The Long March to Finding Flip Houses

Hi Houseketeers! Welcome the next episode of the Flippy House club as we uncover all the investor’s secrets to finding and buying a house that you can make millions on by flipping it!

But first, let me apologize for the longer than usual hiatus. The Coved-19 virus has changed my daily focus from running a business to finding unused supplies of toilet paper. Perhaps I became too focused as my son Brett recently pointed out, we have 83 rolls and another 60 in route. So what if we runout, the toilet is right next to the bath tub! Enjoying that visual? Let’s move on!

Before we get into the meat of finding houses, you may be thinking that the Real Estate Market is collapsing, given the fact that 6,000,000 souls applied for unemployment, and many businesses are closed, you would be correct. I was going to write about how to handle an uber buyer’s market for this episode however, an interesting thing is happening; this time of year usually sees an influx of inventory onto the market. The weather is nice, people are (normally) out visiting open houses, and generally this is considered the prime time of year to put a house on the market. The prices surprisingly aren’t crashing, why? Apparently, hoping this downturn to be limited, sellers are holding on to their houses and there is not the increase in inventory we would normally see. If you recall your basic economics principle from junior college, the law of supply and demand come into play, and prices are holding because there just aren’t those many houses for sale. Just last week, I had a buyer for one of my houses that was in contract and was going to close this week, back out because he got furloughed. I re-listed it Friday and I had another acceptable offer on Saturday. There was little inventory around and the buyer needed to move and voila! Now keep in mind that the house was under $500,000 (a sweet spot), and it was in Huntington (arguably the hottest place to live on the island), but it demonstrates what’s going on.

On Long Island finding inventory is the hardest part of flipping, wholesaling, holding, or any type of investing. The taxes are high, there’s a lot of competition, renovations have to be a higher quality than other parts of the country, and it’s just plain hard. But there are good number of investors who have done well (moi), and the rewards are worth it, if you know the secret recipe. The rest of the this episode and a few upcoming will concentrate on how to find houses to flip and to wholesale.

So, let’s go house shopping!

It’s easier to find investment grade houses (I made that up myself!) in some areas of the Island then others. The most important feature of a house is it’s location. The second most important feature is it’s location, and the third? Go ahead just blurt it out. Right, location! Get my drift? It’s easier to resell a so-so renovated house in a desirable area than a high end renovation in a so-so area. What makes one area more sought-after? The biggie is the school system. Most Island schools are good, a few stink and some are just amazing. Those areas with the great schools command higher prices all the time, even in market downturns. But what’s really important for us investors is that they sell fast. Real Estate brokers call it, Days On Market or DOM, you should look to invest in areas with an average DOM of 60 0r less. Your Realtor can help you determine that.

Taking the above into consideration, the first part of finding a house is determining your “Farming Area”, the neighborhood you will prospect and market for homes. When just starting out, look for an area you know, and that meets your criteria for investing. What’s your criteria going to be? I don’t know (why are you bothering me with these questions, I have toilet paper to find!). Each investor’s criteria are going to be different. There’s no right or wrong, just tolerance of risk. Some investors have high risk tolerance (like me) and others little. Over a large number of flips, I’ve developed my own criteria that is pretty much cast in concrete (except when they’re not):

1. In general, I look for houses that will appeal to the largest audience. I always look at how features of the house will affect how it might resell. You would be surprised what people look to avoid.
2. We look for areas that sell in 60 days or less. That doesn’t mean every house I flip goes in 60 days. Some have sold in 2 days, others over 100 (I hate that). If I am looking at a good deal in an area with a higher DOM, then I add more carrying expenses (such as interest, utilities, fuel, etc.).
3. I avoid double yellow lines streets as they generally have high traffic. Families with young kids generally shy away from houses where their kids could get squished.
4. This may sound counter intuitive, but we don’t like houses near schools. Parking can be difficult and there’s a lot of traffic at the opening and closing for the school day.
5. Commercial areas should be avoided, unless you’re investing in a dual purpose building (retail and residential).
6. Don’t go near properties with power, cell or water towers on them or close by. They’re eye sores and many people feel that there’s dangerous radiation emanating from them (there really isn’t).
7. I don’t love pools mainly due to the fact that not everyone wants one, unless I’m buying in an area like the Hamptons where every house is either beach front or has a pool.
8. I don’t invest in water front, especially on the South Shore of Long Island unless the house has already been raised, and then I still won’t buy it. why? You will sit with the house for a long time. There are parts of the S. Shore that flood from bad rain storms. I hade a house in Lindenhurst with a drain sewer infront of it. Every heavy rain it became a fountain. Also, while we are discussing floods, any house sitting in a flood zone more severe than ‘X’ gets passed by. Trust me, as an investor you just don’t want to mess with it. FEMA has a great site where you put the address in and it shows you the germane flood map.
9. I want a garage and a basement. If the subject is a good deal, but is missing one or the other, I may move ahead with it. But a house with neither is D.O.A. If you recall my very first flip didn’t have either and I owned it for a very long expensive time.
10. And as I mentioned before, stay with a good school system.

When determining your own criteria, start with common sense and work from there.

Pre-forclosure Lists: This is the method that attracts most new investors to the market and dooms them to failure, unless it is part of a comprehensive marketing effort. Companies publish pre-forclosure lists, and you get to pay 100s of dollars for public information you could actually get for free! In order to maximize your success in this method you need to understand the pre-forclosure process in NY as it pertains to Flipping. By NYS law, a borrower in default can go 120 days before the lender can start an action in court. But during that time, the lender has to send the mortgagee a 90-day Pre-forclosure notice (they actually send the notice at 30, 60 and 90 days). These are the basis of the foreclosure lists, which are public knowledge. Your prospecting method here is to write a letter offering to buy the house at the issuances of the notice. Quite frankly, you’re going to be one of 1000s of real estate investors sending letters to an owner suffering from shellshock. I have heard stories where the USPS had to deliver the mail to the owner in boxes due to all the investor letters. Now really, do you think the owner is reading all these letters? Nah. He is throwing them away, or stashing them in his garage or anything other than having to look at them. Why? He’s in some type of financial trouble. Maybe he lost his job, or is ill, or going through a bad divorce. The last thing he is going to do is read letters from a bunch of vultures (I like to think of us as Opportunistic White Knights). So when does this type of prospecting payoff? Well grasshopper, after the last (90 day) notice is sent, the next communication that the owner is getting from his bank is a copy of a lawsuit and the filing of “lis pendens”. Here is where the owner generally pays attention. Yup, nothing gets someone’s attention like a good ol’ lawsuit. Now the owner is going to panic, and one of the things he’s going to do other then call his attorney if he even has one, is to go out to the garbage and grab a few of those letters from the Opportunistic White Knights, hoping to sell his house fast for cash and payoff the bank. The only way an investor wins here is if one of their letters are on top of that pile; which is the reason investors who use this as part of a larger total marketing campaign will send out as many as 25 letters per 30 day period to a single owner (that’s a lot of stamp licking). The success rate is extremely low, perhaps the lowest. But, as part of something bigger, it a method to consider; by itself, nah!

Driving for Dollars: This method is pretty much as its name says, you drive around neighborhoods looking for zombie houses, or homes in ratty shape, or properties with six foot tall grass or anything that would indicate a property is empty or in distress. Then what? You need to be able to find the owner, who is most often not living there. They could be an individual, a bank, a town, the US Government, relatives or hiers, really almost anyone. Often you will see an owner listed on Zillow, or Property Shrak, but more often than not that information is bad. You will mostly need to engage a skip trace company who for a fee investigates who actually owns the property and can get you their contact information. Then you contact them and offer to purchase the property. This is pretty much what many newbies do as the national programs push it as a way to get started off. The success rate is low, and it takes a lot of leg work. As part of a multi faceted campaign, yeah consider it; stand alone, don’t waste your time.

Bandit Signs: This method is at the top of the Flippy House Club Yuk-O-Meter. This is another very low result method whereas the investor purchases cheap signs and then puts them on the roads, like at intersections, highway exits, on wood telephone poles, etc. The sign only needs to say: “We Buy Houses For Cash” with a phone number, and of course it should be in a bright color so it stands out against the other 400 signs that will be planted next to yours. I have never used this method. As a former COO, and still somewhat of a snob, I’m just not jumping out of my car at a red light and sticking as many signs into the ground as I can before the light turns green, as I trip and plant my face into the mud. However, if you prescribe to the adage that any advertising is good advertising, have at it. Just make it part of something bigger. Oh, one more thing, most municipalities have laws against this sort of advertising so expect a love letter telling you to cut it out!

As I said I don’t love these methods on a standalone basis. There are methods that I feel are more professional than hounding a guy with emails, or hanging 1000s of signs, and the like. Next week (unless there’s a new pandemic) I will hit some higher result methods.

Be safe and be healthy…

How can you lose?