Flipping Foreclosures, REO’s and HUD’s

I frequently meet people who are interested in finding foreclosed properties.  They are interested in finding a deal or maybe the urge has hit them to try their hand at flipping a property.  With so many shows on TV like ‘Flip That House’, ‘Property Ladder’ and on and on it is easy to catch the bug!

We watch and see some that do it well and get a huge payday.  We see others that don’t do it well and we instantly think how we would avoid their mistakes and certainly do it better.  And so we have an itch to give it a shot hoping that our outcome will be a successful one.

If you have the money and the skill try you too may become successful at house flipping.  However there are a few things to consider before you decide if you should take the plunge or not.

1) Do you have the money?  Even if you intend to get a loan to cover expenses, you will certainly need much more cash on hand than you would expect.  In this game, planning for the unexpected is a necessity.  You will also be making payments on any type of loan that you may obtain and don’t underestimate how long you will be making those payments.  You must also figure how much it will cost to hire professionals to do the work you can’t.

2) Can you get a loan?  Explore different lending options.  If you are going to flip the house and not rent it or live in it, you will not be able to get an FHA or VA loan.  That leaves a conventional loan.  Most foreclosed properties wouldn’t pass an FHA or VA appraisal, as they have high standards for a home they will loan money on.  Conventional loans usually require a large down payment, but some lenders can get you an 80-10-10 or 80-20 for a construction loan.  You might also look into and interest only loan or a short term ARM (adjusted rate mortgage) to keep payments low while you are working on the home and then bumps up to a regular rate when around the time you are done with the property and can sell it.

3) Do you have the time? If this is just a weekend project it can turn into a much longer project than you may have anticipated.  Consider if you truly want to devote every moment to working on a house instead of participating in other leisure activities.  House flipping is time consuming.

4) Do you have the skill? I’ve seen many houses that have been flipped where those who did it did not have the skill level to be doing the actual work themselves and it showed.  You may fancy yourself able to do the work, but crooked tile or less than perfect carpentry will turn most buyers away and will affect your bottom line.

5) Do you have a good Realtor? You may not realize it, but this is an often overlooked step for many house flippers.  But, those who do it as an ongoing business recognize this and incorporate it into their business plan.

So, you still want to try your hand at foreclosures.  Here are the steps that you will need to embark on.

1) Find a good lender to build a relationship with who will educate you on the available loan products out there and which ones will work best for your goals.

2) Find a good Realtor.  They can set you up on an MLS search to find the price range of homes that you are looking for and even help you find distressed properties.

3) Once you have found a potential home, have your Realtor do a market analysis for the neighborhood to determine what the home could possibly sell for after you have completed the work.  You do not want to overspend and price the house out of the market.  A market analysis will help you set your spending budget and if you will be able to turn a profit.

4) Begin your budget by determining the maximum amount you can spend and still make a profit.

5) Have your Realtor write an offer on the house.  Draw from their experience at writing offers.  They will be able to give you direction and advice at how much to offer.  Some foreclosure procedures, such as HUD, are quite involved and have their own set of procedures.  Most Realtors do not usually charge buyers so this is getting a professional service free of charge.

6) Once your offer is accepted, spend the money to have a home inspection and a termite inspection.  It is worth a few hundred dollars to determine if there is damage or termites that you are not aware of which could cost you hundreds or thousands more than you anticipated.  If the inspection reveals issues that you are not willing or prepared to deal with you can terminate the contract.  The money you spent on the inspection is not money lost, but money that just saved you even more money further on down the road.

7) The inspection will give you a work list of items that need to be repaired beyond the cosmetic.  It is critical to take care of these items before you spend money on the cosmetic.  When you are ready to sell, the potential buyer will have an inspection and you will have to fix these items then anyway, so plan to do them from the start.  Add these items to your budget and allow a little extra money for surprises.  Re-evaluate to determine if you will still have money for the cosmetic and if you are still on target with your budget.  You can cancel an offer based on items found at inspection.  This is your last opportunity to evaluate the profitability of this project and cancel or move forward.

8) If after the inspection you feel that it is still a good deal then you are ready to move forward.  Below is a sample budget.

EXAMPLE
a) Cost of house $50,000.00
b) Inspections 350.00
c) Closing Costs (purchase) 3,150.00
d) Repairs/Renovations 20,000.00
Sub Total 73,500.00

Sell Home for $100,000
e) Loan Payments (6 mnths @ $305) 1,830.00
f) Closing Costs (sale) 7,700.00 includes Realtor Commission

Total Sale $100,000.00
Total Costs $83,030.00

Total Profit $16,970.00

Make a budget and stick to it.  Make sure you know what you can sell your house for before you buy it.  If you buy a house for $50,000 and spend $50,000, but it will only bring and appraise at a market price of $75,000 you have just lost $25,000.  A good Realtor can help you plan ahead, so utilize their experience.

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