Praise for The Business of Flipping Homes “A must-read for anyone who wants to learn how to generate serious wealth in the new economy.” —Dr Albert Lowry, PhD, New York Times bestselling author “People who tune in to my radio show, or read my books and blog, often ask me how they can create multiple streams of income, one of my five secrets to a happy and successful retirement Done right, investing in buying and selling real estate can be a tremendously effective way to add an additional source of income to your portfolio In The Business of Flipping Homes, William Bronchick and Robert Dahlstrom provide you with all you need to know to move properties quickly, legally, and ethically If you’re looking for a way to diversify through real estate, I’m a fan of their work, and this book.” —Wes Moss, host of Money Matters and author of You Can Retire Sooner Than You Think: The Money Secrets of the Happiest Retirees THE BUSINESS OF FLIPPING HOMES Short-Term Real Estate Investing for Long-Term Wealth WILLIAM BRONCHICK AND ROBERT DAHLSTROM Copyright © 2017 by William Bronchick and Robert Dahlstrom All rights reserved No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews BenBella Books, Inc 10440 N Central Expressway, Suite 800 Dallas, TX 75231 www.benbellabooks.com Send feedback to feedback@benbellabooks.com First E-Book Edition: February 2017 978-1-942952-77-0 (print) 978-1-942952-78-7 (e-book) Library of Congress Cataloging-in-Publication Data is available upon request LCCN: 2016037696 (print) LCCN: 2016051587 (electronic) Editing by Brian Nicol Copyediting by Miki Alexandra Caputo Proofreading by Sarah Vostok and Brittney Martinez Indexing by Jigsaw Information Text design by Aaron Edmiston Text composition by PerfecType Front cover design by Ty Nowicki Full cover design by Sarah Dombrowsky Printed by Lake Book Manufacturing Distributed by Perseus Distribution www.perseusdistribution.com To place orders through Perseus Distribution: Tel: (800) 343-4499 Fax: (800) 351-5073 E-mail: orderentry@perseusbooks.com Special discounts for bulk sales (minimum of 25 copies) are available Please contact Aida Herrera at aida@benbellabooks.com This book is dedicated to the motivated individuals who want to use real-estate investing as a means to take back their financial future CONTENTS Introduction PART I: GETTING IT GOING Chapter Chapter Chapter Chapter Chapter Chapter Flipping Explained The Basics of Real-Estate Transactions Finding Deals Using Social Media Analyzing Deals Funding Deals PART II: KNOWING THE DETAILS Chapter Chapter Chapter Chapter 10 Contracts and Agreements Foreclosures Wholesaling Contract through Closing PART III: GETTING TO WORK Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 The Rehab: Planning It The Rehab: Doing It The Rehab: Managing It The Rehab: Staging It The Rehab: Selling It PART IV: MINDING YOUR BUSINESS Chapter 16 Success in a Changing Market Chapter 17 Liability Issues Chapter 18 Tax Issues Involved in Flipping Properties Chapter 19 The Business Side of Flipping Appendix Index Acknowledgments About the Authors INTRODUCTION here’s more to flipping than redoing a kitchen or staging a property The two of us, William Bronchick and Robert Dahlstrom, have more than forty years’ combined experience buying and selling investment properties Credited with introducing the term flipping into the common vernacular, our best-selling Flipping Properties (2001 and 2007) sold a quarter of a million units and started a revolution Syndicated real-estate columnist Robert Bruss said this about the book: “Cannot be recommended too highly on my scale of one to 10 this book rates an off-the-chart 12!”1 We have worked with more than a thousand clients and have helped tens of thousands learn the art and science of real-estate investing We have taken these experiences and written the new definitive book on flipping—the one you are reading right now The Business of Flipping Homes shows readers how to flip properties quickly, legally, and ethically It goes beyond other attempts to write about flipping houses by not only covering the basics but also the many ways to deal with inevitable challenges Every deal is different, yet each investor must have a clear business strategy We have outlined a systematic approach and shared our specific knowledge on how to purchase properties and then sell them for a profit We delve into the business side—either as a career or simply as a part-time venture—of this particular type of real-estate investment and cut through the murky waters of confusing information to give you an A to Z guide to flipping Real estate has arguably created more millionaires in the US than any other profession In a 2014 Bloomberg article, a survey conducted by Morgan Stanley reported that “about 77 percent of investors with at least $1 million in assets own real estate.”2 One of the few certainties in real estate is that the market will fluctuate As seasoned investors, we have learned to be successful in all types of markets, up or down, hot or cold The principles we present apply to every market and every city, regardless of current economic trends, giving you practical wisdom to limit risks and make sound investment choices We realize there is renewed interested in flipping, fueled by how-to television shows, highly promoted seminars, and individuals’ desires to find new career paths and strike out on their own In these pages, we show both new and seasoned investors alike the step-by-step approach to successfully flipping houses We fill in many gaps other books not address and flatten the learning curve in a business that can appear deceptively simple The book begins by explaining what flipping is—and what it is not We demonstrate how to find, renovate, and sell properties using tested methods from our own personal experiences Some of the covered subjects include time lines, working with real-estate brokers, understanding the paperwork, analyzing the numbers, utilizing technology, and finding the money to acquire properties This book explains how to avoid many of the pitfalls and potential issues that not only add cost but could come back to haunt you later Lastly, we address long-term planning, including how to find and work with partners, structure a business, and harness your talents, resources, and aspirations in realistic ways Enjoy the book and find out if flipping is the business for you T Robert J Bruss, “Book Has Tips on Flipping Property,” Naples Daily News (Tribune Media Services), October 14, 2001 Margaret Collins and David M Levitt, “Millionaires See Real Estate as Top Investment for 2014,” Bloomberg, February 6, 2014, http://bloomberg.com/news/articles/2014-02-06/millionaires-see-real-estate-as-top-investment-for-2014 PART I Getting It Going 34 SITE CONDITIONS: The Contractor shall be responsible for keeping the Jobsite free from accumulation of debris and waste materials, and shall have all such debris and waste materials contained in a container or designated location Contractor shall remove from the Jobsite all waste, rubbish, tools, equipment, machinery, and surplus materials associated with the Work at the Contractor’s expense Contractor shall ensure that employees and workers at the jobsite shall observe local ordinances relative to noise, vehicle parking, and shall prohibit the use or possession of illegal drugs, alcohol, and the use of profanity The Contractor is able to access the Jobsite for the purpose of executing the Work, with the exception of any days of the week or times listed here: _ 35 WARRANTIES: For a period of (1) one-year following Substantial Completion (as defined in Section 16) the Contractor shall upon written notice from the Owner correct any defects in, and if necessary replace any portion of the Work prescribed in the Contract which is found (a) to be less than the accepted industry standard; (b) not in compliance with governing building codes at the time the work was performed; (c) to render the space unusable for its intended use Unless the Contractor can demonstrate that the work requiring remedy was not the fault of Contractor negligence, the Contractor shall bear the sole costs of all repairs and or replacements for said defects 36 LIENS: The Contractor warrants that title to all Work covered by the Contractor’s “Application for Payment” as defined in Section of the Contract, shall pass to the Owner in full at time of payment(s) Additionally, the Contractor attests that all portions of the Work for which the Application seeks payment are, to the best of the Contractor’s knowledge, free and clear of all claims and liens in favor of the Contractor, Subcontractor, materials suppliers and or other persons or entities making a claim against the Owner or jobsite for reasons of having supplied any of the following (a) materials; (b) equipment; (c) labor, relating to the Work 37 DISPUTE RESOLUTION: In the event that a dispute arises under the terms of the Contract, the Parties agree to select a mutually agreeable, neutral third party to assist in mediating the dispute If mediation is deemed unsuccessful, the Parties agree that the dispute shall be directly submitted to binding arbitration under the guidelines set forth by American Arbitration Association 38 ATTORNEY FEES: If either of the Parties employs or otherwise engages an attorney in conjunction with a dispute related to the Contract, the Party who successfully defends or prosecutes such claim (s) or a portion of a claim shall be entitled to receive from the other Party such reasonable and necessary attorneys’ fees, arbitration fees, court costs, and expert witness fees and expenses related to the specific claims successfully defended and or prosecuted, subject to applicable laws 39 NOTICES: Any notice or demand (“Notice”) given concerning the Contract shall be in writing and is considered effective upon receipt by the addressee, whether the Notice is mailed, delivered, faxed, or delivered via electronic mail The addresses for potential Notice are defined in Section of the Contract 40 TERMINATION OF CONTRACT BY THE CONTRACTOR: The Contractor may terminate the Contract upon (7) seven-days written Notice to the Owner if the Owner fails to make any payments as prescribed within the Contract 41 TERMINATION OF THE CONTRACT BY THE OWNER: The Owner may terminate the Contract for convenience and without cause at any phase of the Project; however the Owner is required to pay to the Contractor all sums due for portions of the Work completed up to the point of the termination of the Contract 42 ENTIRE AGREEMENT: The Contract, inclusive of any addendums and attachments constitutes the entirety of this agreement between the Owner and the Contractor with respect to the Work to be performed at the Jobsite location defined in Section of the Contract EXECUTED this _ day of _, 20 OWNER: CONTRACTOR: COMPANY NAME COMPANY NAME PRINT NAME PRINT NAME SIGNATURE TITLE SIGNATURE TITLE DATE DATE Scope of Work Stamp Lien Waiver By endorsement hereon, the payee acknowledges receipt of the amount of this check in full payment and satisfaction for all work performed and/or materials furnished on the premises as described on the face hereof the date shown below, and waives all right to mechanic’s and/or materialman’s lien thereof SIGNATURE REQUIRED IN ONE PLACES Date , 20 X MUST BE ENDORSED BY THE PAYEE IN PERSON, OR IF A CORPORATION MUST BE SIGNED BY AN OFFICER GIVING HIS TITLE INDEX A accepting an offer, 73–75 ads business cards, 38, 91, 219, 244 classified, 21–24, 99 door hangers, 36, 243 help wanted, 152–153 investors’, 24–25 letters, 33, 241–242 online, 21–22 postcard, 31–33, 240 real-estate brokers’, 22 sample, 234 after-repaired value (ARV), 6–8, 49, 57–61, 64 agents, brokers vs., 26–27 appearances, 181–182 appliances, 138 appraisal forms, 246 asbestos, 107, 118–120, 127, 158, 162 attention grabbers, 106 auctions, 93–94 B back door wholesaling, 97–98 balanced markets, 202 bank-owned properties (REO), 28–29, 100 bargain and sale deeds, 12–13 basements, 52 bathrooms, 60, 139, 177 bird dogs, 6, 39 branding, 47–48 breach of contract, 78–80, 210 brokers ads of, 22 agent vs., 26–27 buyers’, 27–29 choosing the right, 187–189 contracts of, 85–86 job of, 184 mortgage, 29 building permits, 159–160 business cards, 38, 91, 219, 244 business plans, 225–232 buyers, finding, 8–9 buyers’ brokers, 27–29 buyout clauses, 91 C cabinets, 137–138 call waiting, 25 capital gains, 215–216 carpeting, 143 ceiling fans, 140 classified ads, 21–24, 99 See also ads cleaning a rehab, 173–175 closing costs, 111–112 closing process, 113 condos, 199–200 construction contract, 274–279 construction methods, 133–134 contingencies, 77–78 contractors bids from, 124–125 labor costs of, 153–154 written agreements with, 154–155 contracts and agreements breach of, 78–80 broker vs homemade, 85–86 contingencies, 77–78, 105–107 drafting the offer, 80–85 earnest money, 75–76 electronic signatures, 86 mortgages paid off, 110–111 offer, counteroffer, and acceptance, 73–75 title search and commitment, 108–110 conventional loans, 63–64 corporations, 211 counteroffers, 73–75 countertops, 137 credit, personal line of, 67–68 credit cards, 67–68 curb appeal, 146 D deals analyzing, 49–61 choosing the house, 51–54 classified ads and, 23–24 funding, 63–70 location of, 50–51 motivated sellers and, 20–21 online ads and, 21–22 real-estate brokers’ ads and, 22 rental properties and, 22–23 decorations, 178–179 deeds bargain and sale, 13 elements of, 14–16 general warranty, 12 quitclaim, 13 special warranty, 12–13 demolition, 157–158 depreciation, 201, 216 difficult properties, 10 discrimination, 210 distressed property (definition), documents, recording, 16–17 door hangers, 36, 243 doors, 141 downspouts, 149 E earnest money, 75–76 electrical issues, 129–132 electrical projects, 139 electronic signatures, 85–86 entryway, 168, 176 equity, instant, evictions, 5, 95 exit strategies, 7–8, 202–205 exterior updates, 146–147, 146–150, 164–166, 175, 178 F Facebook, 42–44 face-to-face communication, 43 falling markets, 200–202 family room, 176–177 farming neighborhoods, 30–31 faucets, 138 FHA loans, 65–66 financing conventional loans, 63–64 credit cards and personal lines of credit, 67–68 FHA and FNMA, 65–66 friends and family, 68 hard-money lenders, 64–65 HELOC, 67 partners, 69–70 seller, 68–69 flippers definition of, retailers, 4, 6–8 wholesaler, 4–6 flipping plan, 223 pros and cons, 205–206 vision, 223–224 floors, 141–142, 180 flyers, 36 FNMA loans, 65–66 foreclosures, 91 auction, 93–94 buyout clauses, 91 finding, 92 finding pre-, 92 going after, 90–91 government-owned, 93 judicial, 88–89 nonjudicial, 89 process of, 262–263 protection laws and, 92, 264–270 redemption, 89 reinstating the loan, 90 short sales, 95–96 strict, 90 forums, 46, 245 foundations, 119, 129, 130 foyer and family room, 176–177 friends and family, financing from, 68 front doors, 147 full-time investing, 230–231 functional obsolescence, 54 furnishings, 179–180 G general warranty deeds, 12 goals, 224–225 government-owned properties, 93 gutters, 149 H hard-money lenders, 64–65, 247 help wanted ads, 152–153 holding, pros and cons, 206–207 home-equity line of credit (HELOC), 67 homemade contracts, 85–86 houses choosing the correct, 51–54 fixing or not fixing, 125–128 foundations, 130 issues with old, 128–134 poor design of, 54 rubbish removal and demo, 157–158 shutoffs, 157 value of, 54–60 housing market, future trends, I independent contractor liability, 219–220 inspections, 172–173 insurance, title, 13 interior updates, 136–146, 161–163 appearances, 181–182 bathrooms, 139, 177 decorations, 178–179 entryway, 176 floors, 141–142, 180 foyer and family room, 176–177 furnishings, 179–180 kitchens, 120–124, 137–138, 142–143, 163, 177 lighting, 180 power of smell, 180–181 unfinished areas, 52, 54, 132, 155, 173, 177–178 investors’ ads, 24–25 IRS form 1099, 217 J job-site organization, 161 joint venture agreements, 248–257 judicial foreclosures, 88–89 K kitchens, 120–124, 137–138, 142–143, 163, 177 L labor costs, 122–123, 153–154 landscaping, 147–148, 166 laws, 209–210 lead, 128 lead-based paint, 51, 120, 126–127, 149, 158, 185 lease-option, 204 lenders, hard-money, 64–65 letters, 33, 241–242 liability issues, 209–213 corporate formalities, 211–212 corporations, 211 insurance, 210 laws, 209–210 LLCs, 211 partners, 212–213 sole proprietorship, 210 liens, priority of, 18 light fixtures, 138–139 lighting, 180 LinkedIn, 44–45 listings, new, 189–193 lists, 165 LLCs, 211 loans conventional, 63–64 FHA, 65–66 FNMA, 65–66 reinstating the, 90 subject to, 91 transaction of, 18 location, 50–51 losses, minimization of, 10 M mail marketing, 31–33 marketing, 185–186 See also ads mail, 31–33 strategies of, 33–36 markets balanced, 202 falling, 200–202 ideal, 198 success in changing, 197–208 material costs, 119 mechanical systems, 143–144 Meetup, 45 memo of agreement, 261 misrepresentation, 210 mold, 125–126 mortgage brokers, 29 mortgages, 17–18, 110–111 motivated sellers, 20–21 N neighborhoods, 149–150 nonjudicial foreclosures, 89 notaries, 16 notes, 181 notes and mortgages, 17–18 O offers accepting, 73–75 counteroffers, 73–75 drafting the, 80–85 negotiation of, 187 terms of, 203–204 online ads, 21–22 P paint, lead-based, 126–127 paint colors, 139–140 painting, 163, 164 partners, 212–213 financing from, 69–70 part-time investing, 231 permits, 159–160 personal lines of credit, 67–68 phone scripts, 236–237 planning, 223 plumbing issues, 132–133 porches, 147 postcards, 31–33, 240 power of smell, 180–181 pre-foreclosures, 92 probate estates, 36–37 profitability, recipe for, 60–61 promotional e-mails, 238–239 purchase agreements, 258–260 Q quasi rehabs, 203 quitclaim deeds, 13 R radon, 107, 118, 127–128 real estate investment trusts (REIT), real-estate brokers agent vs broker, 26–27 buyers’ brokers, 27–29 mortgage brokers, 29 real-estate brokers’ ads, 22 real-estate dealer issue, 217–218 recording documents, 16–17 records, 220–221 red tape, 185 redemption, 89 referrals, 30, 38–39, 148 rehabs, 157 accentuating the positives of a, 175–181 building permits, 159–160 checklist for, 271–273 cleaning, 173–175 contractor bids, 124–125 costs, 121–123 drywall phase, 162 experience and, 117–119 exterior preparations, 175 exterior updates, 146–150, 164–166 finishing touches, 163 fixing or not fixing and, 125–128 help with, 152–153 inspection of, 172–173 interior updates, 136–146, 161–163 labor costs, 122–123, 153–154 landscaping, 166 old houses and, 128–134 order of completing, 160–161 organization of, 161 painting, 163 process of, 157 quasi, 203 repair estimates, 120 responsibilities, 155–157 rough-in phase, 161–162 rubbish removal and demo, 157–158 safety and, 169 selling, 183–194 timing of, 152 tools, 166–169 trim phase, 162–163 vehicles used in, 169 workmanship of, 135–136 reinstating the loans, 91 renovation See rehabs rental properties for sale, 22–23, 185 renting, 205 REO properties, 28–29, 100 repairs See rehabs residential construction contract, 274–279 retail flippers, 4, 6–8, roofing, 148–149 roofs, 133 rough-in phase, 161–162 rubbish removal, 157–158 S safety, 145–146, 169 schedule C, 216–219 schedules, 165 scope of work, 280 sellers attitudes of, 187, 201 attracting, 48 earnest money deposits for, 75, 84 financing, 68–69 foreclosure and, 91, 209 market for, 28, 198 motivated, 19–22, 25, 45, 76, 200, 209 possession and, 83–84 title insurance and, 109 selling properties, 193 sewer lines, 128–129 short sales, 95–96 shutoffs, 156–157, 176 social media Facebook, 42–47 forums, 46 goals for, 47 LinkedIn, 44–45 Meetup, 45 reasons to use, 42 wrong way to use, 42–46 YouTube, 45–46 sole proprietorship, 210 special warranty deeds, 12–13 stamp lien waiver, 281 state deeds, 235 state foreclosure process, 262–263 strategies balanced markets, 202 condos, 199–200 exit, 7–8, 202–205 falling markets, 200–202 inventory trends and, 198–199 speculators and, 199 strict foreclosures, 90 T tax issues capital gains, 215–216 depreciation, 216 independent contractor liability, 219–220 IRS form 1099, 217 real-estate dealer issue, 217–218 records and, 220–221 schedule C, 218 for the wholesaler and flipper, 216–217 termites, 129 terms, offering, 203–204 tile, 142–143 title insurance, 13 title search and commitment, 108–110 tools, 166–169 trends current, 228 economic, 201 future, inventory, 198–199 local, market, 202, 206 neighborhood, 26 trim, 140, 162–163 U unfinished areas, 52, 54, 132, 155, 173, 177–178 V value, 54–60 after-repair, vehicles, 169 vision, 223–224 W wholesaling back door, 97–98 basic strategies, 198 exit strategies, 202 flippers in, 4–6, 216–217 step by step, 98–103 windows, 149 workmanship, 122, 135–136 written agreements, 73, 102, 154–155 Y YouTube, 45–46 ACKNOWLEDGMENTS We would like to express our gratitude to everyone who helped us take this book from an idea to a completed work We appreciate all of you who have supported our ideas, including readers of our past publications, students, clients, and our friends and families We also want to say thanks to our literary agent, Cynthia Zigmund, and to all the people at BenBella Books who have helped us create a text worth reading ABOUT THE AUTHORS William Bronchick is an attorney, active real-estate investor, and co-author of the best-selling realestate book Flipping Properties He has appeared on many broadcast outlets, including CNBC, Fox, and NBC, and has been featured in publications such as The Wall Street Journal, Investor’s Business Daily, USA Today, TIME magazine, and dozens more He is admitted to practice law in New York and Colorado and lives in Denver, Colorado, with his family Robert Dahlstrom is an investor, employing broker, and co-author of Flipping Properties He holds a master’s degree in business administration (MBA) and a bachelor of science (BS) in accounting He has served as a marketing consultant for many small businesses and has been mentoring students for more than twenty years He has been interviewed by radio and print media and is a popular speaker/educator He has been personally involved in hundreds of transactions and worked with a group that has purchased more than 4,000 foreclosures Having built houses and duplexes from the ground up, Mr Dahlstrom is an expert in finding and assessing potential purchases, estimating expenses, and managing the rehab process through to the sale ... Retire Sooner Than You Think: The Money Secrets of the Happiest Retirees THE BUSINESS OF FLIPPING HOMES Short- Term Real Estate Investing for Long -Term Wealth WILLIAM BRONCHICK AND ROBERT DAHLSTROM... learn the art and science of real- estate investing We have taken these experiences and written the new definitive book on flipping the one you are reading right now The Business of Flipping Homes. .. for the beneficiary (lender) A deed of trust is worded almost the same as a mortgage Thus, the deed of trust and the mortgage are essentially the same, other than in the foreclosure process Foreclosure