THE COMPLETE GUIDE TO FLIPPING PROPERTIES THE COMPLETE GUIDE TO FLIPPING PROPERTIES Steve Berges John Wiley & Sons, Inc Copyright © 2004 by Steve Berges All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, e-mail: permcoordinator@wiley.com Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation The publisher is not engaged in rendering professional services, and you should consult a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 5723993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Berges, Steve, 1959– The complete guide to flipping properties / Steve Berges p cm Includes index ISBN 0-471-46331-0 ( pbk.) Real estate business I Title HD1375.B429 2003 333.33—dc21 2003053493 Printed in the United States of America 10 CONTENTS Acknowledgments ix Chapter Introduction Background Real Estate: A Sound Investment Leverage: The OPM Principle Economic Housing Outlook for the Next Decade Chapter Flipping Properties Defined Three Primary Classes of Flippers Scouts Dealers Retailers Using Options To Flip Properties Clearly Defined Objectives Entry Strategy Postentry Strategy Exit Strategy 11 13 13 15 17 19 20 22 23 23 Chapter The Value Play Strategy Buy-and-Hold Strategy The Value Play Strategy The Value Play Selection Process Property Location Price Range Physical Condition 25 26 29 31 33 35 35 Chapter Ten Ways to Locate Properties Real Estate Agents Classified Advertising Real Estate Publications Local and National Web Sites Real Estate Investment Clubs Bank REOs 45 45 49 51 51 54 55 ■ v ■ ■ Contents ■ Marketing For Sale by Owners (FSBOs) Vacant Properties Foreclosures 56 60 61 62 Chapter Valuation Methodologies How to Know How Much Is Too Much Valuation Methodologies Replacement Cost Approach Income Capitalization Approach Sales Comparison Approach 65 66 66 66 68 70 Chapter Financial Analysis The Texas Two-Step Multiply Your Efforts by 22 From Residential to Commercial 73 73 82 93 Chapter Seven Steps of Successful Negotiations The Psychology of Negotiating Comprehensive Knowledge of Market Degree of Seller’s Motivation Backdoor Exits Concessions The Red Herring Technique The Money-Talks Approach 111 111 114 115 119 121 122 123 Chapter Financing and Closing Considerations Conventional Mortgages Mortgage Brokers Local Banks Lines of Credit Owner Financing Partnerships Your Business Plan What Every Borrower Should Know about Credit Scores Underwriting Guidelines The Closing Process 127 127 129 130 131 133 135 136 137 140 142 Chapter Assemble a Winning Team of Professionals Scouts and/or Dealers Office Manager Property Rehab Manager Local Lender or Mortgage Broker 149 150 151 152 153 ■ vi ■ ■ Contents ■ Real Estate Attorney Title Company Real Estate Agents 153 154 155 Chapter 10 Three Keys to Maximizing Your Potential Postentry Planning Doing It Yourself versus Hiring It Out Increasing Your Property’s Marketability Preplanning Heightening Visibility through the MLS Offering a Marketable Product Competitive Pricing Offering Incentives Summary 157 157 159 163 163 164 166 167 167 168 Chapter 11 The Three Principles of Power The Principle of Vision The Principle of Passion The Principle of Autonomy 169 172 178 180 Appendix A Property Inspection Checklist 183 Appendix B Owner and Subcontractor Agreement 195 Appendix C Sample Real Estate Forms 201 Appendix D Sample Personal Financial Statement 219 Appendix E www.thevalueplay.com 223 Appendix F www.symphony-homes.com 225 Index 227 ■ vii ■ ACKNOWLEDGMENTS Much of my life has been profoundly influenced by not one, but two, loving fathers The first father is the father of my spirit He is my Heavenly Father It is with deep humility and eternal gratitude that I acknowledge His hand in all that is good and virtuous in my life The second father is the father of my body He is my earthly father It is with intense love and great respect that I acknowledge his hand in all that is pure and decent in my life The principle of parenthood, and more particularly, fatherhood, is an eternal principle It is a pattern that was established in our premortal existence, continues in our earthly existence, and shall endure throughout our postmortal existence It is with all the sincerity of my heart that I pray I may continue the righteous and loving pattern of fatherhood previously established to the beloved children who have been entrusted into my care—Philip, Samuel, and Benjamin ■ ix ■ ■ Appendix C ■ 215 ■ ■ ■ Appendix C ■ 216 ■ ■ ■ Appendix C ■ 217 ■ ■ APPENDIX D SAMPLE PERSONAL FINANCIAL STATEMENT ■ 219 ■ ■ Appendix D ■ 220 ■ ■ ■ Appendix D ■ 221 ■ ■ APPENDIX E WWW.THEVALUEPLAY.COM Current ordering information for The Value Play Rehab Analyzer can be found at www.thevalueplay.com INSPIRATIONAL QUOTES AND STORIES Although many of the inspirational quotes and stories are taken from the author’s personal favorites and life experiences, material submitted by readers is welcomed If you would like to submit one or more of your favorite inspirational quotes and/or stories for use in a future book, please visit the web site address located at www.thevalueplay.com Anything submitted through this site will be considered by the author for possible future use Proper credit will be given to contributors whose quotes or stories are used in future books ■ 223 ■ APPENDIX F WWW.SYMPHONY-HOMES.COM For information regarding Symphony Homes, please log on to our web site at www.symphony-homes.com ■ 225 ■ INDEX Average monthly rent, 102 Backdoor exits, 119–121 Broadcast fax, 59 Business plan, 20, 21, 136–137 Buy-and-hold strategy, 25, 26, 27 Capital gains, 11, 12 Capitalization rate, 32, 97, 102 Cash flow, 3, 12, 68 Cash flow analysis, 3, 12, 68 Classified ads, 45 Classified advertising, 49, 50 Clearly defined objectives, 20, 21 Closing process, 2, 27, 142–148 Concessions, 121 Conventional mortgages, 127 Cost approach, 66, 67 Credit score, 137–140 ■ Dealer, 13, 14, 15, 16, 17, 18, 20 Direct mail, 57 Entry strategy, 21 Escape clauses, 119 Exit strategy, 23 Financial statements, 2, 69 Financing, 127–135 Flipper, 13–19 Flipping, 1, 2, 4, 6, 11, 13, 18, 20, 22, 25, 33, 35, 48, 65, 82, 128, 135, 150, 166, 167 For sale by owners, 45, 49, 52, 60–61 Foreclosures, 17, 45, 46, 62 Handyman, 48, 49, 152 HELOC, 6, 131 Income capitalization approach, 66, 68, 69, 82, 95 227 ■ ■ Index Inspection, 23, 36, 38, 39, 40, 85, 86, 120, 122 Intermediate-term investors, 12 Internal rate of return, 103 IRR, 103 Leverage, 6, 7, 20 Local bank, 85, 128, 130, 131 Long-term investors, 12 Marketing strategies, 56–59 Model, 2, 3, 19, 75, 78, 79, 82, 137 Money-talks approach, 123 Mortgage brokers, 129 Multifamily, 3, 31, 52 Multiple Listing Service, 33, 52, 164 OPM, Office manager, 151, 152 Options, 13, 19, 20, 45 Other people’s money, 6, Owner financing, 133 Partnerships, 135 Postentry strategy, 21, 22, 23 Preplanning, 163 Price range, 35 Profit margins, 11 Property location, 33, 34 Property’s physical condition, 35–40 Proprietary model, 3, 75 Real estate agents, 45–49 Real estate investment clubs, 45, 46, 54 ■ ■ Real estate owned, 16, 17 Real estate portfolio, 2, 3, 4, 11, 25, 29 Real estate publications, 51 Red herring technique, 122 Refinance Analyzer, 103, 105 Rehab manager, 152 REO, 16, 55 Retailer, 13, 14, 15, 16, 17, 18, 20, 22, 23, 25–26, 31, 32, 33, 35 ROI, 81, 102, 109 Roofs, 37 Sale price calculations, 80–81 Sales comparison approach, 66, 70 Scout, 13–15, 17, 18, 20, 22 Seller motivation, 115–119 Settlement statements, 142 Sewer lines, 37, 38 Short-term investors, 12 Single family, 1, 3, 19, 22, 25, 31, 32, 46, 48, 52, 65, 67, 71 Symphony Homes, 19, 40, 42, 94, 114, 123 Time horizon, 5, 13 Title company, 143, 152, 154 Title report, 142 Transfer tax, 143, 152 Underwriting guidelines, 2, 90, 140 228 ■ ■ Index ■ Value play selection process, 31 Value play strategy, 25–31 Vacant properties, 45, 61, 62 Value play, 2, 19, 25, 26, 29, 30–31, 41, 42 Value Play Rehab Analyzer, The, 75, 82, 90–92 Web sites, 45, 51, 52 ■ 229 ■ ... of the property They know that the markup must be minimal to leave enough profit in the deal to make it attractive to other investors to whom they will sell Deal■ 15 ■ ■ The Complete Guide to. .. Chapter ■ ■ ■ The Complete Guide to Flipping Properties ■ we examine the notion of a term I coined in a previous book, The Complete Guide to Buying and Selling Apartment Buildings: the value play... purchased with to 10 percent down? I realize that some of you may not have even that much to start with; if that is the case, then you may have to search ■ ■ ■ The Complete Guide to Flipping Properties