20 Steps To Your First Deal – Part 1
There’s a lot of information out there for new investors who have specific questions about pieces of the flipping process, but I’ve yet to find a good tutorial that can take an up-and-coming investor all the way from the decision to flip a house through to closing their first house purchase. Part of the problem is that it can be very difficult to create a step-by-step process that will work for every investor in every situation. Additionally, many of the steps required to get that first deal closed will take days, weeks or even months to complete.
But, given the number of new investors I speak with who have absolutely no idea where to start when it comes to buying that first property, I thought I would put together my 20-Step Guide to purchasing that first house (in future tutorials, I’ll cover the actual rehab and selling pieces). For some, completing these steps and closing your first deal may take a couple weeks. For others, it may take months or even a year or more.
But keep in mind that once you go through this process the first time, it gets much, much easier on subsequent deals. In fact, it took me more than a year to purchase my first flip property. It only took another month for me to purchase my next three!
So, if you’ve made the decision to flip your first house, and don’t know where to start, here you go:
- Ask Yourself Why
The first thing you need to do before you start devoting any amount of effort to flipping your first house is to ask yourself, “Why am I doing this?” If your answer is that you think it will be glamorous (like it can look on TV), or if you think it will help you get rich quick (again, like it can look on TV), or if you think that it’s easy money that can be made quickly and without much work — think again!
While flipping houses can be very profitable, and while it can provide the means to financial freedom, getting out of the rat race and long-term prosperity, it’s not easy money. The typical flip my company does generates about $25-30K in profit. Some more and some less. After paying my employees and paying taxes, I earn about $15-20K per house. So, the fact that I can flip about 20 houses per year, I earn a very good living. But, a single flip isn’t going to help me (or you) get rich.
Flipping houses can be a great way to make some extra money part-time. And it can even be a great way to build a business that will generate a lot of yearly income. But, unlike what you see on TV, it’s very rare that flipping a single house will generate $100K or more in profit. And even if it did, Uncle Sam will get his piece.
So, if you’re realistic about what flipping can provide you (good income, flexibility, and potentially financial freedom) and you’re also realistic about what flipping will not provide you (a way to get-rich-quick), then by all means, keep on reading…
- Read The 8 Rules for Flipping in the New Economy
A lot of people believe that flipping in today’s market is nearly impossible. What they don’t realize is that, while the rules have changed since the housing boom earlier this decade, it’s still very possible to make a lot of money flipping houses…if you understand the new rules of the game.
I’ve taken some time to write about what it takes to be successful flipping houses in this down market, and if you follow these rules, you’re sure to avoid the bulk of the difficulties that a lot of today’s flippers are facing.
- Get Familiar With THE FLIP FORMULA
Every investor has their formula for determining if a house is a good deal or not. And while no two investor formulas are ever the same, all the good ones have one thing in common — they are conservative enough to provide you the highest likelihood of success.
I’m not going to claim that my formula is any better than the dozens of others that are out there, but mine has worked over and over for me, without fail. It’s more detailed than most (so it takes a bit more work), but that detail helps ensure that nothing is overlooked in the analysis phase of the planning.
Here is the formula I use: The Flip Formula
After spending time getting intimately familiar with this formula, it should be clear that key pieces of information you’ll eventually need for every flip includes:
- Realistic Selling Price
- Rehab Costs
- Fixed Costs
- Desired Profit
- Maximum Purchase Price
With any four of those, you should be able to determine what the fifth one needs to be. For example, if you know what you can sell it for, what it will cost to fix up, what your fixed costs are, and what you desired profit is, you can determine what your maximum purchase price is allowed to be.
Or, if you know you what your purchase price is, what your desired profit is, what your fixed costs are, and what your rehab costs are, you can determine how much you need to sell the property for to make the numbers work. If you can sell the property for that amount, proceed. If not, pass on the deal.
This formula will become very important later in this process.
- Create A Business Plan
If you want to be successful flipping houses — whether it be one house done part-time as an experiment or 20 houses a year as a full-time business — you need to have a plan. This plan doesn’t need to be 50 pages of small type covering every little detail of what you plan to do, but it does need to cover the basics. At a minimum, a good plan will document the following:
– Will you have a business entity to hold your property(s) and what type of entity will it be
– Your goals
– Your criteria for purchasing property
– How you will find your property(s)
– How you will finance your purchases
– How you will analyze properties
– Your exit strategy(s) for your property(s)
– Your selling/marketing strategy
Again, this doesn’t have to be a long document and it doesn’t have to cover every detail of what you plan to do, but it should provide a good bit of information about what you plan to do and how you plan to achieve it. This will be your guide through the rest of your flip, and may even be instrumental in helping to get financing for your project(s).
If you’d like to see a good sample business plan (in fact, it’s the actual Business Plan I used to start my business), you can get it free by signing up for our Newsletter (don’t worry, we won’t give out your email to anyone and we won’t try to sell you anything)…
- Build Your Team
Even if you only plan to flip a single house, to be successful you must have a team of people to support your efforts. At a minimum, to successfully flip your first house, you will need to find a great Real Estate Agent, a great Property Inspector, a great General Contractor, a Mortgage Broker (or Hard Money Lender), and an Insurance Agent. Depending on your goals, you may also need to find a CPA, an Attorney, a Title Company, and/or an Appraiser.
For more about what each of these team members will do for you, check out: Building Your Team.
- Get Your Financing In Order
First, get familiar with the types of financing generally available to real estate investors: The 4 Types of Investor Financing.
Because it’s easy to find, traditional financing is the preferred choice for many first-time flippers. Unfortunately, if you don’t have the cash, credit, or income to qualify for a traditional loan, this may not be an option. Other investors will pool money from family and friends to do their first deal, splitting the profits with those who invest. While is certainly poses some risks, the benefit is that you’ll pay much less in fees and costs, so in the end, you’ll keep more of your profits.
I won’t lie to you — financing the first deal is always the hardest. Once you have that first deal under your belt, you’re much more likely to find lenders who are willing to work with you (because you no have experience) and you generally need to borrow less money for future flips (because you have the profits from the first one).
If traditional lending is out of the question, and you can’t borrow money from family or friends, your best options are hard money loans (high interest, short-term loans generally made by private investors) or small banks in your area who can provide rehab loans or custom loans to suit your needs. Whatever route you go, I highly recommend making friends with your local bankers — while you might not need/want them now, you will at some point, and those relationships go a long way.
- Have Your Earnest Money
Now is a good time to point out that when you put your first property under contract (generally within 48 hours after signing the contract), you will be required to put a cash deposit on the property. This deposit — known as “earnest money” in real estate terms — can range anywhere from just a few dollars up to $1000 or more, depending on who you’re buying the property from and several other factors.
If you purchase a house from a seller through a private sale (i.e., not listed on the MLS or publicly advertised anywhere), your earnest money deposit will be whatever you and the seller agree to. It could be as little as $10 (or less), if both you and the seller agree. But, if you’re purchasing a foreclosure property from a bank (or any other property listed on the MLS), be prepared to put down at least $500, and often up to $1000 to secure the deal.
Don’t worry, you don’t lose this money. It will eventually go towards the purchase of the property, and if you decide to back out of the purchase within the rules of the contract, you will likely get your earnest money back.
But, the point is, make sure you have some cash set aside for when you sign that first contract.
- Find a Real Estate Agent
Let me revise that — Find a GREAT Real Estate Agent. The difference between an average agent and great agent in this business is the difference between success and failure. Remember, agents make their money when you buy and sell houses. If you buy or sell a house for a little bit more or less, they still make the bulk of their money. But, if an agent convinces you to buy a property for just $10K too much, and then convinces you to sell a property for just $10K too little, your $20K in profit just went out the door.
So, you must find an agent who understands that you are an investor, and that every penny counts. How do you do this?
First, start networking with other investors in your area. Go to Real Estate Investor Association (REIA) meetings, find mastermind groups in your area, look for investor sold houses on Craigslist, etc. This is how you meet other investors. And those investors (at least the successful ones) will have great real estate agents that they can recommend to you.
- Determine Your Investment Criteria
This is the first place where having a great real estate agent makes all the difference. Even within the same small town, there may be pockets of houses that are highly desired by homebuyers and pockets of houses that are nearly impossible to sell. Perhaps buyers are only interested in houses with 4 or more bedrooms. Perhaps buyers are demanding houses with basements, garages, large yards, etc.
Whatever the buyers are demanding in your area, you need to be aware. When I first started investing, I spent countless hours working with my real estate agent to figure out exactly what types of houses were selling in what locations and for what prices. After all that time, I eventually realized that to resell a house in my immediate area, they needed to be 3 bedroom, 2 bath, brick ranch homes, built after 1975, with a garage, fully remodeled, in the $100-135K price range, in neighborhoods in the middle socio-economic range.
Certainly other houses that didn’t meet this criteria were selling, but they were selling much more slowly at much less than market value. The first house I bought didn’t meet all these criteria, and that house took 6 months to sell (actually, it didn’t sell, it was lease purchased); every house I’ve bought since then has met all or most of those criteria, and it’s never taken more than 45 days to sell any of those houses!
So, if you want to give yourself the highest probability of success in house flipping, make sure you know your market. Know what’s selling, where and for how much. And also know what’s not selling, where and for how much. Once you have that information, other investors will be wondering why they can’t sell their houses but you can move yours quickly, easily, and for nearly full-price.
- Look at 100 Houses
Now that you know where you will be buying, what kinds of houses you’ll be looking for, and in what selling price ranges, it’s time to start looking at houses. Having a set of criteria (like “3 bedroom, 2 bath, brick ranch houses, built after 1975, blah, blah, blah”) only goes so far. You need to get an idea of what these houses really look like, what condition they’re in, and what buyers are actually seeing when they’re out looking at houses.
So, have your real estate agent give you a list of 100 houses in your area that meet your criteria. If you can’t find 100 houses that exactly meet your criteria, then find 100 that almost meet your criteria. Then go look at them…
Remember, these are your competition. Take note of what they have in common, what they have that is unique, and what they don’t have. Again, these are your competition! You must ensure that the houses you rehab are both nicer and less expensive than these. If you can’t achieve that, you will not be successful in this business.
By the time you look at 100 houses, you should have a pretty good idea of what your buyers are going to be looking at, and that gives you a tremendous advantage when rehabbing and selling your house(s).