Rehabbing Ugly Houses Will Give You Beautiful Profits

Owning a home may be the American dream, but many people are dreaming aboFlipping a house ut making money in real estate. We have all read stories about someone that made millions in real estate. The fact is many people are living out their dreams buying ugly houses and then selling them weeks or a few months later – often for beautiful profits.

But how are some people able to do this, sometimes even the newbies?

Not surprisingly, there are some rules to follow. And the more attention you pay to the rules, the better the chances of you earning some serious money. I got my start in real estate several years ago by “flipping” houses. What is house flipping?

Flipping a house is the process of buying a house in need of repairs, at a price much lower than market value, quickly adding value by making the necessary repairs to get the house to market standards, and then selling the house for a profit. And you do this by using little or none of your own money. Sounds easy enough, doesn’t it? But flipping houses is not the path to get rich quickly, and it’s certainly not for everyone.

Here are some rules to follow if you decide you want to make some good money investing in real estate – especially by flipping houses.

1. Use The Formula. Buying the ugly house at the right price is crucial in making a profit. You actually make your profit when you buy the house, not when you sell it. You realize your profit when you sell it. Remember that what you get for your house after you fix it up will depend on what similar properties are selling for in the area. It will have nothing to do with what you spent to repair the house.

The following formula has worked well for me and it will work for you:
a. Determine the “After Repair Value” (ARV) of the house you’re considering to purchase. Generally, you can determine the ARV by obtaining a list of comparable sales (“comps”) in the area from a realtor. If relying on comps, be sure you obtain the actual sales price of houses sold and not the list price. Determining the likely sales price of your house is the starting point.

b. Subtract your total costs from the sales price:

* Closing costs

* Loan fees

* Document preparation fees

* Homeowner’s insurance

* Title policy

* Repair costs

* Interest on the loan

* Property taxes

* Sales commissions

* Other fees

You will want to project your costs based on four majaor categories. Buying, Repairs, Carrying or Holding, and Selling. After you determine your estimated costs from all four categories, subtract your total costs from the sales price.

c. Once you subtract your costs from your anticipated sales price, you will generate your estimated profit. You will have to decide how much of a profit you want to make on the deal to make it worth the effort. When you determine your desired profit, you’ll have the highest price you will want to pay for the house.

If you consistently use the formula, you will make better and faster decisions regarding a potential ugly house. Always start with the after repaired value and then work your way through the costs to calculate your desired profit. Also, do not let your emotions get away from you and make a seat of the pants decision that you will regret later. If the numbers don’t add up based on your desired profit, move on. There are plenty more ugly houses out there. Just be patient.

2. Work With An Experienced Realtor. I find it incredible, but too many investors think that all realtors are created equal. Not true. If your goal is to buy run down houses, then you need to find a realtor that specializes in foreclosures, HUD properties, etc. I actually had one fairly inexperienced investor tell me that he thought any realtor could help him achieve his goal. It’s possible, but not probable. To get the right result, you have to go to the right realtor.

Doctors are doctors, but some have their own specialty. If you have a serious case of the flu, would you go to just any doctor to help you get over your misery? For example, would you go to a gynecologist? Of course not. So why go to just any realtor to help you find distressed properties? You get the idea.

3. Use Leverage. Aptly named for the lever, you’ll want to take full advantage of leverage because it is the key to wealth in real estate investing. Leverage is the use of borrowed money to increase your profits when you buy an ugly house. Using little or none of your own money to buy more houses allows you to make a beautiful profit on someone else’s money.

Although your goal should be to buy property for thousands below its value, and you can sometimes buy it with no money down, it is important to understand that it does not necessarily mean that the seller doesn’t receive any cash money at closing. Rather it means that there is little or no money out of your pocket to make the deal.

Some investors think there is something wrong with using someone else’s money to buy houses. Well, for most working families, leverage provides them with not only a roof over their heads and extraordinary tax relief, but also the single best investment they’ll ever make.

Most real estate investors work hard at house flipping, have a long-term plan and stick to it. You can certainly shorten your journey to achieving your financial goals by using leverage.

4. Use Psychology. When fixing up the house, let psychology drive you. It’s not you who has to like the house. Your potential buyer has to like it. Remember, you’re not going to live in the house, so don’t go overboard on the repairs. If you have carefully defined your niche market, you will know their likes and dislikes. Make the right repairs to get the house to market standards and then stop and put a “For Sale” sign on it. I have talked to new investors who frankly admit to doing too much to the house, but they couldn’t help themselves because they didn’t like the way it looked. Doing too much to a house is no different taking your money and throwing out the car window. Either way you lose.

There is almost no other business that allows you to buy ugly houses and make beautiful profits with almost none of your money in a short time. It’s common knowledge that more millionaires made their fortunes in real estate than in any other business. So what are you waiting for? Rehabbing ugly houses can give you beautiful profits.

Lee Salinas, MBA, CPA is a full time real estate investor and the current President of TxREIA. Lee started investing in real estate three years ago after losing his job in June 2002. In three years, he has purchased over 140 properties and authored a business plan to help real estate investors get the cash they need to buy properties. The real estate business plan is available at his website – []

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