To Avoid A Flop, Know How To Sucessfully Fix And Flip

December 23, 2006

You have to know the formula. With all of the exposure on cable TV shows about it these days, you have to wonder, is there any money to be made fixing and flipping houses locally?

The answer, say several people involved in the industry, is yes. But you have to know what you’re doing.

Television programs such as “Flip This House” (on the A&E channel ) and “Flip That House” (a different show, broadcast on the Discovery and TLC channels) gloss over the holding costs and other challenges involved with flipping houses, the Pueblo experts said.

And because the shows are taped in California, the house values and profit margins usually are far above what anyone could hope to achieve in the Pueblo market.

However, fixing and flipping can be done profitably here, the Pueblo flippers say. The key is to buy a property at the right price, know exactly what it will cost to renovate and exactly at what price it will sell.

Fixing and flipping is the practice of buying houses, often at a steep discount, fixing them up and reselling them. The repairs range from new paint and carpet to major work and improvements in order to bring the house back to market value or even increase its worth.

The houses can range from trashed rental homes or foreclosures to those in estate and regular sales. The important part is that they are purchased for substantially less than what they would be worth in good condition.

Some of the local real estate professionals who fix and flip houses said they don’t approve of the cheap “paint and new carpet” level of turning around a house, but they acknowledge that other flippers do it.

“More people are doing it than ought to be doing it,” said Greg Ratliff, owner of Home Quest Real Estate.

Larry Turner, a Re/Max real estate agent and manager in Pueblo who helps flippers buy and sell properties, has done a fair amount of fixing and flipping himself. He said there are substantial differences between the cable TV shows and Pueblo.

“You’re not going to see the same returns you see on the shows,” Turner said.

Flippers in the shows can make as much as $100,000 or more by renovating a home that sells for $500,000 and more in the California market.

“Here, probably a decent return would be $10,000,” Turner said.

For one thing, few homes in Pueblo sell for California-type prices.

Secondly, “the opportunities to find (houses) under market value haven’t been there,” Turner said.

Ratliff said potential fix-and-flippers should carefully tally up what it will cost them to buy a house and turn it around.

“Don’t be guessing,” he advised.

Prospective buyers should include the cost of the loan payments and interest while you’re fixing up the house and while it sits on the market, as well as insurance and buying and selling costs.

Insurance can be difficult to obtain if you aren’t living in the house, Ratliff said, because insurance companies don’t like to insure vacant houses.

He said at least one bank uses a title deed restriction to forbid a buyer from borrowing more than 120% of the home’s purchase price and from selling the property within 90 days or so. “They’re actually trying to stop the fix and flips,” Ratliff said. “The reason they’re doing it is because (some flippers) are not doing a good job. The buyers aren’t getting what they think they’re getting.”

Pueblo has a number of flippers - part time and full time.

Raquel Estrada, a real estate agent at Home Quest, does between three and four flips a year. She also helps other large-scale flippers buy and sell houses.

“It’s a small industry (in the Pueblo area), I would say,” Estrada said.

She knows how to find cheap properties because her company has approximately 15 accounts from mortgage lenders such as Ameriquest that hire Home Quest to sell foreclosed properties. She and other investors also watch the public trustee sales and get leads from other sources on discounted houses.

For her own projects, Estrada said she buys medium-priced properties in what she thinks are the right locations for her projects.

One of her clients is a large-scale flipper, John Sena. He buys, fixes and sells 40 to 45 houses a year in the Pueblo area, so he knows a lot about it.

To make it work, Sena has his own workers, two crews of them, so he doesn’t have to contract work for each house.

Sena said he believes in doing quality work and then selling his houses cheaply enough so that the buyers have some equity, maybe 5%, in the house when they buy it.

“Everyone in the circle on a home has to make money,” he said. “Myself, the workers and the home buyer. If the home is leveraged 100 percent, that home buyer is maxed.”

He said a lot of his customers are first-time home buyers.

“I would hate to see that home go into foreclosure ever again,” he said.

Sena also owns a large number of rental homes, and between the rentals and the flips has made enough to buy a building and open the World Gym in the Eagleridge area.

Sena said a lot of his fix-and-flip projects are on the East Side. He grew up near his Dad’s J and M Grocery and said that if you buy a house on the right block, East Side homes are flipable.

“I try to find a block that’s decent,” he said. “The East Side gets picked on, but there’s good blocks and bad blocks in every part of town.  “I was in Walkingstick the other day and I drove past some houses where the yards were just beat, because they were in foreclosure,” he said.

Unlike some of the TV show flippers, Sena said he doesn’t hire a separate designer to figure out how to renovate his houses. “I’m my own designer,” he said.

Sena said he looks to open up the inside of a house to make it more spacious, especially the area between the kitchen and dining room.

Sena puts an average of $10,000 to $20,000 into each house to make it like new when he sells it. It’s important to know how much he can sell the house for afterward, but Sena said years of experience, by himself and with his father, help.

“I’ve lived here my entire life,” he said. “I know what they (the houses) should sell for before, during and after. I know exactly what I should have.”

Some margins are very small he said, sometimes as little as $2,500.

But, “sometimes you’ll get a good one,” Sena said.

Has he ever been burned by a fix-and-flip?

“I can’t answer that,” he said. “I don’t want to jinx it.”

source:  RIS Media

 

Posted in All Things San Diego, Real Estate