You’ve heard it a million times – you make your money when you buy the house. This is the single most important factor in succeeding with your flip, so you must buy it right. A few years ago in some markets like San Diego you could have bought any old dump, rehabbed it and sold it for a profit because the market was going up so quickly. A lot of investors were born in that era.
Times Have Changed
It’s not like that now so it’s more important to get a great deal. You ideally want to find the house that nobody knows about, or that everyone has passed up because it’s in such bad condition. You want to sneak around and basically buy something with no competition from other investors. Not to say you can’t get a good deal in MLS in San Diego but its more competitive. Don’t be afraid to write what some people call low ball offers.
I love to say “If you are not embarrassed by your initial offer, it means you are offering too much.” Some weeks I write up to 5 offers. Its not about being unfair to the seller but you have to buy at a price that makes you a profit or you will not be in business long. People sell houses in San Diego at a discount every day. Not everyone will want to do the repairs and go through the hassles of a traditional sale, its your job to find these people.
No today doesn’t mean No in 6 months from now
A “no” today doesn’t mean a “no” tomorrow. I’ve had sellers call me back months after getting my offer rejected asking if I was still interested in their house. People might get caught in a jam and suddenly your low offer from 6 months ago can look appealing. This is the best scenario because: A. they are extremely motivated now and better yet: B. there is no competition from other bidders.
Your best deals will come from distressed sellers. Distressed sellers usually fall into 4 categories, sometimes called the 4 D’s. These are Death, Debt, Disability and Divorce. Also, to get inside information on neighborhoods talk to the mailman and meter readers. They know the area better than anyone and have direct knowledge of distressed properties.
Buying the Right House to Flip
You must also pick the right home in the right neighborhood. Generally you don’t want to buy 2 bedroom 1 baths. Stick to 3/2’s for an easier sale as studies show this is the most sale able house. Avoid homes that have functional obsolescence.
This means there are features that make them undesirable no matter what you do to them. This could include houses on hard corners. I call them hard corners because one street is a busy street. These homes tend to sell slower than ones in the middle of the block. Other examples would be strange floor plans or unusual layouts.
Look for homes in a high owner occupied area. Typically you want to find that run down rental house next to a bunch of homes that the owners have kept up for years. You are looking for the worst house on the block and wanting to bring it up to the average level or a little above.
Don’t get obsessed with making it the nicest house on the block because you might price yourself out of the market. Every street has its price ceiling so you have to keep this in mind. At some point you won’t get the money back out, like the law of diminishing returns.