Flip Flops

TV shows, mainstream books and glamorous late night infomercials have people thinking they can easily flip their way to millions. But there are common unforeseen mistakes that are turning ambitious investors into demoralized victims of false images and misinformation.

It seems like every time you turn on the TV, you see shows like Flipping Out, Million Dollar Listing, Flip this House or a myriad of glamorous real estate infomercials. It doesn’t stop with just TV media. Newspapers, websites, free seminars, mainstream books and real estate courses all tantalize our senses with the façade of easy wealth using real estate as an investment vehicle.

American society is largely obsessed with personal finance and the attainment of wealth. Real estate appears to be winning the battle versus other wealth building vehicles. The reasons are clear: Investors don’t need an advanced degree to make it big in real estate. Real estate investing can be profitable in both good and bad times because investors can directly improve the value of their assets – unlike stock market investments which require investors to trust market conditions and decision-making corporate CEO’s. Real estate investors don’t have to work for someone else or invent anything. Possessing rare genetic coding or having a special talent are not required to make money in real estate. Everyone truly has a chance at a better financial life through wise real estate investments. However, there are downsides behind the glamorous images of wealth and exaggerated success stories that various media outlets bombard us with daily. Listed below are the most common mistakes real estate investors make; thus turning their potential property flips into flip “flops”.

• Failure to master finance. Highly skilled investors that make a lot of money in real estate are very proficient in real estate finance. There are no exceptions to this rule. The very best investors build a very close network of bank loan officers from several regional and national banks. They also develop relationships with successful mortgage brokers. Some talented investors go a step further and become loan officers themselves by working at a small mortgage brokerage or by opening their own mortgage net branch. This allows for “hands on” learning of real estate finance.
  Real estate investors need to be on the front lines of real estate finance because market conditions and loan product offerings are constantly changing. Remember: available loan products and lender requirements for borrowers dictate whether potential buyers will be able to cash you out of your investment property if your intent is to sell relatively quickly; therefore you’d better know general lender guidelines before buying a home to flip.

Before a wise investor tackles any deal, they find the answer to these two questions:

1. Where will I get the money I need to carry me through this particular deal and on what terms?
2. What current loan products exist for the wide array potential buyers of my subject home once it’s ready for sale?

Without knowing the answers to these questions, you’ll get crushed on every deal you do.

• Not understanding the concept of seller seasoning guidelines – commonly called “title seasoning” guidelines. Conventional lenders, which your potential buyers may need to use for their method of finance, generally require a property owner to own the subject property being sold for one year prior to sale. Bye bye “quick cash” as seen on TV. On the other hand, FHA lenders generally require a seller to hold title to their property being sold for 90 days or more before selling that property. It’s important to note that not every buyer qualifies for an FHA loan – so you’d better master what FHA lenders look for in a potential buyer’s profile. And remember too that lender mandated “seller title seasoning guidelines” are always changing; therefore the speed at which you intend to flip a house is out of your hands. It’s the potential lenders your buyers will seek for financing which determine how fast you can sell a deal – not you.

• Not selling someone else’s deal first. Other investors looking to flip a property they own will gladly pay you a fee for bringing them a buyer. In fact, I know of many individuals that routinely practice this and have never owned a house; some make huge money this way. I call this type of an investor a Million Dollar Middleman (MDM for short). MDM’s don’t incur any financial risk because they don’t own the houses they sell – other people do. MDM’s simply locate good houses for sale and market to find home buyers. The MDM charges a fee to the seller, to the buyer, or to both parties depending on the transaction. Becoming a MDM teaches you the dynamics of property flipping before digging into your first deal. Available houses and hungry buyers are everywhere – on the internet, in the paper, through people you already know etc. Becoming a MDM or selling homes as a licensed real estate agent is excellent “flip” practice before incurring the risks associated with property flipping such as ownership, obtaining rehab financing, property rehabilitation and lender seasoning guidelines.

• Not marketing to find buyers before attempting a flip transaction. This goes hand in hand with becoming a MDM or obtaining your real estate sales license before you personally buy a house to flip. If you creatively market to find buyers, then you’ll begin to learn what active buyers in your area most desire in a home. By understanding a multitude of buyer’s desires, you’ll know where to buy, what amenities to build in to your project and how much you can sell for when you decide to take on a deal of your own to flip. It’s easy to put together a strong pool of buyers; and there is no rule that says you have to own any homes to do this. Run an ad online or in your local paper that says“FOR SALE: newly renovated homes, priced below market value – all areas”. It’s fine if you don’t have any actual houses to sell – tell them you’re temporarily sold out. Just take the calls, get to know each buyer on a personal level and get their contact information. This is a great way to get a feel for what people want before you try to flip a house of your own.

• Quitting the day job. I saw an episode of Flip This House in which a gentleman bought a house, rehabbed it himself and then realized he couldn’t sell it for a profit because he spent too much on the rehab. He was then put into a position where he had to try and refinance the house and hold it as a rental. Worse than that, he quit his job while rehabbing the home – thinking he would surely become a successful full time investor. This demonstrates how important it is to become a finance expert before jumping into the world of property flipping. If this individual had a team of loan officers or was a finance expert himself, he wouldn’t have quit his job – here’s why: By quitting his job, he destroyed his chances of refinancing because he could no longer prove to potential lenders that he had money coming in to make the future mortgage payments if the house stayed vacant.
  Expert investors know that in order to obtain any financing on a house (in this case a cash-out refinance upon rehab completion) a property owner needs to show either their current income from a job, or show proof of self employment – for a minimum of two straight years. Ironically, banks hate lending money to full time real estate investors who have no other source of employment or cannot show two straight year’s corporate real estate profits on their tax returns. Banks feel it is too risky to lend money to full time real estate investors as the failure rate is high. Because this investor hadn’t planned for the possibility of being unable to sell his investment home, and hadn’t researched what alternative financing options existed before he quit his day job, he lost big money. What’s more, this investor didn’t market to find a pool of potential buyers first; nor did he try to sell other people’s homes as practice before trying his own deal. He had no clue what his local market was like and in the end, he was left “holding the bag”.
• Mistaking the term “net worth” for tappable equity or liquid cash. Net worth is meaningless in real state. What good is having a lot of equity if it cannot be converted into cash? I’d like to interview all of the people on the late night TV infomercials who at one time proclaimed they had a high “net worth”. Regardless of what their net worth was at one point, it is probably all gone because of current market conditions. If you buy, hold and then refinance the cash out of your properties when they appreciate, you’re certain to be overleveraged on your holdings in due time. Combined with the difficulty of being a landlord and continual property expenses, having a high net worth isn’t worth the trouble. It’s fool’s gold.

• Thinking it’s quick and easy. The glamour you see associated with real estate is mostly false. If real estate investing was fast and easy then everybody would do it. You have to work really hard and make wise decisions if you want to be an upper echelon investor. Gurus selling books and courses are doing only that – selling books and courses. They don’t invest in real estate because they spend their time as information marketers. Selling books and courses is risk free and exceptionally profitable. Most gurus and wealth authors want you to think real estate is easy so you buy more of their literature. Because loan products are always changing, combined with a never before seen depreciating market, nearly every book and course on the market is now obsolete.

• Underestimating the importance of partners. Investors who work with a good trustable business partner are more likely to succeed than investors who work alone. In fact, I know many investors who failed miserably in real estate, only to succeed once they hooked up with a good business partner. Your partner will certainly cut into your profits but they will also deaden your risk. It is inevitable: you will lose money on several deals throughout your investment career. A partner reduces your losses by sharing them with you. It’s much cheaper to lose money as a team than lose money with no support to share the loss. It’s also important to note that you and your business partner will have a higher probability of avoiding bad deals because there are two sets of eyes evaluating deals rather than just yours.

• Not understanding property evaluation, realistic rehab cost analysis and matching the type of project to potential buyers. Many investors jump into a deal too soon without understanding how to evaluate properties or how to work with rehab contractors. Beginners can easily overlook potentially catastrophic problems which can sink them financially and create a fat loss on a deal. Appraisers and home inspectors are an investor’s “best friend” until rehab cost analysis and local property values are understood.   Property flippers also commonly overlook the process of matching the type of rehab project to the type of neighborhood and the potential buyers that particular neighborhood attracts. For example, a rehab flip in a blue collar area won’t require Brazilian Cherry hardwood floors and premium paint because blue collar owner occupant buyers pay more attention to price rather than amenities. Also important to note is that other investors buy rehabbed homes in blue collar areas to hold for a cash flow. If your potential deal involves selling to another investor, you may be able to just do a low cost “splash and dash” (i.e. quick paint job and minor fix up) rehab since tenants are generally rough on houses. Contrarily, in the suburbs, you need to make your home better than the rest of available homes on the market and still price it at or below what that particular neighborhood bears. Do you know what materials and contractors will cost you before you buy a home to flip? If not, then you need to talk to other investors who know how to rehab houses cost effectively.

• Not knowing it takes a team. Every successful investor has a team of professionals around them. You need to know other more successful investors and pick their brains. You’ll quickly learn the business this way. Your team needs to consist of experienced real estate investors, real estate professionals such as real estate agents, attorneys, title agency owners, mortgage brokers, appraisers, property managers, contractors, and finally, your regional real estate investor’s association (REIA) leaders.