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Some big mistakes that new flippers make come at the very end.  Specifically items like appliances, flooring, trim, cabinetry, tile, countertops, and paint are all huge factors in how quickly your flip will sell.  All of these factors must play well in your final product.  When it comes to painting it’s usually best to go neutral and choose no more than two colors.  However there is more to painting than meets the eye…  House flippers must also pick the best finish. 

Flat Paint

Flat paint gives off a dull (flat) finish.  Although this may sound unappealing, it’s actually the best choice for the majority of the house.  Flat paint does a better job at hiding imperfections, especially on new drywall.  It’s frequently used for all interior walls and also on the exterior of the house.  Two exceptions may be the bathrooms and kitchen areas, where more dirt tends to collect.   Historically flat finishes are difficult to clean, however there are newer washable flats that tout easy to clean surfaces with minimal cleansers required.

Glossy Paint

Glossy paint comes in several varieties such as satin, semi-gloss, high-gloss etc.  These paint finishes have bright, shiny surfaces.  They also are easier to clean which is why they are commonly used in kitchens and bathrooms.  The problem with them is that they do not hide the imperfections as well as flat paint.  Glossy paints are also used on trim work such as moldings, door jams, window trim, etc. 

The main priority for every house flipper is to sell.  The best choice for paint may be to use a washable flat paint everywhere except on your trim work.  This way you can hide imperfections but still give the new homeowner a washable surface.  Another thing to keep in mind is that the new owner will want to paint and decorate their new house themselves.  Keeping things neutral will allow potential buyers to use their own imagination while evaluating your product. 

Getting good water pressure in your flip or rental is essential to happy home ownership.  I for one cannot stand it when I get in the shower only to get that soft sprinkle of water that takes ten minutes to get the soap out of my hair.  This typically occurs in older homes and in the inner city where the pipes are older and the water lines require upgrading.

 One way to begin diagnosing the problem is to use a water pressure gauge.  You can use these to check the water pressure outside of the home.  If the pressure falls between .40 to .70 it usually indicates normal water pressure coming to the house.  If it’s less, you may want to call your water company to see about increasing it.  If your pressure is within this range then the problem could be the flow inside the house itself. 

If you are flipping an older house then you probably have old corroded pipes which will restrict the flow of water to the fixtures.  Many of these older homes have galvanized pipes as well.  Have a plumber run a new copper main cold water line from outside the house where the pressure is normal.  In some cases you will need to call the water company to have this done.  You can also run a new line directly to the shower/tub that you are installing.  The plumber can also run a hot water line directly from the hot water heater.   Another cheaper option may be to use a shower head that actually boosts water pressure with volume controls.

Some house flippers choose to use a general contractor to manage the entire job.  This is especially true when house flipping is not your primary source of income.  You will need someone there watching your contractors every other day at a minimum in this business.

The two types of bidding methods contractors typically use are “Total Cost” or “Time and Materials”.   The rehab or remodel process can be a tricky one.  You can never know just how much work needs to be done until you start the demolition process.  This is why many contractors choose a time and materials bid.  This type of contract requires you to pay them by the hour, plus materials, until the job is completed.  As you can imagine, this could get very expensive!  A total cost bid however contains a set price.  When combined with detailed plans, and a spec sheet, the total cost contract is the safest route to take for house flippers.  It limits the amount you will pay and typically only very experienced contractors will even give you this type of bid.  If the contractor under estimates the job, he or she will have to eat the extra costs.   The only down side is that you run the risk of the contractor quitting or attempting to get ahead of you on the payments and then leaving the job.  Once again this goes back to doing your due diligence on the contractors prior to hiring them. 

House Flipping Tip 

A spec sheet is a very effective tool that outlines exactly what it is you want in your property.  It also helps house flippers stay on top of the contractors.  The spec sheet can be used to make sure that everything in your project is exactly what you wanted.  Often times contractors bid low on a project but use low grade materials to make up the difference.   Other times they will say that they use top notch materials but catch a case of the “I forgots” or the “I never saids”, come payment time.   A spec sheet is a great way to make sure these issues do not occur.

What is a Spec Sheet?

The spec sheet is a list that details exactly what materials you want used on the project.  For example your spec sheet for your plumbing may include Moen Faucets with the exact model number, price, where it can be purchased, delivery issues, delivery time frame, special order, etc.  It does not need to include this many details but you get the idea.  The sheet should be submitted to your contractors prior to receiving a bid for your project.  This way there are no discrepancies later on and your contractors can include these costs in the original bid.

With the current real estate market and the impending recession, why would anyone want to flip houses?   The answer may just be because of the current real estate market.  In these times houses can be found for huge discounts.  Some investors are buying properties at 50 cents on the dollar or less.   Unfortunately there are many distressed homeowners and properties in times like today.  Personally I am not one to target homeowners that are about to loose their homes to foreclosure.  In many cases homeowners can keep their homes and should speak with a foreclosure counselor before talking to an investor.  However, many property owners want to get rid of property that has been abandoned, distressed, inherited or houses that they cannot make the payments on.  These are great opportunities for house flippers.    

House flipping takes on two different meanings in the real estate investment world.  There are house flippers that buy distressed properties, fix them and sell them.  There house wholesalers that “flip” houses to other investors without ever really owning them.   I happen to be the former.  I like to find distressed or abandoned houses and rehab them.  This way I am actually contributing to the community and the economy at the same time.  The biggest question right now is what my exit strategy will be.

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House flipping without a building inspection is like shooting pool in the dark.  If you cannot see what you are aiming for then you are relying on luck to make the shot.  Unless, of course you are knowledgeable enough to detect problems with HVAC, termites, mold, foundation, rotted out framing, environmental conditions, electrical, plumbing, water damage, and the list goes on.  After a few years in the house flipping business, you may well be able to detect these problems yourself, but why risk it?

Make sure that you use an inspector that is not also a contractor because of the potential conflict of interest.  If he/she is a contractor then be sure to explain up front that they will NOT be contracted to do any of the repair work.   Any inspection should include an inspection report.  This report should list all items that require repair or replacement and potential future problems.   Be sure to ask if the inspection report will include approximate costs and estimated time frame from start to finish.  This information is invaluable when estimating repair costs, negotiating the price (when done prior to contract ratification), and determining the total funding required for a bank rehab loan.  If you do not feel like the inspector was very knowledgeable about his work, you may want to get a second opinion from another inspector.

When investing in other states or jurisdictions, be sure to use a local inspector who is well versed in the local codes, conditions, costs, and policies. 

Real Estate Money Saving Tip

“If you run a small business of any kind, you can pay your child up to $4,400 per year without the child owing any taxes, and without you having to withhold. Use $2,000 of this every year to invest in a Roth IRA for your child - no taxes will be due on the funds when withdrawn, either. Use the other $2,400 to cover school clothing or other items your child needs anyway. Meanwhile, you take a $4,400 deduction for salary to your child”  by “The Simple Man’s Guide to Real Estate”

This thing with the house in the Hopkins area is driving me crazy.  I’ve had this project on hold for two weeks now and I’m loosing my mind.  Actually this property has been on and off for the entire time that I’ve owned it due to the organization/city attempts to derail it.  I’m not sure if I should proceed to finish it or if I should wait until I hear from the city.  The letter that was recently sent from “the organization” stated that I should receive something from the city within 2 months from the date of the letter.  There is a lot going on with this area and I am hearing rumors from different people about what they want to do with this block.  The latest rumor is that they want to rezone it to commercial, and sell the properties to doctors so that they can run their practices from them.  The property is directly across the street from the main hospital campus, so it is in a prime location.  A couple years from now, this block will be worth a mint. 

House flipping is a business but I would actually consider moving into this house if I can keep it.  The problem is that the city wants it.  They don’t care that I am rehabbing it or that I would make it my primary residence.   What they are doing seems unconstitutional, since I am not sitting on it like a lot of investors.  The ordinance clearly states that homeowners on ”preservation blocks” will remain and only properties that are not up to code or in vacant status will be acquired. This property was vacant when I bought it and needed a full rehab.  This is what I do, buy vacant properties and rehab them.  They can clearly see that I am raising the property and they are using every tactic to get me to stop.  Does this sound like a government that is interested in improving the quality of life in the city or one that is interested in making money?

 You can follow along with this project by clicking on the Hopkins Project category or clicking here.

How much do I pay for a property? 

This can be the biggest challenge for new investors.  How do I know how much to pay for a property?  There are so many factors involved that it can feel a little overwhelming.  In fact it scares some investors away from buying their first property.  I’m here to tell you that it’s not rocket science.  A class in using a spreadsheet program such as Microsoft Excel or learning to use a financial calculator might be the most difficult part of the process.   There are several performance measurements commonly used when valuing property.  Three measurements commonly used by investors include CAP Rate, Net Operating Income (NOI), and Return On Investment (ROI).  There are many other ratios and measurements used in real estate finance such as Gross Rent Multiplier, Debt Service Coverage Ratio, Operating Ratio, etc.  This information can be found in many finance books or at finance courses at your local Community College.

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The framing was completed about a week ago and the brick work is done on the rear.  For some reason I forgot to take pictures of the staircases inside.  Actually, I was meeting with other investors at the time and then followed them to see another property.  They are new to the house flipping business and wanted to see one in action.  I will snap some more shots this weekend and post them next week.  If you look up at the top, you can see where we added brick.  I plan to stucco the rear to give it a more modern look.  If my budget runs too tight I may decide to paint or install siding.

As some of you may have noticed on the first picture, we cut out and framed two windows on the rear addition.  They look very nice from the inside and bring in a lot of natural light.  They will show well come open house.  The natural light compliments the open floor plan and the windows as soon as you walk in the front door.  The area where the windows are located will be a sitting area behind the kitchen.  There is enough room inside for a table and chairs.  The block of abandoned shells behind the house may eventually be torn down to build Strip Mall.  At least that’s what I think I saw on the plans.  It seems that things are changing everyday here.

On a somber note, I stopped work this week while I sort through this mess that I am in the middle of with the city.  I received a letter from them pertaining to his property and the phrase “eminent domain” was contained in it.  Actually the letter did not come directly from the city, but instead from the organization overseeing this project area.  I’m keeping my fingers crossed on this situation because it has been a mess from the beginning.  We will see how this thing plays out soon… I hope.

Let’s get straight to the house flipping point…

 House flipping rule # 1 - Buy the smallest or ugliest house in the neighborhood. 

Being a house flipper means that you don’t mind the dirty work; or paying someone else to do it.  The main reason for this rule is based on future appraisal value.  The smallest house on the block has the biggest potential to be raised.  Once the rehab work is completed, it will appraise higher based on the new improvements, and the value of other houses on the block.  Conversely the largest house on the block is already carrying the weight of the market value.  Adding square footage for instance will not bring the same Return On Investment (ROI) as it would for smallest house.

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