Flipping Real Estate Advice For Beginners: Snakes in the Grass
So you want to try your hand at flipping real estate? Well first let’s talk about an important issue that most beginners never think about, dealing with town officials.
Massachusetts, like many towns across America, has its share of “old school” towns with their own “old school” governments. Many municipalities, especially the ones in more rural areas don’t have a lot going on and thus like things just the way they are. Additionally, outsiders are often not welcomed. Keep this in mind when working out of your usual towns and areas that you are familiar with. You may very well run into one of these situations and find yourself regretting ever flipping real estate in that location to begin with.
I, personally, am not from the Cape but am familiar with a number of associates and Realtors from that side of the bridge. Things can operate very differently in this area and outsiders need to be aware. I took that warning with a grain of salt. Who me? Worry? Nahhh! Can’t happen to me. I was of the belief that if the law was on your side and you went through the proper channels then all should be good. Not the case!
We were alerted to a home in a small town on Cape Cod that was sitting on a double lot. We got the home and lot under agreement and thought it may take a few months to go through the motions to separate the land from the home but if we account for our time then we should be all set. That was partially true. We were able to separate the land from the lot but not until 18 months later and
many legal fees that accrued along the way. In this particular instance, we were required to go before the town Zoning Board. Being that the board on that date did not have all of its members present, it was required for us to have a majority vote for our plan to pass. Okay, shouldn’t be a big deal. We have not only the property law and regulations in our favor, but also Massachusetts state case law as well.
Turns out one gentleman on the board knew the previous owners, who had passed away several years before, and he firmly believed they didn’t want this to ever happen. A member of the Zoning Board could apparently speak to people beyond the grave and rule on their behalf?!!!! Are you kidding me?!!! This one little problem required us to go back through the motions again 6 months later and jump through several more hurdles before we could accomplish what we were trying to do. By the time we got this done, we were in the midst of one of the worst winters in our recent history and that delayed us even further. Suffice it to say that our projected healthy profit dwindled to almost nothing and took 18 months to get.
Snakes for Hire:
Know Your Market or Make Sure You Know Someone Who Does
Many of us get opportunities on properties that are outside of our geographic area or area of expertise. We have them brought to us through email, phone calls or casual conversations. We think “great, I really have stumbled on something”. We try to make sense of it by running comps. Looking at similar properties on the market, etc. We contact local Realtors who are looking for listings and they back up what we think. Great! It looks like a deal, let’s do it! Be careful of those agents out there that you do not know.
They may misrepresent the after repair value (ARV) in order to get a listing. They may full well know that they are not going to get that top value you were promised and know that price drops will be required along the way. Getting listings is a very competitive business and there are snakes out there. Once they take that listing and post at the price they previously assured was a slam dunk they can start to put up hurdles… “Oh, the market has shifted a bit”, “I think the main road is now a problem”, “there are too many similar properties on the market now”, etc. These agents are pro’s and by the time that they get the property under agreement your profit has been potentially been fully eaten away.
What is the harm in the agent doing this? Nothing! They still get their percentage from the sale and move right along with the money from the sale in their pocket. Be aware of such tactics and be sure you get second opinions and references on the agents and representative you choose to use.
Snakes In Plain Sight:
Be Sure Your Contractors Are Not Just Looking to Make a Quick Buck
Rehabbing requires a firm understanding of rehabbing the property, timelines and finance. If you misjudge any or all of these you are likely to lose a lot of money. You need to have a firm understanding of the job being done and stay in tuned with who is doing what and why. Be leery of contractors who are too good to be true.
These contractors can often come in the form of a friend or acquaintance who you think has your best interests at heart. They oftentimes do not. Business can be treacherous and you need to be leery of everyone and their motives. Get your contracts in order and be sure you have spelled out all necessary items that will be needed your project completed in a timely manner. Often times these contractors aren’t trying to do a bad job from a timing perspective, they are just incompetent.
This is why references and past experiences are just as important to take into account. In one example, we hired a friend of a friend who had a strong background in general contracting. The project was out of our typical geographical stronghold so we took a leap of faith that this contractor who was spoken so highly of was not only competent but also trustworthy. Nope! Wrong! In this instance he not only was incompetent and unable to get things done, but also charged a premium and moved at a snail’s pace.
Furthermore, he had a very unprofessional knowledge of the local codes and laws and thereby upset local inspectors and slowed the project down substantially more. At a certain point, we were required to cut ties and finish the project ourself. This process required bringing in another contractor from out of the area that we were comfortable with so we were sure he could finish up the job properly. He did just that, but not after chewing up so much of our profit that it wasn’t worth all of the time and travel associated to get it done. Be aware of this pitfall and make sure your have your T’s crossed and your I’s dotted.
Snakes in the Walls, Literally:
Be Prepared for the Unknown
When evaluating any upcoming deal while flipping real estate, be sure to account from the unknown. This comes in the form of putting in a buffer of financial cushion for unknowns. Also, make sure the profit on a project is worth your while. Many houses can often be just the basics, paint, kitchen, roof, list, sell and collect your check. Most are not this easy.
Be ready for the unknowns that you cannot account for. All of the homes we acquire come without a professional inspection. This is often a key component of us purchasing the property. We buy cash with no contingencies and sellers and banks are more often willing to take less because they don’t have to go through the headache and delays associated. This comes with it’s rewards for sure, but there are instances that this is not the case. You often can’t account for what you can’t see.
As an example we purchased a home in my hometown that seemed to be a great deal. It came from a local police officer who stumbled upon it after family dispute. He sent along the location, I tracked down the owner and placed a call. This owner lived in Florida and was renting to family who stopped paying rent months earlier. She just wanted to be done with the property. Great! This sounds like a slam dunk. We ran the numbers after reviewing the property, made an offer, and it was accepted. Perfect! That’s a perfect scenario to acquiring a property and flipping real estate as seamlessly as possible. Let’s make a bunch of money…. Woah there big fella, not so fast!
Upon purchasing the property we started the tedious task of cleaning this “beauty” out. 9 dumpsters, yes, 9 dumpsters later we got this hoarder special emptied out. Once we emptied it out we were able to really start to evaluate what was needed. All of the typical stuff; roof, windows, siding, flooring, kitchen and so on. We actually walked through at one point and saw something in the corner. As we got closer we realized what it was. It was an actual snake!!!!! We jumped like a couple of school children and ran. As we turned around we saw that it slithered it’s 3-4 foot body right back inside the wall! To this day, still the most startling moment of my career in real estate as well as the highest pitch my voice has ever gotten!
We order windows and started the process. Once our contractor started to remove the windows he realized the extent of water damage from the failing roof. 2 of the 4 walls of the home were completely rotted from water damage and needed replacement. The damage spread into some of the floor joists and required a pretty major undertaking that ate up a huge percentage of our profit and elongated the project substantially. While we didn’t lose money, it certainly didn’t turn out to be the cash cow we had hoped for.
All in all, while all of the 60-plus properties I have renovated in the past 3 years of my flipping real estate career have been money makers, there is a certain percentage that have hurdles that are difficult to foresee. These moments help to provide on the job training that often times only first-hand knowledge can provide. This business can be wildly rewarding but it also has its pitfalls and you need to always be aware – keep your head on a swivel! I suppose it adds to the excitement for us adrenaline junkies, but keep in mind that your investors want their money returned with interest at the end of the day. If you are too lax and don’t pay attention, you can get yourself in some deep water and potentially endanger those relationships and thereby damage your ability to acquire and renovate future projects.
My suggestion is to heed the words of advice you receive and to keep learning. There are always going to be things that you run across that you are not familiar with. Keep those people around you that know what you don’t and treasure their knowledge, as they are sure to do with you. It takes a village to be successful and no one does this business alone and is successful, at least for very long.
Now get out there and start flipping real estate!
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