Wednesday, September 12, 2007

Bravo's Flipping Out!

I don't know if any of you saw this show, it was about a residential real estate investor Jeff Lewis and his team of characters as they go about life and renovating homes for resale. Jeff is a total charachter and you can't help but laugh at how anal he is about things. The homes he renovates are absolutley gorgeous which adds to the show as well. Flipping out is over now but you can watch all the episodes at www.bravotv.com - hopefully they bring it back for a second season.

On a seperate note, flipping homes can be profitable but you really do need to have had some real estate expierence as well as having dealt with contractors and understanding pricing. Construction always takes longer than you expect due to material delays, labor delays, weather, etc. It's usually also more costly due to the unforseen and cost overruns. If you ever decide to do a flip, make sure to get very good home inspections prior to purchase even it means bringing in couple different inspectors and spending a little more money. Nothing worse than finding out later there is a plumbing problem, an hvac system is about down, roof leaks, water damage, etc. that you may not see with the naked eye. I almost recommend for your first flip, try to purchase something for 60 to 70 cents on the dollar based on comparables. This gives you some slack for mistakes. Focus your attention on the kitchen, bathrooms, paint and flooring and curb appeal. Obviously, any problems ala roofs or hvac should be taken care of first, I don't care how good the house looks without working hvac it won't sell. If you have no expierence with contractors, take multiple quotes and make sure any little extras are noted on their proposal and in writing. Also, make sure you understand and payment terms are in writing. Many residential contractors will want money up front for materials, DO NOT do this, acceptable payment terms should be 50% of the job at halfway less a ten percent retainage of the job and then the rest at completion. Contractors should all carry both liability and workers compensation insurance. Also, do not pay the final 50% until you are completely satisfied. Also, when you go into a flip you should relalize all of your costs including the payment, insurance, taxes, labor and materials for upgrades, cost of new appliances, broker fees, etc.

Say you buy a house for $170,000 that appraises at $210,000.00. You plan to do minor renovations totalling $10,000 that you hope will add $20,000 in value. You plan to sell the home for $230,000.00. So lets work backwards from $230,000.00. First the comission on $230,000.00 is $14,000.00, less the construction and say you run over 20% which is very possible so $12,000.00, construction takes two months so your note most like runs with tax and insurance probably $1,600 a month so a total of $3,200.00. Assume you then have to carry the note an additional six months while it sells which is $9,600.00 so after all that your at $191,200 after expenses for a profit of $21K. But realize until it does sell, you are out of pocket close to $40K, maybe it sells quicker, maybe it doesn't. Just realize, you probably won't make as much as you hope so you really need to push the construction and improvements as fast as possible, while also trying to save on everything possible. Also, if you have a day job, this is probably not the best way to invest your money, contractors typically work 7-3 and typically won't work weekends unless they get more pay. Trust me, these contractors all need supervision and coordination so don't think you just tell them what to do over the phone or based on one meeting, you'll end up frustrated and disappointed. Some things to think about if you decide to get in the flipper market.

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