WIXLIB

THE COMPLETEGUIDE TOFLIPPINGPROPERTIES

THE COMPLETEGUIDE TOFLIPPINGPROPERTIESSteve BergesJohn 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 anyform 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, withouteither 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, MA01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to thePublisher 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 bestefforts 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 warrantiesof merchantability or fitness for a particular purpose. No warranty may be created or extended bysales representatives or written sales materials. The advice and strategies contained herein may notbe suitable for your situation. The publisher is not engaged in rendering professional services, andyou should consult a professional where appropriate. Neither the publisher nor author shall beliable 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 CareDepartment 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 printmay not be available in electronic books. For more information about Wiley products, visit ourweb 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.)1. Real estate business. I. Title.HD1375.B429 2003333.33—dc212003053493Printed in the United States of America.10 9 8 7 6 5 4 3 2 1

CONTENTSAcknowledgmentsixChapter 1IntroductionBackgroundReal Estate: A Sound InvestmentLeverage: The OPM PrincipleEconomic Housing Outlook for the Next DecadeChapter 2Flipping Properties DefinedThree Primary Classes of FlippersScoutsDealersRetailersUsing Options To Flip PropertiesClearly Defined ObjectivesEntry StrategyPostentry StrategyExit Strategy11131315171920222323Chapter 3The Value Play StrategyBuy-and-Hold StrategyThe Value Play StrategyThe Value Play Selection ProcessProperty LocationPrice RangePhysical Condition25262931333535Chapter 4Ten Ways to Locate PropertiesReal Estate AgentsClassified AdvertisingReal Estate PublicationsLocal and National Web SitesReal Estate Investment ClubsBank REOs45454951515455 v 12468

Contents MarketingFor Sale by Owners (FSBOs)Vacant PropertiesForeclosures56606162Chapter 5Valuation MethodologiesHow to Know How Much Is Too MuchValuation MethodologiesReplacement Cost ApproachIncome Capitalization ApproachSales Comparison Approach656666666870Chapter 6Financial AnalysisThe Texas Two-StepMultiply Your Efforts by 22From Residential to Commercial73738293Chapter 7Seven Steps of Successful NegotiationsThe Psychology of NegotiatingComprehensive Knowledge of MarketDegree of Seller’s MotivationBackdoor ExitsConcessionsThe Red Herring TechniqueThe Money-Talks Approach111111114115119121122123Chapter 8Financing and Closing ConsiderationsConventional MortgagesMortgage BrokersLocal BanksLines of CreditOwner FinancingPartnershipsYour Business PlanWhat Every Borrower Should Know about Credit ScoresUnderwriting GuidelinesThe Closing Process127127129130131133135136137140142Chapter 9Assemble a Winning Team of ProfessionalsScouts and/or DealersOffice ManagerProperty Rehab ManagerLocal Lender or Mortgage Broker149150151152153 vi

Contents Real Estate AttorneyTitle CompanyReal Estate Agents153154155Chapter 10 Three Keys to Maximizing Your PotentialPostentry PlanningDoing It Yourself versus Hiring It OutIncreasing Your Property’s MarketabilityPreplanningHeightening Visibility through the MLSOffering a Marketable ProductCompetitive PricingOffering pter 11 The Three Principles of PowerThe Principle of VisionThe Principle of PassionThe Principle of Autonomy169172178180Appendix A Property Inspection Checklist183Appendix B Owner and Subcontractor Agreement195Appendix C Sample Real Estate Forms201Appendix D Sample Personal Financial Statement219Appendix E www.thevalueplay.com223Appendix F www.symphony-homes.com225Index227 vii

ACKNOWLEDGMENTSMuch of my life has been profoundly influenced by not one, buttwo, loving fathers. The first father is the father of my spirit. He ismy Heavenly Father. It is with deep humility and eternal gratitudethat I acknowledge His hand in all that is good and virtuous in mylife. The second father is the father of my body. He is my earthlyfather. It is with intense love and great respect that I acknowledgehis 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 ourpremortal existence, continues in our earthly existence, and shallendure throughout our postmortal existence. It is with all the sincerity of my heart that I pray I may continue the righteous andloving pattern of fatherhood previously established to the belovedchildren who have been entrusted into my care—Philip, Samuel,and Benjamin. ix

Chapter 1IntroductionBuying and selling real estate can be one of the most profitableand lucrative investments activities an individual can participatein. There are many approaches to investing in real estate, most ofwhich are centered around various time horizons. On one end ofthe investment spectrum is the buy-and-hold strategy, where aninvestor might purchase a property and hold it for many years. Onthe other end is the buy-and-sell strategy, where an investor mighthold the property for only a few months, weeks, or even days. Itis the latter of these two strategies that I focus on in this book.While readers of this book are likely to have broad and diversebackgrounds, you do share one thing in common—that beingyour interest in real estate and, in particular, your interest in flipping properties. I try to be as thorough as possible since some ofyou are likely to have little to no experience, while others of youare seasoned professionals searching for that edge. This being thecase, those of you who have a great deal of experience may findsome of the material to be a bit basic. It is vital, however, that I laythe proper foundation for those who are not as experienced. Manyof you have most likely purchased single-family houses at onetime or another and have at least a minimal degree of rental property experience.In Chapter 2, the concept of flipping properties, along with specific types of flipping, is more fully discussed. Then in Chapter 3 1

The Complete Guide to Flipping Properties we examine the notion of a term I coined in a previous book, TheComplete Guide to Buying and Selling Apartment Buildings: thevalue play. I love using the value play strategy, as it is the quickest and surest way I know of to build wealth when it comes to realestate. In Chapter 4, we explore several methods you can beginusing immediately to locate prospective investment properties,and in Chapter 5, we study in depth the most common methods ofdetermining value and examine the most appropriate one for usein your analysis. Proper understanding of the valuation processwill greatly facilitate building your real estate portfolio. Then inChapter 6, we examine more fully the practical application of thevaluation methods described in Chapter 5 by using various financial analysis models that were created to analyze potential purchase opportunities.Chapter 7 helps you to more fully understand the rules ofengagement as they apply to buying and selling properties, as weexamine the seven steps of successful negotiating. In Chapter 8,we study the advantages and disadvantages of many of the methods of financing. We also take a look at the key elements of writing a professional business plan, as well as credit scores,underwriting guidelines, and the closing process. Then in Chapter9, we discuss how you can assemble a winning team of professionals to help you maximize your potential. In Chapter 10, weexamine the merits of three keys that will help you to maximizeyour potential as a real estate investor. Finally, Chapter 11 discusses what I refer to as the three principles of power. These threeprinciples are not just limited to helping you succeed in realestate, but, when properly applied, will benefit you in manyaspects of your life and will lead to an increase in your level offulfillment and happiness.BACKGROUNDA convergence of events from my own life experiences over thepast 20-plus years has provided me with unique insight into the 2

Introduction real estate market. Three primary components have contributed tomy experience. First and foremost, like many of you, I havebought and sold a number of both single-family and multifamilyproperties over the years, and I am currently an active investor.Second, my experience as a financial analyst at one of thelargest banks in Texas has provided me with a comprehensiveunderstanding of cash flow analysis. Working in the mergers andacquisitions group for the bank, I reviewed virtually every lineitem of financial statements of related income and expenses forpotential acquisition candidates of numerous banks that we had aninterest in at any given time. I spent several hours a day using asophisticated model and a specific set of assumptions to determinethe market value of these banks. Since leaving the bank someyears ago, I have developed my own proprietary model that I nowuse to facilitate the valuation process for single-family, multifamily, and development opportunities. The beauty of understandingcash flow analysis is that once you grasp the concept, it can beapplied to anything that generates some type of cash flow, whetherit be banks, single-family houses, manufacturing businesses, orretail outlets. The type of business is not important provided youunderstand the key assumptions relative to the specific industryyou are evaluating. Finally, my experience as a commercial mortgage broker has provided me with an inside look at the lendingprocess and, more specifically, what the lenders’ underwritingdepartments typically require to get a loan approved.I believe the culmination of my own skill sets and life experiences will be of great advantage to you as you seek to enlargeyour personal real estate portfolio. I should mention one additional characteristic of mine that I attribute more to my personality than to any other factor. It is my inability to be satisfied withany single real estate purchase or acquisition. In other words, thetraditional process of buying and holding a property, quitefrankly, bores me. Who in their right mind wants to buy a piece ofreal estate and then just sit on it for 10 or 20 years? I know, Iknow—a lot of people do, including some of you, I’m sure. As forme, however, I can’t sit still long enough to hold an investment 3