Thursday, January 10, 2013

Flipping a Property (Reality vs What's in "books")

Happy 2013 Everyone!

This article is mostly for new people but other more experienced investors may learn some amazing tidbits here for free!  The next couple of minutes can literally save you thousands of dollars and countless hours of time. on, it will be worth it.

If you're a typical real estate investor, you'll go to seminars, buy books, read everything you can on the subject, and then hear about stories where someone bought an apartment complex with no money and flipped it for a million dollar profit overnight using transactional funding!  Now you want to try something similar because you are soooo smart with your knowledge :) Now isn't that special?!  It's also unrealistic and if it did indeed happen, it was a complete fluke of astronomical proportion luck.  How do you think I know that?  From plenty of real life deals and experience, that's how.  MLS deals are the worst to deal with because there's just too much public information.  Off-market deals are better if you're selling to a homeowner, but if you're selling to an investor, the first thing they are going to check is how much you paid for the property!  Yep!  That's exactly what they are going to do.

Here's the reality folks:  The buyer wants to know how much you're making, no matter how stupid that may sound, that is the complete, honest reality of life.  And they'll find out in the HUD-1, won't they?  If you're not sure, go get a copy of a completed transaction HUD-1 and look at it closely.  The buyer will see "your" money.  So it doesn't matter whether you are using transactional funding or not.  The money distribution is on the HUD-1.

It's unfortunate, but you can rest assured that all buyers will look at the HUD-1 when it comes time to close and if they think you're making too much, your deal is dead.  If you're going to be making a significant gain on your deal, then you have to negotiate that ahead of time and make it completely clear to all parties.  I'm not talking about $10k profit.  That's reasonable and not necessary to discuss with the buyer, but if you're flipping an apartment complex for say a $500,000 or $1,000,000 profit on a quick flip without adding any value, then you are probably doomed to failure unless you can negotiate that up front.  

However, what I am writing in these short paragraphs that's free to you will save you a lot of time and money if you heed my advice.  

If you're expecting to make a significant sum on the deal, work out "your" money ahead of time and make sure it's ok with the buyer, otherwise when you're selling, you could get all the way to closing table and the buyer will likely back out if they think your side of the ledger is getting too much money, regardless of whether they are getting a smoking great deal or not.  Doesn't that sound counter-intuitive?  Absolutely, but people are funny and that's how people (buyers) think, make no mistake about it!  If you don't believe me, go do a deal where on paper, you make a ton of cash in a quick flip!  If it works, then I'd love to know your secret, but I would venture a guess that the probability is 99.99999% that you will fail at this endeavor.  Quick flips for big money are highly unlikely using conventional methods. 

Psychology plays a big part in real estate because you have to remember, that this is a people business and not a property business.  Always remember psychology comes first, and the deal comes second.

All the best in the New Year!