Why do you want to flip houses?
As a real estate investor, you don’t have to have hundreds of thousands of dollars in capital to become an investor or to start a new project. You don’t have to start with huge amounts of overhead.
You can simply find a distressed property, fix it up and sell it for a large profit.
The goal in real estate investing is to become financial freedom.
Your First Deal
Some of the things you’ll be getting following these steps to your first deal are:
- Knowledge of the areas and types of houses you’ll be buying and selling
- A list of ready and willing cash buyers to buy houses as-is from you for good profit
- How to find owners of vacant/run down houses
- What to mail to get the owners to contact you
- What to say when motivated sellers call you
- How to analyze a potential deal to know what to offer
- Contracts to use to put the house under contract and then to assign that contract to a cash buyer
Step 1: Determine The Area
The first step is to determine where the goldmine of houses are.
Goal: Find the neighborhoods where rehabbers are fixing and flipping houses
Avoid: Neighborhoods where every other house is boarded up and prostitutes are walking the streets in the middle of the day.
The neighborhoods you want to create as your ‘Farm Area’ are the ones where there are some vacant and/or run down houses.
These are areas where there is a lot of deferred maintenance on the houses…basically, they need paint and they have broken windows.
These are areas where a fixed-up house will be desirable for a family to move into.
These are where other investors are already doing deals.
This is where they want to buy more deals.
How
- Print out a map of your city from maps.google.com
- Determine where the working-class neighborhoods are (usually up and coming areas, older areas)
- If you’re not sure, you can call some real estate agents or other real estate investors and ask them where real estate investors are doing a lot of rehabbing.
- Alternatively, you can visit the National Board of Realtors website and find the median home price for your area: click here to find the current median home for your area
- Armed with the median home value, check out Zillow.com for your city and find the areas that are just below that median value. These are typically areas that are great for flipping because this is usually where the largest number of buyers that can qualify for a bank loan are looking to live.
- Circle those areas on your map.
If you’re still not having luck determining this, just get out there! Drive through different parts of town and look for neighborhoods where there are roll-off dumpsters in the driveways because the houses are being fixed up.
This is the first actionable step. It’s a low barrier to entry. You might be getting out of your comfort zone a little, but you’ll find some interesting parts of town you may not have ever been to.
Step 2: Drive For Dollars in The Area
Drive slowly down neighborhood streets and really don’t want to have to swivel your head from side to side constantly to be able to scan both sides of the street. Bring a friend and have your friend keep their eyes peeled on the right side and you on the left side.
Types of houses you are looking for (distressed and likely vacant)
- Insanely overgrown lawn
- Boarded up windows
- Newspapers and door hangers piled on the porch
- No car in driveway
- Peeling paint, rotted wood, broken windows [Tip: Drive the area on trash day in the morning. Many times the houses you want are the ones that won’t have a trash can at the curb!]
What to expect
Each driving for dollars adventure should yield about 50 to 100 addresses and take about 2 hours if you are in the correct areas.
While You’re Driving For Dollars
Whilst looking for vacant/rundown houses, you will also find the following:
- Contractors – when you see a roll-off dumpster in the driveway and contractor trucks, get out of your car and go talk to them! Get their business cards! Look at the quality of work they are doing and whether they’re keeping the job site clean. Make note of all of these things. These are the perfect contractors because they are likely already working for real estate investors. Ask the contractor the owner buys a lot of houses. Ask if you can get their contact info. They are a perfect addition to your buyers list because they have already proven they actually buy houses and in the area where you are going to buy in!
- Investors – If a junkie house is being fixed up write down the address and attempt to find the owner. You can employ the skip tracing method discussed in the next section to find them.
- Landlords – Look for ‘For Rent’ signs. The really good ones are the ones that are the red ‘by owner’ type sign. These real estate investors love rentals and would make perfect end buyers for your first deal! Landlords can sometimes pay more than fix and flip investors because they use a long-term investment strategy.
Skip Trace the Owners
Here are the steps to take the addresses you’ve collected and find the owners of each house.
- Google ‘[your county] appraisal district’ (this will help you locate your county appraisal district’s website)
- Look for a property search and search for each address
- This is where you’ll find the name and address of the owner (as this is who and where the property tax bill goes to!)
- Now you’ll want to find potential phone numbers for homeowners. You can use a free service like AdvancedBackgroundChecks.com to find the phone number of owners.
Call/Text/Mail the Owners
Now, it’s time to make contact! Don’t worry I’ll tell you what to say if someone picks up the phone in Step 3.
Your options to make contact are:
- Call them – Do what others are afraid to do.
- Text them – Send a quick text like ‘Are you the owner of the house at X?’
- Send them a letter
Step 3: Work Leads
What to do when someone answers the phone or calls you
- Get information about the house like the number of beds and bathrooms
- Don’t worry so much about square-footage or lot size as the county appraisal district website has all of that (even Zillow has the number of beds and baths…but we want to start the conversation with things easy for them to answer to get them talking)
- Ask what repairs and updating the house would need to get it into sellable shape
- Find out why they are wanting to sell the house
- Dig more into why they want to sell as sometimes the first answer isn’t the core reason they are selling
- Ask how much is owed – you’ll want a good idea of whether to go and see the house – TIP: Ask this just like you’re asking how many bedrooms and bathrooms the house has…it’s only awkward if you make it awkward and beat around the bush when asking this.
- Set an appointment to see the house – yes, go ahead and set it. After we analyze the potential in the deal, we can always cancel so we don’t waste their time…or ours.
TIP: Take the time to be conversational. Do NOT just ask the questions firing one after the other without actually talking with them. This is where you build trust.
How to analyze the deal
Now we need to figure out how much we can pay for the house!
The typical formula for calculation the max offer is:
Maximum Allowable Offer (MAO) = After Repair Value (ARV) X 70% – estimate repair costs – your wholesale fee
This is basically the 70% Rule Real Estate Investors Use.
For example:
After Repair Value (basically what similar houses, aka comps, sold for): $200,000
We don’t know what repair estimate will be yet so we leave that empty.
We should shoot for a $10,000 wholesale fee.
MAO = $200,000 X .7 – repair estimate – $10,000 = $130,000 – repair estimate
Do they owe too much?
Now, we know that if the seller owes much more than $150,000 it’s going to be able to hit the numbers we want. This is where you would call back and cancel the appointment. If you know a real estate agent, you could recommend that agent and see about getting a referral fee from them.
If they owe less than $150,000 there is potential. Go see the house!
TIP: I’d say even if they owe too much, go ahead and see the house anyway. It will take the pressure off of you because you’d feel like there’s not really a possibility of a deal anyway. You can get comfortable talking with a seller face to face and estimating repairs without any pressure to do the deal.
Step 4: Put House Under Contract and Follow Up
The most important moment in the whole acquisitions portion of doing a deal. We spend a lot of time, money, and energy getting to this step.
Key: you treat each and every appointment with the respect it, and the seller, deserves.
Go in with an intention to really help the seller with their property problem. They are looking for someone to come in and save the day for them.
And most importantly, you’ve got to show confidence.
If the seller asks you a question you don’t know the answer to, simply tell them, “You know, I really don’t have an answer for that. But I’m going to find out and get back to you.”
Here are some important tips:
- DO NOT TEAR THE HOUSE APART. Sellers are very aware of all the issues. Just talk about the potential. Don’t make them feel ashamed and embarrassed for letting it get to the current condition.
- Take pictures and make a list of observations. Nothing is worse than forgetting what something looked like.
- Make conversation about things you see in the house. This is all about building rapport. However, if you’re not interested, simply don’t do it.
Knowing what repairs are needed, it’s time to calculate repair costs.
With the repair cost estimated, you can calculate what you can offer the seller.
To return to our previous analysis example, we’ll just plugin the $25,000 we estimated it will take to fix up.
MAO = $200,000 (ARV) X .7 (70% rule) – $25,000 (repair estimate) – $10,000 (our intended wholesale fee)
MAO = $105,000
Now that you have the most you can offer, don’t offer it! Instead, offer less so that you have room to negotiate.
I’d offer $101,530 at this point using the example.
Do not second guess yourself. Your mind is going to start making assumptions about what the seller might take and might not take. Simply state how much you’re willing to buy the house for as if you didn’t care whether you got it or not. There is no need to justify to the sellers on about why the offer is what it is.
Important: If you are wholesaling (which is the strategy in this guide), be upfront with the seller that you will be working to find an end buyer to fund the deal. And set the closing date at least 30 days out to give you time to find the buyer. For earnest money, give $10 or $25. It’s really just to make it a binding contract.
Seller Says Yes
Congratulations!
Seller Says No
It happens. Don’t beat yourself up over it.
Now you will need to follow up…religiously…until they either sell it or tell you to stop contacting them.
Step 5: Assign the Contract
You’ve got the contract and now it’s time to find an end buyer. Typically, this end buyer is another real estate investor.
If you bought the house using the 70% rule, there should be no problem moving this deal!
Finding a buyer
- Have a real estate agent pull up all of the cash bought fixer uppers in the area over the last 6 months. You can likely skip trace or simple Google the company names that bought the houses. See if any of these want another deal in the area.
- Post the deal on Craigslist
- Go to local real estate investor Meetups and Real Estate Investor Associations
- Google ‘We buy houses [your city]’ and call all of the top websites
Seeing the house
Did you get those pictures while at the seller appointment? It’s best to upload these to Google Drive or Dropbox and then share that link with interested cash buyers.
After they’ve seen the pictures, they should have enough to go on to give you a consider earnest money deposit to lock up the deal. They might want to view the house. If you have a great deal, I’d recommend getting the deposit before seeing the house (especially if the seller is still living there and you don’t want to be having to schedule a ton of showings).
Choosing which buyer
To choose who to go with, you figure out who is most qualified to pull the deal off. You don’t want someone that will flake and leave the original seller hanging.
Vetting cash buyer:
- First with a serious non-refundable earnest money deposit (usually $2,000 or more)
- Someone that can close within a week (you don’t want your contract with the seller to expire before it closes)
- Someone that doesn’t ask you silly questions about the house. They need to do their own due-diligence. When they ask a question about the house, you can just tell them that you’ve never lived there nor owned the house and they’ll need to verify everything for themselves.
Now you just need to wait until it closes! The good thing is, the assignment of contract basically just swaps you as the buyer of the original contract with the seller to the end buyer that you found. You no longer have any obligation in the deal.