#HIPTalk: Comp analysis -Know thy Neighborhood; Part 2

Know thy Neighborhood by the numbers. It would be worthwhile to re-set this part of the conversation as Know thy Numbers.  In as little as an hour of your time, you can perform a comp analysis that will give you confidence for how to make a deal work.  The questions you have to ask yourself are; is there enough net income to take the risk? How am I valuing my time?  Is there an alternative renovation strategy that can increase property value?  Is there an alternative renovation strategy that will decrease the cost of construction?  How much labor am I willing to take on myself to off-set cost? 

The comp analysis is a lot less daunting than it may sound. If you need an assist, either send me a note if interested in it or you can find this spreadsheet on your Hiphom Fixer dashboard. The analysis should have four distinct areas of data collection and analysis:

  1. Comparative property data– this section is two parts; comparative properties (comps) that have sold and active comps. The data points at a minimum are listing and sold price, square footage (sq. ft.), days on the market, bedrooms, baths, the year the property was built and distance from the prospective property.
  2. Quant analysis – should include the listed and sold price/sq. Ft., the percent difference between the list and selling price which indicates whether the market is stable and how it is trending.
  3. Quality analysis – is your view of the physical conditions of each of the properties.  With today’s online photos you can get a good enough feel while sitting at your desk.  Things like central AC, basements, location make a difference and should be noted.
  4. ARV price comparison is the quantitative pessimistic and optimistic view for establishing the market price. Having a comparative range provides a method to set expectations and allows you to consider whether to set a price above or below this range.

The fact is that ARV pricing is a nuanced value upon which there will be many opinions.  With that said, it would be a bit foolhardy to set a construction strategy that dictates an ARV well above the mean. 

The next conversation will be a discussion on renovation strategies. Meanwhile, join the conversation, please like, comment or share. This article is HIPTalk a regular communication for buyers, investors, and realtors interested in the flip home market.  Share HIPTalk! Visit us at www.hiphom.com

#HIPTalk #REIA #SJREIA #NREIA #MBA #flixandflip

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#HIPTalk: Comp analysis -Know thy Neighborhood

Know thy Neighborhood was a phrase that came to mind while engaged in a recent talk at a Real Estate Investors Association (#REIA) meeting.  The conversation was all about the importance of buying well to ensure a profitable return on the flipping investment.  We all nodded in agreement; though, it is a bit more complicated than simply how well you buy.  

The fact of the matter is that the appraisal value or as the flipping industry defines the After Renovation Value (ARV) is significant.  The very nature of the process is speculative, as such; you should not take it for granted or rely solely on a single evaluation.  As a case in point, recently, I had an experience where a lender sent out three real estate agents to perform comp analysis on their behalf.  Each agent took a completely different tact when selecting properties that were active and recently sold. In one case, the agent used foreclosed properties and homes that were 5 miles away from the prospective property which significantly altered the result.  In turn, the lender used a formula driven from all three agents, and in the final analysis, their view was $45K less than my review on the property. My study suggested an ARV in the range of $270K that was the selling price. To add insult to injury, the lender they would not budge even after further review. Eventually, I found another lender that used a professional appraiser who had an analysis similar to my evaluation.  Luck you say, perhaps, I like to believe that it was proper due diligence.  If you want to see a sample of this analysis send me a note and I will forward it to you.

 

Why does this matter?  It doesn’t if you are buying with cash. If you are using a lender to fund the purchase and construction, it matters a lot.  Most lenders have a loan threshold in the range of 70% of the ARV. In the example above, the maximum combination (mortgage and renovation) loan at $270K ARV is $189K. At the initial and lower appraised ARV of $225K the combination loan would top out at an ARV of $157K for a difference of $32K less.  It matters because if you want to do this deal, you now have to come up with an additional $32K in cash.

Determination of the ARV has a direct impact on several strategies that ultimately dictate the project profitability.   A few of the investment areas to consider are funding and investment renovation cost strategies, and, ultimately, profitability.  

Enough for today, I will further breakdown the investment areas and go into more detail on the comp analysis.  Meanwhile, join the conversation, please like, comment or share. This article is HIPTalk a regular communication for buyers, investors, and realtors interested in the flip home market.  Share HIPTalk!

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FLIPPING RATES NEAR HISTORIC HIGHS, BUT FLIPPERS ARE PLAYING A DIFFERENT GAME

Home flipping activity[i] is on the rise. The rate has increased on a year-over-year basis for 12 consecutive quarters, and on a seasonally adjusted basis is now at the highest level since we started keeping track in 2002. But the flipping game is different this time around, with short-term investors focusing more on adding value than speculating on prices.

In this CoreLogic special report, we take a deep dive into home flipping. Not only do we investigate flipping rates nationally and across U.S. metros, we also estimate the gross economic returns[ii] to home flipping at the national level, and test to see what factor is most correlated with such returns.

Home Flipping Rates Up Nationally, Highest in Sand States

By the fourth quarter of 2018, the flipping rate in the U.S. reached 10.9 percent of all home sales – the fourth highest rate since we started keeping track in 2002, just behind the first quarter of 2018 (11.4 percent, the highest on record), the first quarter of 2006 (11.3 percent), and the first quarter of 2005 (11.1 percent). The flipping rate in the fourth quarter of 2018 was also the highest rate for any fourth quarter in our flipping data series.

US Quarterly Flipping Rates

While we use the two-year definition of flipping in the remainder of this report, it’s important to also look at how other measures of home flipping have trended over time. As we can see from Figure 1, the fluctuations in flipping activity over time has predominantly occurred not from the involvement of short-term flippers (buying and reselling within 6 months), but rather from longer-term flippers (one year or more). This could be for a few reasons that we’ll investigate in a future report, but it could be a combination of: (1) as prices rise during a housing market expansion, flippers undertake more complicated and time-consuming flips (2) less experienced flippers enter the game, and can’t turn around flips as fast as more experienced flippers, or (3) tax-incentives encourage flippers to take advantage of market appreciation by holding onto properties longer.

Using the two-year definition, we also find that flipping rates vary sharply across the country, tending to be highest in sunbelt metros and lowest in rustbelt metros, although the dichotomy doesn’t fit perfectly. For example, eight of the top ten metros with the highest flipping rate in the fourth quarter of 2018 were in the Sunbelt, with Birmingham, Memphis, and Tampa leading the pack with rates of 16.5, 16.2, and 15.1 percent, respectively. Just two of the top ten were in the rustbelt, with Camden and Philadelphia having rates of 14.9 and 14 percent.

Metros with Highest Average

At the low-end, flipping activity tends to be lowest in Rustbelt metros, although two Sunbelt metros, Austin and Houston, make the list with flipping rates at 4.3 and 5.9 percent, respectively. Several metros in Connecticut also lag the country, with Bridgeport, Hartford, and New Haven showing flipping rates of 4.4, 5.1, and 5.3 percent. Five other Rustbelt metros make the list: Springfield, MA, Pittsburgh, PA, Kansas City, MO, Elgin, IL, and Kenosha, WI.

Metros with Lowest Average

Returns Have Been on a Wild Flipping Ride

In addition to flipping rates, we also estimate economic returns to flipping. What’s the difference between an economic and normal (nominal) returns? Nominal returns are simply the percent difference between what an investor paid a property and what they sold it for, and economic return is the return that excludes opportunity costs, which in the case of flipping is general home value fluctuation. By using economic returns, we can get an idea about whether flippers are adding value of whether they are speculation on market appreciation. See our endnotes for a clarifying example.[iii]

Gross Flipping Returns

Nationally, we find that gross economic returns in the U.S. have been on a wild ride over our study period. From 2002 – 2007, both economic returns and annualized economic returns (the latter of which controls for the length of a flip) hovered around 4-5 percent. Because closing costs when selling a home are anywhere from 5-8 percent, these findings suggest that the only other way that flippers were trying to make money was by speculating on home value appreciation (remember, economic profits exclude home price appreciation).

After 2007, returns skyrocketed for flippers to a median of around 40 percent (and near 100 percent when annualized), presumably because they were able to purchase distressed properties at deep discounts and quickly resell them at a profit. The fact that annualized returns diverge significantly from non-annualized returns suggests that flippers were quickly reselling their acquired properties, and indeed we find that the median days of flipped home decreased sharply from over 300 days in the mid-2000s to just under 200 days during the foreclosure crisis. Since then, the median time of a flip has rebounded slightly to around 220 days. This shift during the recession caused the annualized returns on home flipping to spike.

As mentioned above, we also find evidence that flippers are shifting away from price speculation and toward adding value to properties. How do we know this? By combining CoreLogic’s public records data with our robust statistical models, we can estimate the discount that a flipper received on a property when they purchased it, and the premium they received when they sold it, relative to similar properties that weren’t flipped. These two metrics, along with market appreciation, are the three ways that flippers can make money on a home.

Flipping Transaction Discounts and Premium

Just like we found that flippers were likely relying on price speculation from 2002 – 2007, we also find that they weren’t particularly good at buying properties at a discount or selling them at a premium relative to other non-flipped but sold properties during the same time period. Since then, we’ve seen growing signs that flippers are getting increasingly good at buying properties at a discount while the premium they’re selling for has remained mostly constant. This is yet more evidence that flipping today is less risky and less speculative than during the 2000s.

More Corporate Flippers

What’s more, the trend away from speculation and toward value-add might be due to an entrance of more experienced, professional flippers into the market. To explore this trend, we looked at the share of flipped homes that were sold by a business entity, such as an LLC, INC, or CORP, rather than by an individual. The trend has clearly been upward, with the share of flipped homes rising to a series high of 41.2 percent in the third quarter of 2018 from a series low of 11.4 percent in the third quarter of 2005.

Returns Highest in Areas with Older Housing

Like flipping rates, we also see substantial variation in economic returns to flipping across U.S. housing markets, with returns highest in the Rustbelt and lowest in the Sunbelt. At the high end, returns are highest in Detroit, Philadelphia, and Pittsburgh with returns of 95.9, 92.8, and 75 percent, respectively. The other seven markets with the highest economic returns to flipping are in Ohio, Maryland, Delaware, Wisconsin, and New York with returns ranging between 58.9 and 70 percent, respectively.

Tend to be Highest

On the low end, flipping returns tend to be lowest in area that have newer housing stock. For example, the three markets with the lowest returns are Raleigh, Colorado Springs, and Charlotte, with returns of 5.1, 7.7, and 7.8 percent, respectively. The other seven markets with the lowest economic returns to flipping are in Arkansas, Missouri, Texas, Arizona, and Tennessee, Florida, and Nevada, with returns ranging between 8.4 and 10.8 percent, respectively.

Metros with Lowest Median

We can see the relationship between age of homes flipped and economic profits by plotting the median age of home flips against the median economic profits of the 78 markets we have estimates of economic returns. The relationship is quite strong from a statistical perspective, with a R2 coefficient of 0.64. This means that 64 percent of the metropolitan-level variation in economic profits can be explained by the variation in the age of homes flipped.

Returns Highest in Metros

Does this mean that home flippers are reaping more net profits in these older markets? Not so much. While gross economic returns are highest in places with older flips, they don’t capture the amount of money that flippers invested into the flip. On the contrary, flips undertaken on older homes likely require more capital to bring the home up to market standard than newer homes. Such updates might include costly improvements to electrical systems, plumbing, foundations, and roofing. What this does tell us is that flippers are likely to reap substantial discounts when buying properties with such deferred maintenance. In future iterations of our work on flipping, we’ll focus more explicitly on using our vast databases to estimate what improvement were made on a given property, the costs of such work, and thus the net economic profits earned by flippers.

For a more detailed description on the methodologies used in this analysis, please see the full white paper to be presented at the American Real Estate and Urban Economics Association National Conference in May 2019 here.

[i] CoreLogic defines flipping as the purchase of a property with the intent to sell within a two-year period for profit. CoreLogic uses the 24-month definition as that is the Internal Revenue Service’s threshold for when real estate holdings could be considered owner-occupied and thus eligible for capital gains exemptions. The author diverges from previous CoreLogic work on flipping that uses a 12-month definition. This is because 12-month flips only capture flips that are subject to short-term capital gains tax, whereas properties flipped but held for 12-24 months are considered investments but subject to long-term capital gains tax. Since long-term capital gains tax rates tend to be lower than short-term capital gains tax rates, using the 24-month definition thus allows for a much broader analysis of investment in, and returns to, home flipping activity since some flippers may choose to hold properties longer than 12 months so that they may pay the lower long-term capital gains tax rate.

[ii] CoreLogic measures returns as the annualized economic returns to flipping, which considers the opportunity costs of a flip (price growth of similar houses that weren’t part of a flip), any market discount the flipper received on the purchase of the property, and any premium the flipper received on the sale of the property. Because CoreLogic does not observe the capital expenditures that an individual flipper deployed to undertake any renovations or repairs, our estimates of returns represent the upper bound of a return.

[iii] Consider this example: an investor purchases a property for $100,000 and sells it a year later for $200,000 after spending $50,000 on renovations. In this case, they earned a 100 percent gross return and 50 percent net return. However, over the same year, an identical house next door that didn’t have any work done to the property went up in value by $25,000. In this scenario, the gross economic return to the investor would be 75 percent, since we exclude the $25,000 the flipper would have made just from market appreciation. Considering the $50,000 the investor put into the property as well as the $25,000 market appreciation means the flipper earned $25,000, or 25 percent, net economic profit.

© 2019 CoreLogic, Inc. All rights reserved.

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What is HIP? An awesome Affiliation

What is HIP? HIPHom-Fliphom’s affiliation with Vanessa Stefanics and Nick Andrews the #1 team at RE/MAX Tri County in 2018, now, this is HIP. Having 19 years of residential real estate experience in New Jersey they bring a wealth of knowledge and enthusiasm to every deal. Their success speaks for itself. Vanessa is a member of the RE/MAX Hall of Fame and a New Jersey Association of Realtors Circle of Excellence award winner each year since 2007.

The HIPHom Affiliate Program is an opportunity for realtors to leverage the HIPHom~Fliphom platform to increase market share.  Vanessa believes that “targeting Homes In Process enables us to provide to the investor more options to market their home”.   The national average for flipped homes runs approximately 6% of existing home sale and in some markets it is as high as 30%.

 “We could not be more proud of our relationship with Vanessa and Nick” remarked Tom Rust, Founder of HIPHom~Fliphom.  He further observed, “They represent the quality of realtor with who we want a relationship. It is for this reason our Affiliate Program is an exclusive affiliation for the markets they serve.”

With every home sale Vanessa and Nick proudly make a donation to the Children’s Miracle Network.  We are here to help! %.  If interested in the Affiliate Program, please contact us through our website at www.hiphom.com; look for Affiliate Program. www.vanessaselllshomesnj.com

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What? A Devil in Flippin’ Homes

Tom Rust

CEO/Founder HIPHom~Fliiphom LLC

Flipping homes successfully is all about the devil that is lurking in the details. If you consider how much dialogue suggests how easy it is to make money flipping homes, it is astonishing on how few talk details.  It does not have to be confusing; however, misjudge and run the risk of losing money.  From experience, I can tell you that it is a whirlwind of emotion;  fun, exasperating, and rewarding. If you start your flipping journey without a sound business plan, at some point, you will likely question your decision to try your hand at flipping homes in the first place.

Unless you have a bundle of cash to burn, there are a few simple lessons to making a smart investment decision.  Trust what you know.  The real estate mantra of location/location/location holds particularly true for flipping a home profitably.  The three things to focus on when making your decision are; investment formulas do not work--comps and time matters. 

Investment Formulas Do Not Work

If a “flipping guru” suggests there is a thumbnail formula using percentages that will provide you with the confidence to invest in a flipped home I am here to tell you; don’t walk, run away. Let me explain by way of simple math.  Let’s take a look at a 15%net profit on two different homes without consideration for the degree of difficulty.  On a $500,000 home the simple view profit is $75,000 and on a $250,000 home this is $37,500; a significant difference. How much is your time worth? $37,500 may be good for you, I know I value my time and so should you.  So much of your money gets caught up in the vacuum of lost time. Before you pull the trigger, go through the exercise of determining what your ARV (After Reno Value) will be and analyze all of the costs and time you have to commit to the project. The warning is trying not to get pulled into the excitement of unlimited profits before you have walked through this exercise. 

Comps Matter 

The homework you do upfront sets the tone for the result; profit. Understand the recent (previous 3- 4 months) of home listing and sales prices.  For more on this subject, go to the #HIPTalk article “Comps – Know thy Neighborhood.”   Properties values can swing wildly even across the main road within proximity. The comparative must take into consideration the square footage of the home and lot, number of bedrooms/baths, garage, basement, and general condition of the home.  

The effort on this analysis will provide a sound foundation for establishing your ARV.  The ARV is the price you believe you can sell the flipped home once you complete the renovation.  With this information in hand, you can establish an optimistic and pessimistic ARV range.  Establishing a range will give you some cushion for unanticipated events and unforeseen market conditions that may be on the horizon. 

Time Matters

Everyone, including myself, always believe that we can get something done faster than what takes place, again; the facts belie the beliefs. The average flipped home takes in the range of 9-11 months to complete; this is from the moment you take possession until you hand over the keys. The amount of time you plan on must take into consideration things like municipal approvals, construction time-based in the degree of difficulty, municipal approvals, selling/marketing time and buyer closing to accommodate-- appraisals, legal and title work, mortgage approvals and scheduling. Brace yourself and expect that something will not go according to plan.

If you account the average sales time for marketing a property is 60-90 days, and buyer closing is 30 -45 days, then the amount of time you need to add onto your schedule can be as high as 135 days after you have completed the property.  Was this in your plan? Now keep in mind the cost of money and carrying or holding costs for this period.   Plan on it, time does matter.

Flipping homes is not for the faint of heart; you can make good money and feel accomplished.  Success comes to those who plan, do the homework, the math, and embrace the detail.  Because the devil lurks to those who avoid him; if you do not like or know how to analyze the detail, find someone who does.  There are plenty of tools online, including our website for investors and fixers of flipped homes, to go through in detail the exercise above.   Visit HIPHom-Fliphom as part of your plan.

The information contained in this analysis is provided for informational purposes only, and should not be construed as legal advice on any subject matter. You should not act or refrain from acting on the basis of any data in this analysis without seeking legal or other professional advice.

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A Flippin’ Market

Tom Rust

CEO/Founder HIPHom~Fliiphom LLC

With all the hype around flipping homes have you ever given it a thought as to how to find one if you were interested to buy a refreshed home?  Most of us have and why not.  Consider the amount of programming presented by HGTV and other cable TV channels to promote flipping homes.  The short list looks like this; Fixer Upper, Property Brothers, Fix or Flip, Home Town, Design Star, Good Bones, House Hunters, Ellen’s Design Challenge, Love it or List it, Rehab Addict, Curb Appeal, Gardening by the Yard, Designed to sell, Beachfront Bargain Hunt, My first Place, Divine Design, Color Splash, Property Virgins, Holmes Makes it Right, Tiny House hunters, Flip or flop. Are you tired yet? Apparently not, we keep watching and dreaming, and, why not, it’s fun!

We seem to have an insatiable appetite for viewing and or perhaps dreaming of buying into one of these properties.  It makes sense.  Some of the best property locations are in established neighborhoods where the housing inventory has just become dated.   For most, the thought of contemplating doing a renovation is daunting.  The lack of skills, time and or energy is significant factors that should not be wisely overlooked.

When you look into the market it’s difficult to find a resource to search for such properties.  Even the best real estate agents only know those homes that have been refreshed within their sphere of operation.  It’s no one’s fault this is just how the industry has evolved.

Today, there are over 200,000 homes flipped annually in the USA that are sold after the construction is completed. The flipped home market has offered a constant national average of near 6% of existing home sales annually irrespective of economic conditions. If you drill down you will find that there are areas in the Northeast, Southeast and Southwest that have pockets approaching 30% of existing home sales. Classically, this is a market waiting to be organized and improved; perhaps its time has arrived.

The reality of making a profit on flipping homes varies broadly; however, there are a few truths about the economics of the flip that both buyers and fixers need to understand:

  1. The neighborhood dictates the price range. As such, know the comps of the neighborhood.
  2. How the investor/fixer buys the “in need of repair” home is a key element for the measure of renovation and profitability.
  3. Time is money. The amount of time it takes to sell a home costs both buyers and sellers. Further, it eliminates the chance for the buyer to put forward desired design features before the home is complete.

The flipped market is not a custom home market.  As such, the buyers feature set may not always be met by the investors design elements or will have to yield to a plain vanilla approach to satisfy a broad market. If we shift the paradigm to create a resource whereby the buyers and fixers can engage prior to the home being completed it can drive a more satisfying sale for the buyer and potentially a quicker turnaround for the investor. 

 

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How to Make Money Flipping Houses

As appaered in the January 2018 issue of Entrepreneur Magazine.

 

R.L. Adams

CONTRIBUTOR

Entrepreneur, software engineer, author, blogger and founder of WanderlustWorker.com

January 2, 2018 11 min read

Opinions expressed by Entrepreneur contributors are their own.

Want to make some serious money this year? While there are plenty of ways to achieve that goal, flipping houses is one surefire way of earning cash. And quickly. The problem? Most people have pre-conceived notions. They think that in order to flip a house you need plenty of capital or great credit. Well, you don't need either. And I'll tell you exactly why and how you can pull this off even if you only have a few hundred dollars to your name and a poor credit score.

Clearly, if you're hurting for cash, you can still make money onlinewhile you sleepor do it fast when you're in a bind. Yes, it depends on your skillset. It's true. We do live in a virtual world. Yet people overlook one of the most viable and lucrative endeavors for making money. Why? It takes some legwork. Sweat equity, if you will. But the best part? Making money flipping houses isn't just a viable option, it's a lucrative endeavor when you know what you're doing.

The problem? Most people live with a scarcity mindset. They think that there isn't enough money to go around. But not just money. Time. Resources. Connections. Credit. And anything else for that matter. Well, not only are people making incredible amounts of money in real estate, they're quite literally crushing it by flipping houses. But not just flipping houses in the traditional sense. I'm not talking about buying a home and upgrading the kitchens and bathrooms. Not about replacing the flooring or pipes.

No. Not at all. I'm talking about making money, not just by flipping houses, but by flipping the contracts themselves. We're talking about arbitrage. Buy low, sell high. Merchants do this every single day. They'll buy low in one market, then turn around and sell it in another market for a higher price. Think import-export business. The beauty of this? You can replicate this in the real estate market simply by bringing a motivated seller and a cash buyer together. That's it.

Investors have made a fortune with this specific method. And if you don't believe me that you can do this without cash or credit, just look at the story of Kent Clothier. Clothier has built a proverbial empire out of flipping houses. No. Scratch that. By flipping the underlying contracts. He arbitrages his way forward to the tune of nearly 1,000 contracts flipped each and every single year.

But Clothier didn't start out successful. In the very beginning, he was broke. Close to bankruptcy, in fact. Credit, shot. At the end of his rope. 18 months prior, he had left a successful grocery business. And he was down to his last $4,000 in his bank account. While he understood arbitrage in the grocery business, he was nearly destitute when he saw a late-night infomercial about real estate. That "system" cost him $1,000. It was 25% of his net worth at the time.

Fast forward to today and Clothier's family now owns and operates Memphis Invest. A behemoth in rental property management. With roughly 5,000 properties under management, not only is Clothier well-versed in flipping real estate contracts, but also in managing properties themselves. He also hosts an annual event that helps educate entrepreneurs on how to implement this specific strategy.

As one of the largest aggregators of MLS data in the United States, Clothier organizes, cleanses and desiminates all the relevant datapoints for people using the platform. And it's fairly epic. The best part? Clothier's Real Estate Worldwide has developed a SaaS platform for people looking to specifically do this. That platform is used by over 60,000 real estate entrepreneurs across the country. It provides instant, real-time access to every dataset you'd possibly need to flip contracts.

But from the outside looking in, it seems a bit bewildering. How can you possibly making money in real estate simply by flipping the underlying contracts? It's just a matter of finding the right sellers in the right neighborhoods and bringing them together with the right buyers. That's it. Easier said than done? Maybe. First and foremost, you need to understand how to analyze and extrapolate the data to make the right decisions.

How to Make Money Flipping Houses

Here's exactly what you need to do to make money flipping houses. First, a lay of the land. Understand the market forces and the playing field, and you can capitalize on it. Your goal? Find a distressed seller on one end. On the other, a cash buyer. Why a cash buyer? Because you want the transaction to close quickly and be able to turn around and sell your interest in a property fast. And, of course, you want to profit in the end. 

How do you do that quickly? Find the right cash buyers. In other words, you need investors. If you know rich people or you're friends with people who're already investing in the real estate market, then great. If not, scour the web. There are several marketing methods you can use to ensure that you find the right buyers. You could build a full sales funnel devoted to that end. You could run Facebook ads. You could even do a webinar

But if you want to save yourself some time and aggravation, all you need to do is comb through county records. That's where you'll find a gold mine of data. A treasure trove of information is just waiting to be hand-picked. All you need to do is to analyze county records for all the cash transactions, and locate the relevant buyers. Sure, it takes some effort. But it's the easiest way to find the money.

It would be futile to identify distressed and motivated sellers without having cash buyers lined up. The only way you can flip the contracts is if you have both parties at the ready. That's what it takes. But that's not all. There's an entire 5-step process for you to execute this strategy. Yes, you can make money flipping houses, but you need to ensure you execute each and every single step meticulously. Once the systems are in place, just automate. That's it.

1. Identify the right markets

First and foremost, you need to identify the right markets. Maybe your local market isn't the hot market right now. Maybe it's a market in another county or state even. Search for the right market. The goal? Figure out where cash buyers are putting their money. That's the key. While you don't need a system to help you identify the right markets, it certainly helps.

But at the end of the day, the right markets are crucial. It could make the difference between flipping a contract and being caught holding the bag. Why? At the end of the day, if you take on a contract to purchase a house, and you can't flip that contract to a cash buyer, you could end up being liable. Clothier says you have to be careful and know what you're doing. One quick way to solve that issue is to tackle the right markets.

2. Identify the right price

Not only do you need to find the right market, but you need to identify the right price. We're talking about the price that not only you're going to pay for the property. But also, the price that someone is going to be willing to pay to buy it from you. What's the right price? There are proven algorithms in place that will help you identify and justify this. Clothier explains it like this. 

  • Take the last 30 days of transactions that were all cash for a particular neighborhood or block where you're looking to buy a property.
  • Punch in those addresses into ZillowTruliaRedFin or any other website online for estimating the retail price. Get the difference.
  • Now, take the average of all those differences. You've just identified the gap. That gap is the average markup (or markdown) from retail for any given property in that market. 
  • When you find a listing, use the average gap to estimate the price that a cash buyer would be willing to pay for that property. 
  • Ensure that whatever home you secure as a contract, that it's lower than that gap. How do you do this? You'll have to ensure you have a motivated seller and an all-cash offer. That's it. 

3. Identify the right property

Now that you've identified that gap, you need to find the right property. Scour the MLS. Or, search online through retail channels. Look for distressed homes. Vacant homes. Possibly homes that are on the verge of falling into repossession or short sales. Going about this isn't a simple task. Again, it's easier to have a system to do this. But even without one, you can learn. You just have to start somewhere. 

However, it isn't always about using retail channels. Talk to real estate agents. Ask friends or neighbors. Go to local bake sales or PTA meetings and simply talk to people. Once you put your intentions out there, you'll be surprised at just who comes out of the so-called woodwork.

4. Identify the right buyers

You need to line up your buyers. Keep in mind, that when you secure a contract to purchase a home, you usually have about 30 days to close on it. You'll need buyers lined up that you can flip those contracts to. Without cash buyers at the ready, you'll need to do all the legwork once you've secured the contract, and that could turn into a major hassle for you. Clothier says you don't want to be scrambling to find those buyers when it comes to crunch time.

Here's how you do it. Send out letters to every single cash buyer you can find in the past 30 to 60 days. You can usually locate their addresses from county records. Introduce yourself. Tell them who you are and what you intend to do. Try to schedule a call and figure out what they're looking for. Develop a relationship. Find a way you can add value to the exchange.

5. Identify the right sellers

Clothier says that this is a bit more tricky. You have to identify the right sellers. Finding a vacant home isn't always simple as 1-2-3. How do you go about doing this? What about homes that are near or close to entering into foreclosure? Clothier says that there are a few ways to do this. 

  • Look for key terms in the listing description. For example, you might find something like "must sell" or "for immediate possession" or even "below market value." 
  • Look for liens on the property. Liens can come in the form of tax liens. They could also be from judgments or other creditors. 
  • You can also drive through neighborhoods and inspect the homes. Look for telltale signs of vacant properties. For example, uncut or unkempt lawn and garden or a full mailbox. 
  • Talk to neighbors located around the property and ask them about the home to figure out what's the history and what's been going on there. 
  • Talk to real estate agents who might have some inside knowledge on a particular property and specialize in that area or neighborhood. 

Keep in mind that the right seller is key. They need to be motivated. Without the proper motivation, there's no desire for them to enter into a below-market-value purchase contract with you. Yes, there are a lot of variables to consider. But if you want to make real money in real estate, this is how you do it. 

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