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March 2, 2016:  Flipping Houses Is Actually Very Easy
                              By Lloyd Segal, author of "Flipping Houses"

 
Taking on new challenges can be stressful and scary.  But don't let those emotions cause you to think flipping houses is too complicated, because it's not!  The rules and regulations governing flipping are straightforward and understandable.  And although at first the learning curve can be a little steep, it smoothes out the longer you do it.  Flipping is simply a process, and any process can be learned.  Real estate investors come from all walks of life and educational backgrounds.  In fact, there are no special qualifications for being a flipper.  You can do this!
 
Remember how you felt when you first learned to drive an automobile?  Very complicated right?  Yet driving is probably second nature to you now.  Well, the same with flipping.  Eventually, with a little practice, buying and selling houses will become as second-nature as driving a car.  Keep at it; keep practicing.  It will get easier. 
 
It only seems complicated now because you’re just starting out.  Successful flipping takes time and experience.  More importantly, it takes motivation, drive, determination, and hard work.  You can overcome inexperience by doing your homework, asking for guidance, and working hard.  Stick with it and soon you'll be experienced and won‘t think of it as complicated.
 
If you’re still scared, here’s some good news!  A built-in safety net exists to help you, right where you live.  Real estate professionals are in business to help people just like you.  For example, real estate agents need you.  They need homes to sell or they don't earn commissions.  Lenders need you.  Contractors need you.  Title companies need you.  Attorneys need you.  You’ll need to form a “Dream Team” of these professionals to help you.  Your dream team will welcome your calls and your questions.  You’ll build long-term business relationships with your team members, and they with you.  And as you become more experienced, you will pass on the wisdom you've gained to others who can benefit from the path you've chosen.
 
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April 1, 2016: You Should Buy Directly from the Owner Before the Foreclosure Sale
                      By Lloyd Segal, author of "Flipping Houses"

One great flipping technique is to buy properties from homeowners before the trustee’s sale.  The time period between the notice of default and the trustee’s sale (the actual foreclosure auction) is known as the foreclosure pending stage.  In California, this stage is approximately three months and 21 days, but all states are different.  During this period, purchases of foreclosure properties are in many ways similar to a normal real estate purchase.  You negotiate directly with the homeowner, sign a purchase contract, and proceed with the transaction.  The main difference is that instead of the homeowner deciding voluntarily to sell the property, the homeowner is forced to sell because he's confronting losing his home in foreclosure.
 
You can easily find homeowners in the early stages of foreclosure by checking foreclosure notices in the county recorder’s office.  The notice of default and the notice of trustee’s sale will list the borrower’s name and address, and you can contact them directly.  You can also contact the trustee for additional information about the property, but don't be surprised if she's not particularly friendly or cooperative.  The trustee provides foreclosures services to the lender, not flippers like you.  The trustee is paid to prepare the notices and conduct the trustee’s sale, not to act as a real estate information hotline.   So if you're interested in a foreclosure property, the best strategy is to contact the homeowner directly.  But keep in mind, the homeowner is under severe pressure and is not likely, at least at first, to respond positively to your approach.  You'll need to be tactful, respectful, and aware at all times that the homeowner is under a great deal of stress and strain.  Visualize a deer caught in the headlights of an on-coming car and you’ll get the picture.  So please, be sensitive to their predicament.
 
Why the stress?  Because most homeowners don't want to lose their homes.  They will desperately hold onto the hope that things will somehow work out.  They are also embarrassed they're facing foreclosure, even if they find themselves in that position through no fault of their own.  They are under severe financial pressure and confronting the very real possibility that they will lose their home if they don’t do something fast.
 
If the homeowner is receptive to your approach, the first thing you'll need to determine is the current market value of the property.  Next, you will need to deduct all of the existing liens to determine whether the homeowner has any equity remaining in the property.  Let's say, for example, that the home has a fair market value of $300,000.  You've been able to inspect the home, and other than cosmetic repairs, it's in good shape.  You estimate you'll spend $10,000 getting the house ready to flip.  You decide you want to make at least 20% profit.  So, you decide your walk-away price is $260,000, which leaves you room to make the profit you want while covering repair and holding costs.  In this scenario, you offer the homeowner cash for his equity subject to the existing liens. But if the homeowner still owes $320,000 on the mortgage, you're not likely to buy it for $260,000.  In this scenario, the homeowner is underwater.  In other words, his home is worth less than the balance of the loan.  Here, you’ll need to approach the lender to accept a “short sale.”  A what?  A short sale is a sale of the property at its current market value.  The lender waives the amount their loan exceeds your purchase price.  Why would a lender accept a short sale and lose money?  Simple, the cost to foreclose would be greater than the proceeds they would receive from the short sale.  In fact most lenders prefer a short sale rather than losing more money through a foreclosure sale.
 
As you can see, buying while the foreclosure is pending does have several advantages.  The homeowner may be desperate and willing to accept less than the full amount of their equity.  In addition, you can enter the property to inspect it before purchasing (unlike when you buy at the trustee’s sale).  And, if you contact the homeowner directly before the homeowner has listed the property with a realtor, the homeowner avoids paying commissions, which could allow you to purchase the property for a lower price.  (The average realtor commission is 6% which would come to $18,000 on a $300,000 sales price.)
 
Buying foreclosure properties can be a win-win-win situation for you, the homeowner and the bank.  You may be able to find great deals, the homeowner can escape a foreclosure, and the lender avoids another REO. But before you contact the homeowner, keep these things in mind:
 
+ Treat the homeowner with respect and dignity.  Don’t take advantage of these people during this incredibly vulnerable period in their lives.  Always remember the adage “what goes around, comes around.”  Use the Golden Rule; treat     homeowners as you would like to be treated, and you can’t go wrong.
 
+ Never mislead the homeowners.  Never represent yourself as a lawyer, realtor, appraiser, or financial advisor (unless, of course you are).  State up front that you’re an investor and plan to sell the house after you rehab it. 
 
+ Don’t make friends with the homeowner.  Never make friends with themsolely to convince them to sell the property to you.
 
+ Always recommend that the homeowner contact his attorney to get advice.  Don’t try to circumvent other interested parties.
 
+ Put all agreements and offers in writing.  In real estate transaction, verbal agreements are “worth the paper they’re written on.”   
 
Let the homeowner decide what is best for them.  Don’t simply look out for your best interests.  Your goal is a win-win-win result.  Always discuss other options they have, including negotiating with their lender, filing a lawsuit, selling their property, refinancing, or filing bankruptcy.  Don’t try to influence their decision.  In this and in all matters, represent yourself professionally and with integrity.
 
 
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May 19, 2016:  Pay Close Attention to Existing Problems And Your Neighbors

                         By Lloyd Segal, author of "Flipping Houses"

Every property you consider should be inspected as thoroughly as you can before you consummate the deal.  If you can access the inside, thoroughly inspect the interior, room by room.  If you can't get inside, you can still inspect the exterior.  Get a sense of the neighborhood, assess the quality of schools, and check out local crime rates.
 
What if you find a property, but the tenants refuse to cooperate.  Under these circumstances, you can’t set foot on the property, much less inside the house for an interior inspection.  But with camera and notebook in hand, you can still evaluate the property from the street:
  
-       The overall impression the property makes (“curb appeal”),  
-       The condition of the paint, brick, masonry, or siding,
-       The roof, gutters, and downspouts,
-       The windows and doors,
-       The driveway and garage,
-       Landscaping, and
-       Exterior structures.
 
During your exterior inspection, check all four sides of the house.  Unless the yard is very large or the house is surrounded by a tall fence, you can almost always walk around and see the majority of the house and the lot.  Watch out for the following:
 
Standing water:  Standing water around the house is a sign of poor drainage.  Poor drainage can cause settling or cracked foundation.  Look for damp, mossy areas and areas where grass doesn't grow.  Some drainage problems are easy to fix.  But if you see standing water, make sure you investigate further.
 
Water and moisture damage:  Rain, snow, and moisture damage can be seen by wood rotting in the soffits (where there's no ventilation), or moss growing on roof shingles or siding.  These signs of exterior moisture damage usually indicate problems inside the house, especially in attics.  Dampness also promotes the growth of mold and mildew, which creates health risks and is expensive to repair.
 
Structural problems:  Major structural problems, like a cracked or settling foundation, can be very expensive and time-consuming to repair.  In fact, unless you can get a firm estimate on repair costs and pay a low price for the property, don't buy the property.  During the exterior inspection, look for large cracks in walls, especially in corners.  Long horizontal cracks can be a tip-off to foundation movement.
 
While you’re assessing the house, develop an overall impression of its location and the surrounding neighborhood.  Try to determine whether the house has potential to sell quickly once you fix it up.  For example, if you make cosmetic improvements, will the house appeal to a broader range of buyers?  Will prospective buyers feel the neighborhood is attractive and a place they would want to raise their families?  Will the house be comparable with other houses in the neighborhood?
 
Now you can appreciate why it is always beneficial to meet with the homeowners.  The meeting will allow you the opportunity to see inside the home!  Once you have actual knowledge of the interior condition of the house, you can more realistically negotiate a fair price between you and the homeowner.  Even if you don’t buy from the homeowner, and ultimately purchase the property at the trustee’s sale, seeing inside will give you an edge over other investors who may be bidding on the property sight unseen.
 
Every property you consider should be inspected as thoroughly as you can before you consummate the deal.  If you can access the inside, thoroughly inspect the interior, room by room.  If you can't get inside, you can still inspect the exterior.  Get a sense of the neighborhood, assess the quality of schools, and check out local crime rates.
 
What if you find a property, but the tenants refuse to cooperate.  Under these circumstances, you can’t set foot on the property, much less inside the house for an interior inspection.  But with camera and notebook in hand, you can still evaluate the property from the street:
  
-       The overall impression the property makes (“curb appeal”),  
-       The condition of the paint, brick, masonry, or siding,
-       The roof, gutters, and downspouts,
-       The windows and doors,
-       The driveway and garage,
-       Landscaping, and
-       Exterior structures.
 
During your exterior inspection, check all four sides of the house.  Unless the yard is very large or the house is surrounded by a tall fence, you can almost always walk around and see the majority of the house and the lot.  Watch out for the following:
 
Standing water:  Standing water around the house is a sign of poor drainage.  Poor drainage can cause settling or cracked foundation.  Look for damp, mossy areas and areas where grass doesn't grow.  Some drainage problems are easy to fix.  But if you see standing water, make sure you investigate further.
 
Water and moisture damage:  Rain, snow, and moisture damage can be seen by wood rotting in the soffits (where there's no ventilation), or moss growing on roof shingles or siding.  These signs of exterior moisture damage usually indicate problems inside the house, especially in attics.  Dampness also promotes the growth of mold and mildew, which creates health risks and is expensive to repair.
 
Structural problems:  Major structural problems, like a cracked or settling foundation, can be very expensive and time-consuming to repair.  In fact, unless you can get a firm estimate on repair costs and pay a low price for the property, don't buy the property.  During the exterior inspection, look for large cracks in walls, especially in corners.  Long horizontal cracks can be a tip-off to foundation movement.
 
While you’re assessing the house, develop an overall impression of its location and the surrounding neighborhood.  Try to determine whether the house has potential to sell quickly once you fix it up.  For example, if you make cosmetic improvements, will the house appeal to a broader range of buyers?  Will prospective buyers feel the neighborhood is attractive and a place they would want to raise their families?  Will the house be comparable with other houses in the neighborhood?
 
Now you can appreciate why it is always beneficial to meet with the homeowners.  The meeting will allow you the opportunity to see inside the home!  Once you have actual knowledge of the interior condition of the house, you can more realistically negotiate a fair price between you and the homeowner.  Even if you don’t buy from the homeowner, and ultimately purchase the property at the trustee’s sale, seeing inside will give you an edge over other investors who may be bidding on the property sight unseen.
 
When you buy a property and start to make repairs and/or renovations, don’t be surprised if the neighbors stop by.  They’ll be fascinated not only by the changes you're making to the house (and how it will affect the neighborhood), but also by the fact that you're obviously treating the purchase as an investment.  Remember that neighbors would really like to have a say in who lives in the neighborhood.  If someone they know (and like) is looking for a home, you can be sure the neighbors will tell them about the home that's currently being fixed-up in their neighborhood.
 
You'll find that some neighbors will "accidentally" wander by to introduce themselves and see what you're doing.  Others will want to check out the rehab taking place, because they would like to make changes to their own homes, and if nothing else, would like to see the ideas, materials, and subcontractors you are using.
 
So, whatever you do, don't ignore the neighbors!  They could potentially buy the house, or refer a buyer to you.  But don't talk about what you paid for the house or how much you're spending.  Simply say you're “working hard to make sure the property is safe, clean, well-maintained, and in move-in condition for the next owner.”  If a visitor asks what you'll list the property for, a candid answer could be, "You know, I'm not sure.  We've finalized about 90% of our renovation plans, but we are still considering a few options, so I'm not sure yet what a fair price will be.  All I'm sure of right now is that we're putting a lot of money and effort into making this property special."
 
Conversations like these can often get the neighborhood excited and generate “buzz” even before renovations are complete.  Some buyers may want to get in early and purchase the property before you've invested a lot in renovations.  In that way, they can pay less for the property, save money by performing renovations themselves, and pick out the carpet, paint, and other materials themselves.
 
As you can see, your neighbors are your best marketing partners.  I’ve flipped several properties to relatives and friends of neighbors who were referred to me.  And don't worry about where you stand in the repair and renovation process when you sell.  If you can make a reasonable profit and you're happy with the deal, then sell.   
 
Here’s another secret: Work on the exterior first (or start the exterior renovations at the same time you begin renovating the interior).  This can generate a great deal of word-of-mouth advertising.  If you still haven't sold the home by the time renovations are complete, hold an open house.  And be sure to invite all the neighbors!

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July 15, 2016.  Hard Money Lenders Serve a Very Important Purpose

                            By Lloyd Segal, author of "Flipping Houses"


Let’s say you find a property that you want to purchase.  It’s a great deal, but the house needs some major renovations.  If you can fix it up, you can flip it for a substantial profit.  The problem is that because of its condition, you can’t get conventional financing.  There is only one viable option: Hard Money.  
 
What is hard money?  A hard money loan is a high-interest, short-term loan.  You can find hard money lenders through your mortgage broker, or from other investors in your area.  You can also find them listed in the real estate/loans classified section of your local newspapers.  These lenders include private finance groups, local mortgage brokers, or just regular folks looking for a good place to park their money and yield high returns.  Hard money offers you three major advantages:
 
1.     You get access to financing you may not be able to get through a conventional lender.
 
2.     Hard money lenders often accept the future value of a property as collateral.  In that way, you don’t have to borrow against your home or other assets.  You might even be able to borrow enough to cover both the purchase price and the cost of rehabbing the house.
 
3.     You can set-up a separate escrow account with a hard money lender to fund repairs and renovations.
 
The major disadvantage of a hard money loan is its cost.  That’s why they call it HARD money.  It’s hard to pay back!  Why is the interest rate so high?  Because these lenders incur greater risk making these loans, and they want a commensurate return for that risk. 
 
When dealing with a hard money lender, you can expect the following:
 
Interest Rate.  Because of the higher risk, interest rates are naturally higher, sometimes double the going rate for conventional loans.  For example, if the current rate for a fixed-rate mortgage is 6%, you can expect to pay between 12 and 14% for a hard money loan.
 
Points.  Hard money lenders often require you to pay a fee (“points”) for arranging the loan.  The fee ranges between two to four points depending on the deal.  One point equals 1% of the loan amount.  For example, with a $100,000 loan at four points, you’ll pay $4,000 just for the lender to arrange the loan.
 
 
Loan-to-Value Ratio.  Loan-to-value (“LTV”) is the ratio of the loan to the value of the property.  For example, a loan of $100,000 on a house valued at $200,000 has an LTV of 50%.  Hard money lenders will typically loan only 50 to 65% of the property’s value (not the purchase price).  So, depending on what you pay for the house, you may need additional funds to cover repairs and/or holding costs.  
 
Term.  The term of the hard money loan will be typically one year (rather than a typical 30 year loan).  But because of the risk, the hard money lender will want you to pay the principal down more quickly.  As a result, your monthly payment will be higher than with a conventional loan.  Lenders will sometimes reduce the fees or points if the loan is paid off faster.
 
Balloon Payment.  Many hard money loans have balloon payments.  Instead of making equal payments over the life of the loan, the final payment is the remaining balance.  If your loan is amortized over 10 years but is due in one year, you’ll have a huge balloon payment when the loan comes due.  If you line-up other financing in the meantime, or flip the house, that’s not a problem.  But if you don’t, you’ll need to have sufficient funds to handle the balloon payment.
 
Prepayment penalties.  Because of the short-term nature of the loan, most hard money lenders waive the prepayment penalty if the loan is paid off sooner.
 
Closing costs.   Hard money loans are closed just like conventional loans.  You will be required to pay any fee or points you agree upfront, so make sure you fully understand your responsibilities at closing before you agree to the loan.
 
Does all of this sound scary?  It can be if you don’t take the time to understand the deal and what it means to your investment.  But it doesn’t have to be.  Look at it this way, the profit the hard money lender makes is irrelevant.  What matters is your profit.  Simply factor the cost of financing into your calculations, just as you would repair costs, real estate commissions, or any other expense.  After all, if you can make a decent profit on your flip, does it really matter how much the hard money lender makes on the deal?  It really shouldn’t matter, because you are still making your profit and you couldn’t get a loan from a conventional lender.  In other words, don't let the cost of the hard money loan blind you to the profits involved in the deal.
 
You should also take into consideration how long you’ll need the loan.  For example, the hard money lender is charging you 12% interest per year.  But you only need the loan for six months because you’re going to renovate and then flip the property.  In that situation, the effective interest rate is only 6% for you (not 12%).  That means that money is going to cost you only 6% for six months.  If you look at that way, suddenly it doesn’t sound so bad, especially when you consider you couldn’t qualify for a conventional loan anyway.
 
 







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