Getting into the nuts and bolts of LI flipping
Hi Houseketeers! Welcome back the Flippy House Club (get it Boomers? Micky Mouse Club, Flippy House club; Houseketeers, Mouseketeers? Damn, I have to explain everything!).
In this episode, we go through the basics of getting your flipping business set up. I get many calls from potential investors who are going through a life change (not the red sports-car type) who want to enter the exciting world of Barco Lounger investing. But they’re hesitant to start as it can be a bit intimidating; there are many moving parts and the steps aren’t necessarily intuitive. So listen carefully Boys and Girls.
Before we get into it, I wanted to mention that I put together a really boss outline / check off sheet covering (almost) all the steps needed to get from cradle to grave (probably not the best way to put it these days) in the flipping business. Want a copy? It will cost you your contact information so ‘Bob’ from our super superslick overseas based marketing department can contact you at the most inopportune times, while endeavoring to convince you that he is indeed American with questions like how many homers did the NY Jets have this year (we all know they had none). The check off sheet will give you some structure and priority in your flipping program, while surely becoming a family heirloom.
So what’s the very first thing to do? Set up an entity. That means form a Limited Liability Company (LLC) or a sub-chapter S corporation (s-corp). They’re very similar in how you pay taxes. Neither actually pays corporate income tax. Rather, they both simply pass company income through to the owner(s) who then pay taxes as normal personal income. The major difference is flexibility in management, and if there are employees in the company. You need to discuss with your accountant which type of company (LLC or S-Corp) best fits your situation. I can’t stress this enough, you must have an entity setup before you do anything else. An entity protects you. Any lawsuits that may result from dopey things you may have done stop at the corporate vail that the entity provides. It protects your personal property. Don’t I sound lawyerly?
Speaking about accountants and lawyers, let’s take a moment to discuss another step in getting started off, your team. Even if you are a one band, you need people to support the functions of flipping you aren’t qualified to do. That would be just about everything at first. To start, you need professionals, better known as lawyers and accountants. Your professional’s practice should be concentrated in the Real Estate sector. I know this seems obvious, but it needs to be said. You’d be surprised how screwed up a closing can become with a non-real estate experienced attorney who isn’t familiar with NYS real estate law. Remember, NYS just loves fine you when you mess up. Accountants unfamiliar with NYS tax law can miss deductions or even worse take the wrong ones or too many. Then you get a visit from the IRS and wind up in a state run, one room, two bed condominium, spooning with a guy named Bubba who still watches re-runs of Deliverance (can you hum that tune).
Next to be added to your merry band of misfits should be a real estate agent who understands the requirements of real estate investors. We are an unusual group, and normal agents don’t get us. Investor focused agents understand our needs and understand that we are possible repeat customers; not a common occurrence in real estate (how many times do you buy a house in a year?), so they take care of our needs as they expect there will be subsequent deals for them. The best ones do some investing themselves. Where they differentiate themselves from the normal agent is helping to determine the After Repair Value also known as the ARV; it is the amount you will resell your flip house for. Its the basis of your deal. An understated ARV can cause you to miss out on a good deal. And an overstated ARV can (will) cause you to loose money. A good agent will give you their best opinion on what the ARV will be. But you have a possible slight conflict of interest here as the agent’s income is solely based on you buying a house they are representing. He or she may inflate the ARV somewhat to make the deal look better. Can you imagine an agent being a little less than truthful? The horror! What to do? What to do? There are a few things you can do to move the odds in your favor. Hopefully your agent will be truthful with you (most certainly will). Or you can bring in your own appraiser. The good thing about that is the appraiser will give you both the ARV and as-is value (something a lender will want to see). Or, (plug alert) for a slight fee, our company offers services to new investors whereas we can give you all the values you need to get to an accurate number. On a future episode, we will cover all the math needed to determine the ARV, Maximum Offer (MO) and data needed to make an offer on a flip house.
Last and probably most difficult to bring to the team is the dreaded contractor. Let’s face it, unless you’re going to swing the hammer yourself (highly not recommended) a contractor is your only other choice. Every time you ask for a proposal to do a renovation from a contractor, it costs him money and time to look at the house, review the work, and then give you an offer. As a newbie, you simply aren’t going to be successful at winning your first bid. Most likely, you are going to bid on many houses before you hit one, if ever. These guys aren’t going to keep on supplying you proposals at nauseam. What do to? What to do? Pay them for their time. It can cost a few hundred bucks, which can get expensive, but this can be an incentive to learn costing. Also, it will teach you to only go after houses you actually have a shot of getting. There are way too many investors out in the world who have no idea what they are doing, and are screwing up the market for me. Don’t be one of them! There is information out there that you can use to cobble together a priced scope of work (we will cover Scopes Of Work in the future). For instance, in an average house in Suffolk County, you can assume a kitchen renovation is $12,000 to $15,000 plus appliances, a full bath $10,000, a half bath $8500, a roof $13,000, etc, etc. Access to this type of information is usually through your local Real Estate Investors Association (REIA) workshops or some excellent books, or…….(another cheap plug alert), we can assist you in getting a construction budget and detailed Scope Of Work (SOW), which you can then have a few contractors bid to. One other thing, even if your contractor is a great guy, and you’d love to kick back and have a beer or two with him, (write this down) contractors are not your friends. In a contractional relationship, you are on opposite sides of the table. Be aware of extras. Be aware of change orders. Often that’s how they make profit, banging you on the extras. I’m not suggesting all of them are dishonest, only a few bad apples. You can mitigate your risk by insisting that the contractor furnish you a detailed and priced Scope Of Work. Then walk thru the project with him and make sure what you expect to be included is so. Make the SOW part of the contract along with any architects drawings.
Dealing with agents and contractors encouraged me to become an agent, and over time put together my own construction crew. My renovation costs are about 15% less then my competitors. If you re going to flip full time I really recommend becoming an agent. It just makes the business easier, and you will make the commission, which can add a lot of money to your income. This year we will flip 15 houses with an average net commission of $8,000. Do the math.
Of course, all the above is meaningless unless you actually have a house to renovate and flip. Next on the Flippy House Club Hit Parade, we start the long march in securing inventory (a cooler way to say houses, don’t you think?). So long Houseketeers!
How can you lose?