fix and flip real estate investing

Presented By:Steve Heideman

Fix and Flip Real Fix and Flip Real Estate InvestingEstate Investing

Presented By:Steve Heideman

• Speculators

–Have no plan

–Buy high and sell low

–Rely on luck and the market to bail them out

Speculator vs. InvestorSpeculator vs. Investor

• Investors

– Do their homework

– Follow a specific plan

– Successfully calculate risk

– Make their money going in

Speculator vs. InvestorSpeculator vs. Investor

What happened to the haunted What happened to the haunted house?house?

• Generates cash• Flipping is a short term

venture• Works in any market• Can be done part time• Doesn’t require a lot of

your own money• An equal opportunity

investment choice

Benefits of Fix & Flip StrategyBenefits of Fix & Flip Strategy

Five Step ProcessFive Step Process

• Find

• Analyze

• Buy

• Fix

• Sell

FindFind

• Develop Specific Investment Criteria– Price – Condition– Location

• Create a plan to generate leads– Fit Criteria– Don’t fit criteria

OUTCOME: A house with investment potential

AnalyzeAnalyze

• Make decisions about which improvements will maximize your profits

• Create a thorough and accurate improvement budget

• Determine what you can sell the home for once fixed up

Outcome: An offer that maximizes profit given the risk

BuyBuy

• Make your offer• Negotiate with the seller• Bring in professionals to

perform a final examination• Close on the house

Outcome: An investment house you own

FixFix• Use improvement budget to

create step by step construction plan

• Your profit depends on ability to implement the plan quickly and thoroughly

• Serious mis-calculations can diminish or evaporate your profit

• Step-by-step improvement process is critical!

Outcome: A renovated house that is ready to sell

SellSell

• Set yourself up for success in the final stage

• Set realistic selling price• Good marketing• Add the finishing touches• Maximize profit

Outcome: Money in the bank!

Step 1:FindStep 1:Find

• Define your target

• Generate Leads

• Qualify Leads

Define your TargetDefine your Target

• Proximity

• Selling Price

• Sales Activity

• Age

• Appeal

• Safety

Generate LeadsGenerate Leads• Prospect

– Focus: An Interesting house– Activity: Searching– Cost: Low

• Advertise– Focus: An Interested Seller– Activity: Attracting– Cost: High

• Network– Focus: People who help you find

interesting houses or interested sellers

– Activity: Connecting– Cost: Low

Qualify Leads: The Qualify Leads: The HouseHouse

• In your target neighborhood?• In satisfactory condition?

– Fire damage– Lead Paint– Water damage– Major foundation problems– Collapsed roof– Asbestos– Major termite damage– Aluminum wiring

• Not a neighborhood misfit?– Unusual architecture– Lot irregularity– Layout– House size– Street– Neighbors– Infrastructure– Scene of a crime

Qualify Leads: The Qualify Leads: The SellerSeller

• Means to sell at your price– Equity– Cash to pay off loan– Agreement with bank

• Motivation to sell– Needs to sell quickly– Doesn’t want the hassle

Qualify Leads: The Qualify Leads: The SellerSeller

Factors that make a seller motivated– Life Events

• Relocation to another city for job• Physically unable to maintain the

property• Divorcing and needs to sell

– Financial Hardship• Can’t afford house payments• Already moved and facing 2 payments

– Must Sell “as is”• Can’t afford to fix the house• Is too busy to fix the house

– Vacancy• Doesn’t want to remotely manage

repairs• Unable to rent it

Step 2: AnalyzeStep 2: Analyze

• Identify Improvements

• Determine Selling Price

• Estimate Improvement Costs

• Account for Quiet Costs

• Set Minimum Profit

Identify Identify ImprovementsImprovements

• What Must I Do?– What are the problems that

NEED to be fixed

• What Should I Do?– What is the proper level to finish

out• Basic• Designer• Standard • Custom

• What Could I do?– What is the untapped potential

Determine Selling Determine Selling PricePrice

• Determine the Eventual Selling Price– Pull the comps– Drive the comps– Read the market– Check with experts

Estimate Estimate Improvement CostsImprovement Costs

Consequences of Missed or Miscalculated Improvement Costs– Increased Cost

• Direct cost of improvements

• Cost of the extra holding time

• Downward market pressures if extended into unfavorable selling season

– Increased Time• Time of performing additional

improvements

• Extra time caused b scheduling conflicts

• Longer time to sell due to seasonal forces

Estimate Estimate Improvement CostsImprovement Costs

3 Ways to Estimate Improvement Costs

– Hire a Professional• Thoroughness: Excellent• Accuracy: Good• Speed:Good

– Do it Yourself• Thoroughness: Good• Accuracy: Good• Speed:Poor

– Use Rules of Thumb• Thoroughness: Poor• Accuracy: Fair• Speed:Excellent

Note: Use a 5% Contingency when estimating costs

Estimate Estimate Improvement CostsImprovement Costs4 Broad Cost/SQFT Categories

1. Make-hab: +/- $5/sqft• Falls between just cleaning the

place up and a rehab

2. Rehab: +/- $15/sqft• Mostly Cosmetic with minimal

permitting and inspections

3. Remodel: +/- $25/sqft• Replacing is the key word

4. Restructure: +/- 40/sqft• Major layout changes &

structural repairs

Account for Quiet Account for Quiet CostsCosts

• Buying Costs– Costs incurred when you buy the house

• Closing Costs• Holding Costs

– Costs incurred while you own the house• Utilities• Maintenance Costs• Taxes• Insurance

• Cost of Money– Costs related to borrowing the money

needed to purchase and improve the house• Principle• Interest

• Selling Costs– Cost incurred when you sell the house

• Real Estate Agent Commissions• Closing Costs

Set Minimum ProfitSet Minimum ProfitAverage Profit= 10-20% of

Sale Price

• Base Profit– A percentage of Eventual Sales

Price that you should receive for every flip

• Rehab Risk Profit– Additional profit that you should

receive based on the complexity of the improvements

Set Minimum ProfitSet Minimum Profit

• Recommended Rehab Risk Factor: $5/sqft

Improvement Cost/Rehab Risk Factor=Rehab Risk

**Add Rehab Risk to Eventual Selling Price

Step 3:BuyStep 3:Buy

• Arrange Financing

• Present the Offer

• Close the Purchase

Arrange FinancingArrange Financing

• Pay in full

• Attract Financial Investors

• Borrow the Cash

• Partner to Get the Cash

Present the Offer

• Establish Trust– An Awareness of the Sellers Situation– Your Value Proposition– Your Ability to Close– The Improvement Costs– The Quiet Costs– Your Expected Profit– The Cost to Sell at Market Value

• Make the Offer– Purchase Price– Earnest Money– Closing Costs– Closing Date– Acceptance Date

**See Sample Letter

Close the PurchaseClose the Purchase10 Steps to Closing a Home

• Set Up Escrow• Arrange Inspections• Confirm Improvement Cost

Estimate• Order Property Survey• Request Settlement Statement• Prepare Financing• Review Title Search Report• Arrange Property Insurance• Prepare for Improvements• Sign Closing Documents

Step 4:FixStep 4:Fix

• Plan the Work

• Assign the Work

• Work the Plan

Plan the WorkPlan the Work5 Components of a

Construction Plan• Scope

– What work needs to be done?

• Specs– What materials are needed?

• Budget– How much will the work cost?

• Sequence– When to schedule the work?

• Trades– Who does the work?

Assign the WorkAssign the Work

3 Ways to Get the Work Done

1. Hire a General Contractor

2. Manage Work Yourself Through Specialized Trades

3. Do It Yourself with the Help of Individual Workers

Assign the WorkAssign the Work• Hire a General Contractor

– Predictability: High– Cost: High– Personal Involvement: Low

• What a Good General Contractor Should Do:– Manage the entire rehab project– Consult with you on your improvement plan– Collaborate with architects and designers– Draw up a comprehensive scope of work and

material specifications– Create a budget and timetable– Pull permits and schedule inspections– Schedule, order, and make payments for all

materials– Hire, schedule, and make payments for all

trades– Ensure adherence to budget, schedule, and

quality– Manage risk and solve problems that arise

**Plan to Spend 25% or more for a GC’s markup

Assign the WorkAssign the Work

• Manage the work yourself through specialized trades– Predictability:High

– Cost: Medium

– Personal Involvement: Medium

Assign the WorkAssign the Work

• Do it yourself with individual laborers– Predictability: Low– Cost: Low– Personal Involvement:

High

Assign the WorkAssign the Work

Assign the WorkAssign the Work

• Finding Contractors– The best way is

networking!• Real Estate Investors• Construction Professionals• Real Estate Related

Professionals• Friends, Neighbors,

Relatives, and coworkers

Assign the WorkAssign the Work

• Qualifying Contractors– 7 Factors

• Longevity• Licensed & Registered• Real Estate Investment

Experience• Insurance• Business References• Customer References• Competitively Priced

Assign the WorkAssign the Work

• Use Contracts to Set Expectations and Protect Yourself

Work the PlanWork the Plan

• Stay on Schedule

• Stay on Budget

• Ensure Quality

Work the PlanWork the Plan

• Stay on Schedule– Sequence

• The order in which work gets done

– Lead Time• The time it takes to

start work

– Duration• The time it takes to

complete work

Work the PlanWork the Plan

• Stay on Budget– Execution is Key

• Manage rough work• Manage labor• Manage scope• Monitor spending

Work the PlanWork the Plan

• Ensure Quality– Link payment to performance– Monitor and measure progress

often– Address problems immediately– Prepare for the work

• Work is clearly defined• Job site is clean• Prerequisite steps are completed• Materials are on site

– Manage rough spots– Pay for predictability

Step 5:SellStep 5:Sell

• Prepare to Sell

• Make the Sale

Preparing to SellPreparing to Sell

• Decide who will handle the sale– You (FSBO)– Real Estate Agent

• Commission

• Term

• Agent Bonus

• Set the Selling Price– DO NOT try to erase mistakes by

raising the sales price, you will be adding to your misery

• Stage the House based on it’s design level

Make the SaleMake the Sale

• Put the home on the market

• Consider offers

• Close the sale

MONEY IN THE BANK!!

3 Biggest Mistakes in Flipping

1. Paying too Much for a House

2. Over or Under Improving a Property

3. Doing too much of the Work Yourself