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“The Flip is Dead” part 2

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OK, maybe the Flip isn’t Dead yet…

Based on our reader’s comments, reports of the “Death of the Flip” may have been exaggerated…

Click here to read the article that started the controversy (60 comments strong and counting…).

However, as we read through your comments, one point that we made in the original article kept coming up, namely that investors with limited capital (and probably experience) are getting squeezed out of the game in a new way, especially if their local markets are saturated with investor-buyers.

For example, here’s what Vena of regoddess.com wrote:

Flips are alive and well–fully renovated bread and butter properties priced at “quick sale” prices (5-10% below “market”) are selling in 20 days or less in my market to FHA buyers. And since they can be picked up at 60-70% of quick sale price, ALL IN, it just makes sense for experienced rehabbers to buy them. Having said that, anyone who isn’t jumping on RENTALS at today’s prices is just plain insane…


[Editor's note: Vena is one of the best investors and teachers out there. We are using her excellent comment solely to raise questions about current challenges for investors in general.]

Lots of good insight in Vena’s comment, but let’s pick it apart a bit.

First, she seems to be making a few assumptions, mainly that she can buy and rehab a property for 60-70% of quick sale price. I would like to hear how feasible that is for investors in other markets because what I’m hearing is that whether buying at auction or buying REOs, prices are going up and margins are going down.

Second, she assumes that there are plenty of FHA buyers around.

Third, she qualifies her comment somewhat by suggesting that these deals are really best for “experienced” rehabbers, which probably means investors with ready cash and plenty of rehab know-how.

To sum up, Vena’s approach will work if you have:

  • cash to invest
  • properties to be had for 60-70% of quick sale price
  • experience as a rehabber
  • a stable market with eager FHA buyers

There’s not much you can do about the last three factors (you’ve either got it or you don’t), but what about the first–access to cash?

If the market conditions are good and someone finds a potentially profitable deal, what can an investor with limited capital do to grab the opportunity?

Where do you guys find private money to back you on deals?

Leave a comment below: What would you recommend to someone just starting out–especially someone with drive, local knowledge but little cash–in today’s market?

  • http://Www.gabhartinvestments.com Cgabhart

    Well you shouldn’t be flipping if you don’t have experience. Flipping is not a novices game contrary to what some people who sell a dream will tell you. If you have the experience and can find the deals you can get the money.

    If you don’t have experience or much cash you should start by buying your own house to live in with an FHA loan, then rent it out later and buy another owner occ. Simple and effective and that’s what I did.

    And yes people say the deals aren’t out there and they ALWAYS do., but there always is. I hadn’t bought a property in a few months and everyone kept telling me there wasn’t any good deals which kinda started scaring me. So I decided to make a 30 day challenge for myself (goto http://www.gabhartinvestments.com and type in 30 day challenge) in may to buy 2 deals.

    Well I bought 5 with 3 in escrow to sale, 1 in the construction phase and one which is a long escrow that we close on in September we are in San Diego one of the most active markets and there still is deals for those who develop the skills and put in the effort and time

    Don’t flip if you aren’t able to handle losing money though and if you have 0 experience.

    http://Www.gabhartinvestmentsments.com

  • mark

    Deals are not a problem finding in Houston area, have cash, but, getting refied back out of for rentals seems to be the problem. Have one now trying to refi at 65%, lenders want 6mnth seasoning. If we didn’t use our cash and did hard money, wouldn’t be a problem for rate and term with no seasoning. Crazy, have the cash and want you pay 5pt and 15% interest just to refi for rental. Is there anyone who doesn’t sell the loan to secondary market? This penalises the people have not played loose and fast .

  • http://N/A Samuel

    Cgabhart !!!! I LOVE U !!! Your response it extremely logical !!! I’ve always wondered at playing a “New Game” without experience and yet Hope to win !! I started out With Literally NO MONEY and I saw How REAL the world can get.
    You need money to live, to eat, virtually everything requires money !!! And If a Detail oriented JOB requires you have experience how much more this Hi-skill, Multi industry, high knowledge demanding, very tasking business known as Wholesaling or House Flipping. No wonder 95% of people who start, leave it sooner than later.

  • http://www.newriseinvestments.com Melissa Sanchez

    We work with investors with limited capital, limited time, limited experience, inability to obtain financing. We are a real estate investment firm specializing in multifamily apartments and we pool investors together – large and small – so they can achieve the same buying power as those with large amounts of capital and experience. So there are options out there for their for all types of investors, just have to educate yourself.

    Find some educational materials here:
    http://www.newriseinvestments.com/ebooks.html
    http://www.newriseinvestments.com/blog

  • http://www.7dayclose.net Joseph Irons

    I would have to say that when you are looking at a rehab, and it is true there are many out there, you should have cash enough to handle the project. The question you asked is where does one get the money? Marketing, networking I found 2 private money lenders in California who like my market…I have a friend who gets a lot of overseas money…we find this money by marketing and being the expert in our area. However, rehab is only one exit strategy..rentals is another. It is my opinion that if you invest in rentals solely for the appreciation then you could be setting yourself up for failure. I have been successful for several years and even had started speaking and coaching across the nation when I met Todd Dotson..he showed me another market to flip to..and another avenue I normally said pass on! Flipping boarded up vacant ugly houses to the end user who wants to invest sweat equity and live there with there family. If you want cash flow and you don’t have any money or credit you can still do a sub2(subject to existing finance) Todd and I both like this strategy a lot…cash flow like rentals, equity when tenants refi and no toilets or 2am service calls.

    If you are going to invest today you really have to be a jack of all trades..when I was in the military as a Navy Hospital Corpseman stationed with the Marine Corps we used to say “jack of all trades, master of none”

    I like partnering with Todd Dotson and his niche wholesale system…I am also flipping commercial contracts with David Montelongo..who is starting to teach this..

    The point is look for multi exit strategies and pick one you can make money at…don’t be a one trick pony..defiantly don’t have blinders on there are a lot of ways to make money in this business and there are many different ways to flip the deal! To your success

    Joseph Irons
    Look me up on social media sites

  • Rodd Steele

    Fix and Flips are not DEAD. The game has just changed thats all. There will always be deals out there, now you have to calculate in at least 6 months of holding costs (if you are using hard money). Which means that you have to buy at really discounted prices because as we all know hard money will eat up your profits real fast. Investors without cash probably shouldn’t be playing the game right now in my opinion.

    I sold a couple of wholesale flips in April and those investors still have those houses on the market waiting for a buyer to come along. Good thing for them they bought with cash so they can wait it out. And most likely they will be waiting it out for a little while longer with school starting and fall approaching. Once you understand economics the game becomes easier to play. If you listen to Peter Schiff or Gerald Celente they will say that the worst has yet to come in real estate. If you listen to your local politician they will say that everything is ok.

    Fix and Flips are only dead for certain players.

  • http://rdillion.com rick dillion

    Investors are currently buying and holding as rents are positive (rents higher than PITI)in the Vallejo / American Canyon area. There are a few investors flipping properties, but most realize that its a great time to buy and hold on to the homes until the market improves. I had one investor turn down $50,000 more than he paid when offered the day after close of escrow. he is convinced that in 2 or 3 years his return will be even greater. However, I see the rental market as also declining in income, as some investors rent them out quickly at lower rents so as not to have a longer term of vacancy. Instead of $3,000 month they rent for $2,500 month. Timing is everything. Rick Dillion, Broker

  • http://www.HugeProfitWholesaleDeals.com Ryan

    I deal mainly with REO properties but have been moving more toward motivated seller’s (homeowners not banks). What I am seeing is that the banks (REO’s) are holding out for a higher purchase price but the ARV’s have not gone back up yet. Thus, squeezing the profit margin down to where the deals are getting harder to find in this niche market. Still out there, but much harder to find. I think once the ARV’s start to climb again, then the higher price for REO’s won’t be as much of an issue because the profit margin will still be there.

    Private money is definately the way to go. We still use hard money lenders but several of them have gone out of business and the others have become more expensive and take too long to approve the deal. Where do you find private lenders? Just as Joseph Irons said, you have to let everyone know that you have a fantastic private lending program that will give them an incredible return secured by real estate. Then you have to have the ability to educate them on your program. We have a couple of doctors, lawyers and high paid individuals that loan cash on our deals. We also have several people that had IRA’s or CD’s that we helped restructure so they can particapate in our private lending program. Depending on your markets price point, you may not need many private lenders to keep your business going. Remember, private lenders can be anyone you come in contact with. You just have to tell everyone about your program. It’s a numbers game just like finding your next investment property.

    Ryan
    http://www.HugeProfitWholesaleDeals.com

  • http://www.dreamteamdiscountproperties.com Kim

    I think there are some very valid points being offered here. I don’t disagree with Vena or with the points that were made counter to her point of view. All valid. I met her at an event in Atlanta a couple of years ago, and she is quite savvy at the game. I do, however, want to know how she’s selling to FHA buyers inside a 90-day window for more than a 20% increase in sales price. This IS possible, but with ALOT of caveats. So again, not for the inexperienced investor.

    As an experienced investor in my market, I find this to be a great time for rehabbing and turning out retail properties, but were finding this is taking 90+ days in our market currently. I am a HUGE advocate of buy and hold, either by renting or by owner-financing cheap acquisitions to new buyers, and then selling the notes to discount note buyers. Also an advanced strategy, so not much here for the inexperienced investor. Anyone interested in learning more about discount note buying and selling, Donna Bauer, “The Notebuyer”, out of Cincinnati, OH, is one of the foremost authorities on this topic.

    Best of luck and success to you all!

    Kim Christie
    GaREIA
    Find our page on FaceBook at Dream Team Properties

  • http://www.realestatepromo.com Ryan Johnson

    Vena’s comment is spot on because she is an active investor who knows the pulse of real estate investing. REI isn’t some game to play pundit, it’s her life’s work and what she wrote is not some hollow musing. I’m mighty cautious of who I back online and Vena never strays from the reality of investing. She’s not making assumptions, she’s illustrating her market (Ohio) which is a fairly good market barometer. An assumption is assuming that flips are dead and there’s a new way of investing.

    Here’s my take on the parts:

    “1st” – 60-70% is REI, the investor discount, and an essential function of the MAO formula. It’s generally not in your best interest as an investor to go beyond 70% ltv. If REO’s and auctions are getting bid up pass that point they aren’t going to last forever… if you want deals at 70% connect with wholesalers, get on their buyers list, give them all the specs about what you want in a property and you’ll get your 70% from a very happy wholesaler. REO’s and auctions AREN’T the only game in town and listed REO’s are going to have higher competition and lower margins for the average investor because it’s less work than pushing through a short sale or unearthing pre-foreclosures. There’s less competition there because the skills and effort provide a barrier to entry to lazy or less than educated investors. The road most traveled will have the least grass on its path..

    “2nd” – FHA – There are always going to be active FHA buyers out there searching, here about ¾ of buyers are FHA. Whether there are plenty, enough, or some isn’t the top priority. Finding them, marketing well, meeting FHA specs, and pricing your property realistically (a little nicer than others, while being a little cheaper will sell… ask any hard money lender the biggest reason why the properties that they finance fail fail and they will tell you that it is usually because those investor get sentimental about the property and price it poorly. If priced correctly and you’ve done things right the house will sell, it’s not the quality and quantity of FHA buyers out there but rather the root is within amateur investors becoming more sentimental and less about the hard numbers.

    “3rd” – Experienced rehabbers have a real grasp of REI as a whole to be experienced rehabbers. Key point is having a real grasp REI and a fluency in its operations and your own. Ready cash and experience make a world of difference, but this is again an assumption that I’ll cover in the summation of Vena’s “sum up.”

    I’ll start from the bottom up

    1) Stable market with eager FHA buyers… I’m willing to bet she’s not implying that finding an FHA buyer is the only exit strategy a flipper has, it’s just the most common and requires you to bear in mind FHA requirements when you’re buying and fixing. Investors know that they have a variety options like wraps, seller financing to selling discounted notes. Finding an FHA buyer is what she has built her system to bring in because they’re the majority that requires a special set of consideration from the start, but a savvy investor knows the alternatives and conventional buyers though more scarce are more desirable. There is something you can do about it and that is to have your system cater to FHA requirements to reduce complications!

    2) Vena’s been doing REI in all ways, shapes, and forms since she was very young and has the advantages of experience. But for other investors networking and finding honest contractors who understand investing can be a valuable addition to the team that doesn’t require you to have a vast rehabbing knowledge. I’m sure you cover this in your “How to Build Your Real Estate Dream Team” copy. Again, there is something you can do about it!

    3) 60-70% is where we work, it’s insane to deter from that rule of thumb but yet again there is something you can do about this reality and that is become a better, more well connected investor!

    4) Cash to invest – There are reason so many reasons why wholesaling and bird-dogging are the most common starting points for most investors:

    – it’s a natural entry to making money without risking a whole lot of money, just time.
    – become familiar with the different roles within the investor economy.
    – observe how the successful conduct their operations, because you’re part of it!
    – begin building your flip fund nest egg.

    There’s always JV’s and Hard Money to start out that will both provide you with a means of making a significant check. Depending on the deal one can be better than the other. If you have good credit and a flare for being professional you can go to your bank for a loan. If you know your stuff you will be far more effective at raising private money. So you have JV/HML/PML/Banks as options… you can also take advantage of the economic feasibility of seller financing.

    I can’t help but think that some wanna be investors become lazy or complacent because they have a sense of entitlement that if they sit back falsely believe that they can passively become a successful investor because they call themselves one. There is big money in REI and where there is big money there is going to be competition… where there’s competition you have to put in time and effort instead of simply thinking that “Hey with REO’s and auctions I don’t have to get my hands dirty with motivated sellers or any of that nonsense… all I have to do is call myself an investor and bid!”

    If you want to be successful in REI, especially starting out you have to be tenacious, find out what you don’t know and what you don’t even know what you don’t know, learn everything you can and take action. Fail forward if you must, but this is a very real profession with high stakes where competition, networking, and education.

    *Private money*

    IRA’s are great because gold is just a hedge, stocks are volatile, inflation is a concern, and many IRA’s aren’t receiving the attention they deserve by their holders. 10%+ interest secured by real estate is a fairly easy sell to the right people and it’s the job of the investor to learn how to locate, convince, and convert their IRA money into your operations. Same goes for non-IRA in a lot of cases, but the coming evisceration of social security is clearly written on the wall to anyone worth convincing in most cases.

    Bottom line is that this business is coined as creative real estate for a reason and if you think that the only concern you should have is the bidding prices at auctions and REO’s (you make your money when you buy) you are selling yourself short on options, opportunities, and exit strategies.

    This isn’t a business for someone who wants become rich by being a lemming!

  • http://www.JacksonvilleWealthBuilders.com Adam Rigel

    Too much thought is put into “Where do you guys find private money to back you on deals?” The people that are doing large volumes of deals a year will tell you that finding private money is EASY!!!!!! Why is that you ask? If you find a GREAT deal the money will find you. My company buys 6 homes a month to renovate and resell. We don’t even start to think about where the funds are going to come from until we know that we have put a house under contract for the RIGHT price. Once that has happened then it’s all about letting people know why your numbers work.

    One exercise that I put our students through to help them find private funds is to force them to make a list of 10 people that they know who may have $20,000 to invest. The next question that they always ask me is, “Why $20,000 if that’s never going to be enough for me to buy and renovate a home?” The answer is because people often have more money then you think. And you will also find that after they have done one deal with you, magically they are able to find a whole lot more money then they told you they had available.

    If you buy right and start with you inner circle looking for private lending, you will be able to fund an unlimited number of deals.

    Check us out at http://www.Jacksonvillewealthbuilders.com

  • admin

    Vena is a super-sharp, successful investor whose insights we respect because they’re grounded in real-world experience. Our question was more about whether her approach would work for others.
    –Ed.

  • http://info@VandoraFunding.com Jeremy Crutchfield

    The flip isn’t dead, it’s just changed. You can’t use C funds on the A to B transactions in most cases anymore. We had to go put together transactional funding for this reason. If you need help with this, email us at info@VandoraFunding.com.

  • JDSmith

    For the folks thinking about getting into the quick turn business,
    first watch about 12 episodes of “Property Ladder”. It’s a reality
    show about newbies getting into the rehab business. They think they
    know it all, but totally screw up every time. And they have a very
    experienced mentor available to advise and they do the exact opposite
    of the advice and lose money.

    1. They screw up their financing.
    2. They screw up their cost analysis.
    3. They screw up their resell analysis.
    4. They screw up their repairs and remodel. (Like they would live there.)
    5. They screw up their staging and open house.
    6. They ignore valuable advice from the highly experienced mentor
    on all of these items.

    Newbies buy the book “Flip” by Rick Villani & Clay Davis for a
    complete “how to” and business plan for rehab.

  • http://nopsites.com Chris

    Jeremy,

    We will be in touch. We have close to 500+ investors using our lead generating website service right now. We get a lot of requests for funding sources

    We are also coming out with a web based short sale management software next week. This site will be used by the investors looking for funding on the A to B. We are putting together a funding list to add to the site. Maybe we can add you. I’m going to email you right now.

    Chris
    http://NOPsites.com

  • http://www.7dayclose.net Joseph Irons

    Vena is awesome..I follow a lot of what she teaches and she is accurate…remember her comment was about her market. Also, remember that each market is different…however, if you stick to the basics and buy right you can still have a fix and flip as a viable exit strategy. If you want to get in, get out and get paid then wholesale or assign your contract (flip the contract) this way you don’t have to worry about seasoning or financing. If you want cash flow and you don’t want the headaches of being a landlord then Sub2…understand that this last technique is a bit tricky depending on your market, but their are still ways to wrap a mortgage and get paid.

    There is still a lot to learn from Vena and others who are still in the trenches doing deals and teaching…I don’t tell my students to do anything that I am not willing to do myself!

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