... but I can do a lot more than I could starting out.

As for timing... yes, it's a HORRIBLE time to be trying to do much of anything in real estate right now (that's said comparing it to 2-5 years ago).  Can it still be done... SURE... but housing has shot way up, and the cost of borrowing money has pretty much doubled in the past 18 months... so I can't recommend that it's a good time.  Like you said, the numbers just seldom work right now.  Real estate is cyclical, so it will eventually settle down (my guess is when the fed backs off raising rates and the mortgage rates get back into the 5's... which I have heard some supposed experts suggest could be by the end of the year.  Until then, we are always looking, but aren't going to go jumping into something where we would be at risk of being successful by trying to have a margin of $30,000 with $10,000 in repairs, and $12,000 in closing costs.  It's just not worth it.

So I give you an "A" for ambition... but figure out your path.. and unless you have a lot of money to back you up, plan on taking the 'slow road' to getting into flipping... partner with someone up front and learn the ropes!  

All the best!

Randy