Frequently called “distressed properties,” foreclosures are sold at a discount depending on property conditions. There are a couple of ways to buy a foreclosed home: through an online or live auction or an REO, where a bank or government entity (Fannie Mae, Freddie Mac) lists homes that have been repossessed for non-payment. An auction can move fast with experienced investors competing for the best inventory. With little or no time for an inspection or title search, an inexperienced home flipper may be exposed to a host of new ways to lose money since a foreclosure is sold “as-is.”
If you’re just getting started in real estate investing and are looking to buy a foreclosed home, it may be a more prudent path to check lender-maintained REO websites or speak to local real estate brokers, many of whom sell REO properties for lenders. Real estate owned (REO) is the term for a property owned by a lender because it failed to sell in a foreclosure auction after the borrower defaulted on his or her mortgage.
With that in mind, here are a few pointers for the beginner:
Have a budget in mind, have your financing lined up with a pre-approval letter and, have a plan.
Look for the worst house – a mid-sized one that would appeal to a small family – in a good neighborhood (ie: one with good schools and nearby shopping). It is harder to attract buyers for a run-down neighborhood.
Know the comparables (comps) for that area and make sure your budget will allow you to bring the house up to the standards of the neighborhood.
Get an inspection, title search, and as much information on the house as possible before making an offer. Make sure the title of the property is clear of any liens or encumbrances.
Have a contractor walk the property with you.
Get the insurance appropriate to the level of your rehab.
Add beauty. Focus on a house that mostly needs cosmetic improvements and can be updated quickly. Look for an ugly house that would benifit with coat of paint, refinishing the wood flooring, new carpet, and resurfaced cabinets with new hardwear, and new lighting.
Expensive granite counters might look nice but not fit the neighborhood. Again, know your market (comps). Make sure the kitchen has a functional layout with new appliances. The appliances complete the look of the kitchen and that is where you get the most bang for your buck. You should be able to get a package deal for the stove, dishwasher and microwave for less than $2,000. Add that to a refrigerator for Home Depot or Lowe’s for about $1500, and that is will help to move your property. That will help that first time home buyer get into the house easier.
Landscaped the yard, front and back.
Try to incorporate the newest technology like the thermostat and a security camera for the outside (think Ring).
Update the bathrooms with new vanities, basins, cabinet resurfacing, and soft neutral paint colors.
Consider minimalist staging to help set the atmosphere.
Remember time is money.
If you are new to the house flipping business, Priya Kurup, a representative of RE/MAX in Sugarland, Texas recommends asking yourself these questions:
Which is more important, sales price or purchase price?
You don’t want a house that’s just a little under priced for the market — you want a real deal, a house that’s well under the average market price for the area — because the purchase price will affect the scope of your remodel. There’s an upper limit to any sales price you can possibly attract for a flip, no matter how nice it looks when you’re finished. People shopping in the area will only be willing to spend so many dollars per square foot on a home, and unless you plan on adding square footage (not usually the best way to make money on a flip), you’ll be pretty limited in terms of how high you can set your selling price.
How Will You Find the Best Deals?
Most successful flippers have one or more sources for finding underpriced homes. Divorce court or probate court, which manages unsettled debts when someone dies, can be two good sources for flippers to find those homes. Foreclosed homes might also be a good option for you as a flipper.
The trick is to find a home that is more or less sound, but needs some cosmetic work to bring it up to par with the rest of the market. Ideally, your first flip won’t need anything major like new plumbing or electrical work, foundation work or any other big, expensive fix that’s necessary but mostly invisible. It’s much better if you can put your money where buyers’ eyes will be in terms of updates.
Should You Get an Inspection?
Yes! The last thing you want is to discover while you’re renovating is dry rot or another big, expensive fix (see above), and an inspector can identify those potential issues before you claim the house at the closing table. Ask the inspector to focus on the major issues, but it’s also helpful to get an idea of what features might be outdated or not up to code so that you can address them while you’re fixing the place up.
Which Improvements Can You Tackle?
Think about the things that you have experience doing and doing well, whether that’s hanging drywall, painting, installing cabinetry … or absolutely nothing. You need an inventory of the skills that you bring to the table and what you’ll need to hire for, so be brutally honest in your assessment. And don’t forget about timing. If you can hire help and get the house done twice as quickly, that could be well worth the hours you’re spending on contracting help.
Who’s Going to Help You?
Once you’ve assessed your own skills, think about what gaps you need to fill and start looking for people who can fit one or more of your gaps. Ask around for contractor references from real estate professionals, the local Home Depot or Lowes, other flippers. Find out about their rates and availability. When you’ve made a choice, make sure you pay them on time and maintain good working relationships with them for future flips.
What’s Your Time Frame — and is it Realistic?
A realistic time frame is going to depend on exactly what needs to be done, which is another excellent reason to get an inspection. Some fixes will take longer than others, so make sure you’re fully aware of what the house needs and make sure you build in plenty of time for each task, plus some wiggle room. Weather, illness, missing supplies or tools, and any number of other annoyances could interfere with your timeline, so anticipate some “scope creep,” as project managers call it, and accommodate it in your timing so that you’re not working against the clock.
Does the Market Matter?
Talk to real estate professionals about what the typical asking price and price per square foot are in the area, and don’t make any decisions about where to plant your first flip until you’re sure you understand the market well enough to choose wisely. Some markets are much more lucrative than others for fix-and-flippers. Markets that are experiencing a lot of price growth, or “hot” markets, tend to yield lower returns for flippers than up-and-coming markets, at least in part because the asking price across the board for any home is high.
What Will You do to Balance Your Portfolio?
The most successful house flippers usually are dabbling in more than one type of real estate investment, balancing their portfolios to help build wealth. For example, after a few flips many investors might place their profits into a rental house.
Can You Juggle Multiple Deals at Once?
Think about where you’ll find your next flip and start working on it before you’ve wrapped your current one in order to build momentum, stay busy and use your time to its best advantage.
Can You Think Like an Investor Instead of a Homeowner?
It can be tempting to remodel a house exactly the way you’d like it if you were going to buy it. From fixtures to features, some flippers get carried away and start choosing top-of-the-line or custom work that might look amazing … but, honestly, doesn’t really appeal to everybody. Instead, think like an investor. Choose materials and features that are classic and long-lasting, offering wide appeal without sacrificing too much in the way of quality.
How Long Will it Take to Sell?
Although you don’t want a market so hot that price growth is out of control, you do want to look at a real estate market where homes are moving relatively quickly. Once you’re finished with the flip, you’ll have to get the house on the market and sell it — and that house is going to be your financial responsibility until it’s sold, so it’s wise to find a market where you won’t be waiting too long for qualified buyers to bite.
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