Penny Properties 101

The big makeover

When you are in the business of selling real estate for a profit you need to move fast, in order to get the money and then start over with the entire process. This means you have to have everything in place when you place the offer and start the fixing process

Penny Properties 101

Tracy Phillips

DEDICATION

This book is dedicated to my daughters Christina and Charisma

For all the hard work they have helped me with.

CONTENTS

Acknowledgments i

1 Chapter 1 - Introduction

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2 Chapter 2 – Learn the traits of the game

3 Chapter 3 – How to find the deals

4 Chapter 3 – How to find the deals

5 Chapter 5 – Sell for a profit

Chapter 1 - Introduction

Selling a property to make profit can be a great idea to earn some money, but who has the time to wait until the house bought with money from a loan appreciates enough, so you can make a profit? No one, especially when there is another way to approach real estate: house flipping.

Look around you. Do you see any houses that are about to fall over – houses that everyone knows has been unoccupied for years? Find them, fix them and sell them for a profit. This is called house flipping. And this is exactly what this book will teach you.

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Chapter 2 – Learn the traits of the game

When you hear about flipping houses for a profit you think of instant money and speedy repairs. Is this the reality of house flipping or are the TV shows cutting out the reality bites?

The concept of flipping a house is rather simple: you buy a property at a small price, fix it and then sell for a profit. It sounds good, but if you expect to make millions by buying penny properties, you need to get a reality check! However, you can make a full time income doing this.

Flipping is not an easy job and the profits are not that well rounded. On top of it, like any “on the edge” business, if you mess it up you might get into bankruptcy. Other times even though you do all the right things, you still manage to sink along the properties due to house market crashes or other unexpected situations that make the selling for a profit part of the flipping impossible.

When you get into this business, you must know a lot more than the basic concept, if you plan to stick around for some time, investing in the house market. There are many things to learn, but before you start buying and selling, you have to know five major facts of the trade.

• Flipping comes with a risk

• Flipping does not happen overnight

• Flipping works on every market, if you know how to do it

• Know what you want to do with the house

• Consider the worst case

Different types of flips

In the world of house flipping there are multiple ways to deal with the classic three step process. In this book we will focus only on the legal ways to flip a house; there are also a lot of illegal flippers out there who work their way on the market before being caught by the long arm of the law. And they are always caught!

Flipping type 1: Buy, fix, flip

Flipping type 2: Buy and resell as is

Flipping type 3: Buy, refinance and lease with option to buy

Flipping type 4: Pre-construction flippers

Pseudo-Flipping: Scouting for a flipper

Chapter 3 – How to find the deals

There are multiple ways to find a good deal and until you gain notoriety and the deals come to you, let's review the most effective ways to find a deal.

Find a seller under special circumstances

There are many reasons to sell a house and you can exploit some of them when you are looking to buy a house to flip it.

Newspapers, Internet and Direct Mail

Start by looking at the local offers and then enlarge your search area. Be prepared to hear negative replies, as negotiating a deal is never easy and some sellers are just not interested in what you can offer them.

When you are looking a building to flip you need to focus on owner ads, both offline and online, because they are more interested to sell and they also provide some advantages, such as discounts and no extra fees.

Real estate agents

Get into their game and call them to ask for other properties they have on sale. It is best to send a fax or an email to let them know you are a flipper and you are looking to invest in a certain type of property, especially those that require fixing.

Farming neighbourhoods

One of the ways to find great deals on a regular basis is farming a neighbourhood. The principle is simple: you focus on a single neighbourhood or area to buy houses.

Picking the right neighbourhood

When you are looking to flip a building you need to pick the right neighbourhood – if the neighbourhood is not a hot area for commercial buildings, you might have an amazing hotel, but struggle to sell if after the flip due to the neighbourhood.

Picking the right building

The first and most important thing that you should know about flippable properties is that you need to find all the details yourself before the buy! Many flippers buy properties at auctions, without seeing them, which can be a great deal, if the building is in good condition, or might break the entire process of flipping if is filled with mould or requires other significant fixes.

Due Diligence: 10 Steps to Take Before You Buy

Due diligence is one of the most critical periods in any real estate transaction. But many buyers cut corners in the due diligence process in their haste to have their bid accepted. Here are 10 due diligence steps you shouldn’t skip, especially if you’re considering a foreclosure, bank-owned property or short sale.

1. Do a title review. Always get a preliminary title report on any foreclosure property you’re interested in buying, and look for any secondary liens or tax liens. Make sure there aren’t any hidden liens or encumbrances on the property that will blossom into unpleasant surprises later.

A lot of paperwork got lost during the real estate crisis as companies like New Century went through bankruptcy. The courts are still unwinding cases where people sold properties they didn’t own. That’s why it’s so important to ensure that the title is clear and that the property really is for sale. You’d be surprised at how many investors decide they’re not going to get title insurance, but it’s just not worth the risk.

2. Inspect the property thoroughly. You may not be able to get inside a foreclosure property that’s still occupied. But if you can, have a licensed professional inspector review the house for evidence of structural defects, water damage or other major problems.

But most importantly, make sure everything is functional. I know of one case where an owner who had lost his home to foreclosure did what some owners do in that situation: he ripped the wiring out of the walls and took the piping. But then he did something different: after he was done, he put up new drywall. So when they did an inspection of the house, it looked fine, but there was no wiring or piping behind the walls.

3. Consider the surrounding property and neighborhood. Don’t confine your inspection to the structure itself. Look around at the landscaping. Does the property back up against a bank that has no vegetation? Will the drainage work in the event of a heavy storm?

Check out the surrounding neighborhood as well, as its condition can affect the value of your property. Do you see pride of ownership in the other homes? Or do you see abandoned properties in the area? And note that abandoned houses aren’t just a problem in “bad” neighborhoods. Because of the recent housing crisis, you might find abandoned or unfinished homes even in relatively new housing developments.

4. Examine recent sales activity. Look at how many days homes have stayed on the market. Are properties moving quickly or languishing? What are the buy vs. rent trends in the neighborhood? How many of the homes sold were distressed inventory? Too many sales overall could suggest that people are leaving the neighborhood—see if there’s an underlying reason why.

5. Review price trends. Are they going up? Have they plateaued? How do they compare to what they were during the last peak? That information should give you an idea of whether property values are going up or down, and help you figure out what you should be spending.

6. Find out how many homes in the area are in foreclosure. Too many suggests price weakness over the near term. Are there a disproportionate amount of distressed properties in the area? Before the crisis, only about 1% of properties went into foreclosure in any given year—or one home out of every 100. In today’s environment, you might see maybe three or four. But more than that might indicate a problem and a reason the property is priced as attractively as it is.

7. Look at the upside potential. Are you near a good school? Are you near a transportation hub? Are there new businesses that are popping up or being launched in the area? Those are potentially all good upside opportunities for you. Conversely, has there been a plant shutdown recently? That will probably lower property values. The local chamber of commerce can supply some of this information; it also helps to have some local connections.

8. Go to open houses. See what the standard of quality is in other homes that are currently for sale. Are tile countertops fine, or do I need to install granite? This is a good thing to do whether you’re planning to flip the home or rent it. It doesn’t mean you have to overspend. But you want to meet the neighborhood standard or be slightly above it, and spend as little as you can to attain that standard.

9. Research zoning requirements. If you’re going to rent out the property, consult with a real estate attorney to see if there are any local ordinances or laws that might make it difficult to be a landlord. Some areas aren’t zoned for rental property. Some developments limit the number of rentals in the neighborhood; others have limits on the number of adults that can live in a single house, which could be a problem if you plan to rent to people who want to room-share (like college students).

10. Check your liability insurance. If you’re going to be a landlord, check with your insurance agent to find out how much liability and property insurance you’ll need.

While these 10 steps may sound like extra work, they’ll pay off in the long run. Whether you’re going to occupy it, flip it or rent it, real estate is one of the most expensive investments you’ll ever make. It makes sense to protect it.

Chapter 4 – The big makeover

When you are in the business of selling real estate for a profit you need to move fast, in order to get the money and then start over with the entire process. This means you have to have everything in place when you place the offer and start the fixing process as fast as possible.

What to fix?

This is the common question that often arises in various projects, but if you've done your job right, by this stage you already know what you need to fix in order to add value to the entire building. Because you are already tired of the old “kitchen and bathroom” phrase, here are some tips on what to fix according to some advanced criteria:

First, focus on the details!

If you think your customers will not observe a microwave in a patio or the dirty floor of the garage, you are mistaken as they will notice. Always keep in mind that each of your projects talks about you and you don't want your flip to scream “messy” or “lack of details”. Go through the entire house with your contractors and evaluate their work. If you are not happy with what you see, be vocal about it.

Second tip of the day is calling in an expert to evaluate the house. A real estate agent or other person who is used to search for issues in a building can help you spot small things which can go a long way.

Another important tip is making the fix with your potential buyer in mind. Depending on what your exit plan is, you might want to sell the house to an investor, a homeowner or rent it. And when you sell to a homeowner, what type of owner – couple, family, elders or young people?

Depending on the answer to these questions you will know what items to place in each room, not just in the kitchen and the bathroom.

An investor is going to look for quality and attractiveness, something that can bring him a steady cash flow, so aim to have couple of amazing features in the house and make it stand out of the other properties.

Homeowners act on emotions and want to have a beautiful yet highly practical house, so you have multiple options and you can use many tactics to impress them. One of the biggest mistakes you can do when you fix up a house for a homeowner is designing it to your own taste. This is a huge fault, because people have their own pride and tastes and they love to have options. In other words, a house with cream walls, which allows them to repaint in a bold color seems to be more attractive than a house with red or purple walls.

Renters usually look for comfort: a clean place, with lowest utilities expenses and an easy, short commute to their job. They might look for some relaxing features, like a patio or a nice garden, with a pool to spend time with their friends. If you are going to rent the property keep in mind that your furniture is going to be easily worn out, as well as other items in the house, so keep your desire to fix up the building at a high standard in balance with your expenses.

Inside-Outside

When you look at a house, there should be something about it that invites you to come in. You need to get that “WoW” factor when you look at the building for two main reasons: to change the way the building looks and make it visible that you've been working on it, and to attract people to come in.

The wrapper of a gift is not everything, but without it no one gets to see the gift, so pay attention to the exteriors as well as interiors of the house.

Mown the lawn, plant new bushes and cut the existing ones, clean the pool and make sure everything is tidy and the house looks WOW on the outside, just as it is on the inside.

With the house all fixed up, it's time to sell it!

Chapter 5 – Sell for a profit

After you've finished your flip, you need to sell it as fast as possible, for a good price, as close as possible to your calculated ARV. If you have made a good deal right from the start you will be able to sell the house in a rather short period of time, but you should still consider couple of points.

Price is everything

The most important feature of your flipped house is the price you are going sell for – depending on this feature you will either be able to sell and make a profit or you will be left behind by the competitors in the market. When a buyer goes out to buy something he first compares the prices. So, you would want to fix a price within the local market and this means you need to keep an eye on the other properties for sale in the area. There is nothing wrong is listing the property a little over the other houses, as long as you are sure it will sell due to certain unique features or something else that makes it stand out in the crowd.

List for sale a home, not a house

One of the best tricks to attract people and make them buy a house is helping them visualize themselves living inside that house. This means turning the house into a home!

This way you will be presenting a lifestyle, a concept which is much more than a house and people will resonate better with this idea. Make your potential buyer feel at home in the house, by adding furniture and some design items, like flowers and linings to make the place look like it is ready to accommodate its guests.

After everything has been set, call a professional real estate photographer, because you won’t be able to take amazing shots of the house. In a world dominated by amazing video art, especially in the online medium, where your buyers might be, you need to attract people to your house, to see it and fall in love with it. And iPhone pictures are not going to do the job.

Make it BIG!

When you want to sell your flipped home you need to make a buzz around it, so that everyone gets to know you are selling a house and not every house, but your own masterpiece. Listing the property in offline and online medium are well known methods to advertise the property, but you can aim for a classier and most flamboyant promotion.

How to buy a house with No Money Down

The Mechanics of Seller Financing

In seller financing, the seller takes on the role of the lender. Instead of giving cash to the buyer, the seller extends enough credit to the buyer for the purchase price of the home, minus any down payment. The buyer and seller sign a promissory note (which contains the terms of the loan). They record a mortgage (or "deed of trust" in some states) with the local public records authority. Then the buyer pays back the loan over time, typically with interest.

From the seller's standpoint, the short time period is also practical -- sellers can't count on having the same life expectancy as a mortgage lending institution, nor the patience to wait around for 30 years until the loan is paid off. In addition, sellers don't want to be exposed to the risks of extending credit longer than necessary.

A seller is in the best position to offer a seller financing deal when the home is free and clear of a mortgage -- that is, when the seller's own mortgage is paid off or can, at least, be paid off using the buyer's down payment. If the seller still has a sizable mortgage on the property, the seller's existing lender must agree to the transaction. In a tight credit market, risk-averse lenders are rarely willing to take on that extra risk.

Types of Seller Financing Arrangements

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Get an All Inclusive Mortgage

In an all-inclusive mortgage or all-inclusive trust deed (AITD), the seller carries the promissory note and mortgage for the entire balance of the home price, less any down payment.

Junior mortgage. In today's market, lenders are reluctant to finance more than 80% of a home's value. Sellers can potentially extend credit to buyers to make up the difference: The seller can carry a second or "junior" mortgage for the balance of the purchase price, less any down payment. In this case, the seller immediately gets the proceeds from the first mortgage from the buyer's first mortgage lender. However, the seller's risk in carrying a second mortgage is that he or she accepts a lower priority should the borrower default. In a foreclosure or repossession, the seller's second, or junior, mortgage is paid only after the first mortgage lender is paid off and only if there are sufficient proceeds from the sale. Also, the bank may not agree to make a loan to someone carrying so much debt.

Land contract. Land contracts don't pass title to the buyer, but give the buyer "equitable title," a temporarily shared ownership. The buyer makes payments to the seller and, after the final payment, the buyer gets the deed.

Lease option. The seller leases the property to the buyer for a contracted term, like an ordinary rental -- except that the seller also agrees, in return for an upfront fee, to sell the property to the buyer within some specified time in the future, at agreed-upon terms (possibly including price). Some or all of the rental payments can be credited against the purchase price. Numerous variations exist on lease options.

Assumable mortgage. Assumable mortgages allow the buyer to take the seller's place on the existing mortgage. Some FHA and VA loans, as well as conventional adjustable mortgage rate (ARM) loans, are assumable -- with the bank's approval.

Getting Professional Help

Both the buyer and seller will likely need an attorney or a real estate agent-- perhaps both -- or some other qualified professional experienced in seller financing and home transactions to write up the contract for the sale of the property, the promissory note, and any other necessary paperwork.

In addition, reporting and paying taxes on a seller-financed deal can be complicated. The seller may need a financial or tax expert to provide advice and assistance.

Tips to Reduce the Seller's Risk

Many sellers are reluctant to underwrite a mortgage because they fear that the buyer will default (that is, not make the loan payments). But the seller can take steps to reduce the risk of default. A good professional can help the seller do the following:

Require a loan application. The seller should insist that the buyer complete a detailed loan application form, and thoroughly verify all of the information the buyer provides there. That includes running a credit check and vetting employment, assets, financial claims, references, and other background information and documentation.

Allow for seller approval of the buyer's finances. The written sales contract -- which specifies the terms of the deal along with the loan amount, interest rate, and term -- should be made contingent upon the seller's approval of the buyer's financial situation.

Have the loan secured by the home. The loan should be secured by the property so the seller (lender) can foreclose if the buyer defaults. The home should be properly appraised at to confirm that its value is equal to or higher than the purchase price.

Get a down payment. Institutional lenders ask for down payments to give themselves a cushion against the risk of losing the investment. It also gives the buyer a stake in the property and makes them less likely to walk away at the first sign of financial trouble. Sellers should do likewise and collect at least 10% of the purchase price. Otherwise, in a soft and falling market, foreclosure could leave the seller with a home that can't be sold to cover all the costs.

Negotiating the Loan

As with a conventional mortgage, seller financing is negotiable. To come up with an interest rate, compare current rates that are not specific to individual lenders. Use services like www.BankRate.com and www.HSH.com -- check for daily and weekly rates in the area of the property, not national rates. Be prepared to offer a competitive interest rate, low initial payments, and other concessions to lure buyers.

Because sellers typically don't charge buyers points (each point is 1% of the loan amount), commissions, yield spread premiums, or other mortgage costs, they often can afford to give a buyer a better financing deal than the bank. They can also offer less stringent qualifying criteria and down payment allowances.

That doesn't mean the seller must or should bow to a buyer's every whim. The seller also has a right to decent return. A favorable mortgage that comes with few costs and lower monthly payments should translate into a fair market value for the home.

Hiring a Loan Servicing Company

To help ease the paperwork burden, sellers can hire a loan servicing company to help draw up the mortgage, mail statements to the buyers, collect payments, and otherwise administer the mortgage.

For a detailed discussion of the entire home selling process, including a variety of ways to get reluctant buyers excited about buying your home.

What to do when the seller agrees to Owner Financing with No Money Down?

Only use seller financing when the home is owned free-and-clear. (There are some exceptions, which we will cover later.)

In other words, if the owner of the home currently has a mortgage on the property, don’t use seller financing to buy it from them unless you pay off the existing loan first. Your goal when buying using seller financing is to find sellers who don’t have a mortgage. This way, they can provide the financing without the risk of them being foreclosed upon.

You need to get a contract for owner financing signed and notarized.

How can I make a profit with an Owner Financed House?

Lets say you bought the House for 10,000 and the note is 300.00 per month if

You have done your due diligence correctly you should be able to rent this

House out for say 600.00 or so paying the owner 300.00 and netting you 300.00

You can turn the home to a room and board and rent the rooms out to qualified

Individuals. Check city ordinances to be in compliance when doing this.

You can Sell the house for say 12,000 pay off the owner and keep the 2,000.00.

If you are going to do this please act quickly because you have to remember you

Still have a 300.00 note until you sell it.

When you Must Borrow Money and who to use when you do have to borrow.

New Breeds Of Real Estate Loans Could Help House Flippers

These new real estate loans could help house flippers do more deals…

Capital sources are once again innovating and bringing out new loan programs. Some may be used directly by real estate wholesalers and house flippers. Others can be introduced to retail buyers and end investors to increase their ability to absorb new inventory.

Transactional Funding

Transactional funding has been publicly available to a broader range of real estate investors since around 2008. Yet, it is still seriously underutilized. Many investors are sitting on the sidelines, or are doing a fraction of the deals they could be, due to liquidity challenges. Transactional funding offers easy and fast access to 100% financing for wholesale deals.

While transactional funding may provide the easiest qualifying of all loan products on the market today, it is short term money. A new variety of stated income real estate loans are emerging that could be ideal for helping experienced investors to get back in the game, and to enable active investors to expand their capacity and portfolios. These loans do not require tax returns or W2s, allowing for a faster and lower hassle approval process. Wholesalers should be connecting their end buyers to these financing providers to create more win-wins, and to scale deal flow.

Lenders have gotten smarter. They may prefer the easy of lending and debt investing versus owning and managing physical assets. However, they also don’t want to miss out and leave money on the table. So, with equity sharing mortgages they are able to provide great financing terms, and get a piece of the equity appreciation as well. These loans may offer more attractive terms to investors, and can give them advantages of having an experienced and connected ‘partner’. Just be clear about the fine print.

Lines of Credit

More and more lending channels are ramping up their offerings of unsecured lines of credit. Lenders and private investors have trillions in capital to deploy this year, and they want it out there working. Unsecured lines of credit are ideal for rehabbers who may need more working capital, as well as the liquidity to jump on new deals while completing projects already in the pipeline. Again, the better wholesalers do at connecting their end buyers with these real estate financing sources, they more valuable they become, and the more business volume they can do.

Authored by Best Transaction Funding BestTransactionFunding.com is the leading source of transactional funding for real estate wholesalers in the US, where 100% financing, and saying “Yes” is what we love doing all day long.

This Section is brought to you by my friends at BestTransactionFunding.com

Cheap House Fixers to make it look better.

Replace a Window Treatment

Has the window shade above the kitchen sink been marred by repeated exposure to splashes and cooking liquids? Replace a stained window covering with an inexpensive fabric treatment for under 10.00.

Fix the trimwork

Replace mismatched, missing, or damaged moldings, end caps, quarter rounds, or baseboard. Curved areas might require a special piece or trim made of an alternate material. This can be done for under 20.00.

Replace Faceplates on the light switches

Replace all Faceplates to lights in the house head to your local thrift to buy these in bulk.

Paint Walls Where you Need To

Are the walls extremely dirty? You may be able to higher a student to help paint

A room or too in the house this will surely increase your profit. Head to your

Local college and hire a student or two. They always need a little money.

Caulk in the Bathroom if needed

If the caulk in the bathroom is looking dingy, discolored, or cracked, it's time to remove it and start fresh. Whether it's around the sink, bathtub, or shower, old caulk can grow mildew and cause damage by leaking water -- especially between the tub and bathroom floor. Remove the old caulk, clean the space well, and replace it with a new layer. A good caulk seal will last up to 10 years.

Update House Numbers

All it takes is a screwdriver and few minutes to give your front door a personality-filled facelift. Change out poorly operating door hardware or make house numbers more readable for a pretty, practical update on the cheap.

Replacing Carpet

Replace carpet only when absolutely necessary here is a cheap way to buy replacement carpet

Head on over to your local habitat for humanity store they have carpet for pennies on the dollar. All you need to do is find a layman to put it down cheaply. I have found workers at my local college and craigslist for a fraction of the price.

Fix up the lawn

Remove debris from the lawn and make sure it is mowed.

Website Resources

For all your lending Needs

BestTransactionFunding.com

Buying & Selling Properties

http://www.craigslist.com

Real Estate Market Statistics

http://www.realtytrac.com