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If you're just getting started in
real estate and need to build your confidence and knowledge before moving on
(but still need to make some extra cash), I suggest you start with flipping contracts.
By flipping houses, you'll be able to earn while you learn the
ropes in real estate, and you don't have to worry about risk if you do it
right.
What is house flipping? Very simply, it's contracting to buy a
property, then selling your right to buy to a third person. And yes, it is
perfectly legal in all states.
A "quick flip" example
Here's an example of how a typical flip might work. You find a
house that is run down and vacant; there's no for sale sign in the yard.
Through persistence and a little detective work, you locate the owner and
negotiate a "risk-free" contract to buy the property at 50% below
the after repaired value with a very low earnest money deposit ($10).
You contact an investor who rehabs houses in the area, offer to sell him the
house for $3,000 more than your contract amount. When he agrees, you fill out
a one-page "Assignment of Contract" form and get $500 in earnest
money.
A few days later, the transaction closes at a title company or an attorney's
office, and you get a check for $3,000 PLUS your $10 earnest money.
A word of caution . . .
You'll need to be very persistent--it's NOT always easy. Some
months you may find two, three, or more houses you can flip. Other months you
may not find any.
You'll constantly develop new leads. Some leads will work out; some won't.
Some sellers will be very motivated, and some won't. But remember, that time
has a way of changing everything. You must learn to stick with it, even when
you are discouraged.
Where do you
begin?
Start with the end in mind, so you'll know what to do after you
find a motivated seller with a house you can buy well below market. If you
try to find the house first then figure out what to do with it, you're in for
a nightmare.
The first thing you need to do is line up your real estate investment team.
You'll need rehab investors to buy your contract, a title company to close
the contract or perhaps an attorney. And the most important--a good contract
or agreement. Let's go over each of these in a little more detail.
How to find investors who will buy your contract
Read newspaper ads. Look in the daily and weekly
newspapers for the "We buy houses" ads. You may even have some
billboards around town that say "We buy houses." Call each one of
these ads and talk with the investor. Keep an information sheet on each
investor.
Be honest and tell them that you are just starting out and will be looking
for houses that need to be rehabbed. Ask if they would like to be contacted
when you find one. I assure you they will all be very anxious for you to do
the leg work for them.
You also need to find out where they want to buy houses and in what price
range. Some will only work in certain areas and price ranges and others will
say anywhere there is a deal! Ask if they are a cash buyer or if they will
need some extra time to arrange financing.
Attend real estate investment club meetings. Another excellent source
of buyers for the houses you find will be your local
investment club. Most major metropolitan areas have at least one club
that meets monthly. Join and attend every meeting.
The networking opportunities are endless. When you go to the meetings tell
everyone what you are planning to do. Once again, collect names and
information about people who are interested in buying houses.
Attend foreclosure auctions. Some investors hate to go out knocking on
doors and dealing with emotional, distressed owners; they much prefer to buy
at the foreclosure auction.
At most auctions, the property must be paid for with cash or a cashier's
check within hours of the sale. What a wonderful opportunity for you to meet
cash buyers for the houses you find.
Introduce yourself to the investors and hand out business cards. Tell them
you find houses just like the ones sold at the auction and ask if they would
be interested in being contacted when you find something. Again, find out
where and what price range they buy in.
Ask for their business card and make notes on the back or take along a
notebook. Make sure and do this either before or after the auction because
the investors will be focused on bidding during the auction and won't
appreciate distractions.
Keep telephone logs. Once word gets around that you flip contracts,
you'll get weekly phone calls from investors asking if you have anything.
Keep a log of who calls, these will be the first investors to contact when
you have a deal.
How to find a good title company or attorney
Ask other investors who they recommend. This is where all that
networking comes in handy. By building a good relationship with the investors
you call from ads, meet at the investor clubs or at the auction, you'll
develop a base of mentors that you can call anytime you need advice.
Don't abuse the privilege though. Rarely will you make friends with someone
if you call them frequently and keep them on the phone for a long time. Keep
your phone calls brief and to the point. Or better yet, take advantage of the
time at the investor club meetings for your questions.
The agreement or contract
Once you find that elusive
motivated seller and the right house at just the right price, you'll need a
document to "tie up" or buy the house. A contract lets the seller
know you're serious about buying their house and it provides written
instructions for the title company. All real estate contracts must be in
writing.
Now is NOT the time to get creative about contracts. I'd suggest you consult
with an attorney to write your contract in your best interest. If you can't
pay an attorney, the next best thing would be to start with your state's real
estate commission contract then add or subtract a few key clauses.
Do NOT use a contract from the local office supply store--it will be too
vague. You can get a real estate contract from a Realtor or at any title
company. You may also be able to get a good contract through your local real
estate investment club.
Whichever agreement or contract you use make sure to add a clause that
protects YOUR interest and allows you a way out of the contract. An example
is:
This contract is
subject to inspection and approval of the property by buyer's partner.
If you cannot find a buyer for the
contract, you notify the seller in writing that your partner did not approve
the purchase of the house. Then you are no longer obligated to purchase the
property. I'd suggest that you send the notice by certified mail.
Everything you and the seller agree to must be written in the contract or
agreement. If it's not, the seller may develop a sudden case of amnesia.
If the property is vacant, I always ask the seller to provide me with a key
or a combination to the lock box along with permission to enter the premises
for estimating repairs and completing inspections.
You may even ask the seller to allow you to place a "For Sale" or
"For Rent" sign in the yard prior to closing. Remember, whatever
you agree to, put it in the contract.
It is essential that the contract does NOT have any clauses that would
prevent you from assigning the contract. You could add a simple clause like,
"Buyer may assign contract."
In House Flipping
for Beginners (Part 2) we'll discuss where to find houses owned by
motivated sellers, how to evaluate a transaction, and how to negotiate a deal
that's good for all parties.
About the author...
Jackie Lange is a private investor who
specializes in flipping contracts. After studying what many of the national
real estate educators teach about flipping and weeding out what works and
what does not work for her, she has developed a system which has enabled her
to flip more than 80 properties in 2 1/2 years. She is president of Texas
Home Solutions, Inc. and Public Relations Coordinator for the Association of
Independent Real Estate Owners (AIREO) in Dallas, Texas.
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