Finding The Right Realtor For Flipping

Your choice of realtor to represent you in flips is one of the most important decisions in your investment purchase process. This is not the time you want a rookie agent. Your agent should have a good working relationship with the main REO and short sale listing agents in your geographic area. This asset is important because the listing agent may be able to help your agent structure your offer in a fashion that the selling asset manager wants to see.

While your agent isn't a contractor, he or she should be able to look at a fixer and be able to give a close estimate for bringing the property back to move-in condition. Most important of all, your Realtor must have a very accurate estimate of what the rehabbed property will sell for.  Your Realtor needs to be very familiar with the neighborhood and it's associated price trends.  An over-optimistic rehab estimate or resale price will result in a lower profit or, worse, a loss on the resale.

You need a Realtor who will promote the property, not just list it on the MLS.  Before the property is even finished with the rehab, there should be a "Coming Soon" sign on the property with a website showing the progress. Will the Realtor do an email blast to all the agents in the surrounding counties?  These two actions could have the property in escrow before the work is even completed.

Your Realtor should also take photos of the entire rehab process and leave a copy of the photos in an album on the property and on the website. This allows potential buyers to see all the work that has been done.

Find a realtor who has an existing client base of investor buyers looking for income property. The Realtor, therefor, should be well versed in 1031 exchanges. Once again, it is impossible to put too much value on experience.

Finally, your Realtor should be willing to discount rather drastically their commission on the sale of the rehabbed property for two reasons. First, they already made a commission on the buy side of the property. Secondly, the faster they sell the rehabbed property, the sooner they can make another commission on your next project buy.

Experience, experience, experience...... There is no substitute.

Bidding on REO's vs Short Sales Flips

The offer process for REO flip properties differs significantly from the short sale transaction flip properties.  REO fixers come with virtually no disclosures. This means that your inspections need to be even more comprehensive and in-depth than usual. Don't overlook checking with the city and county for violations and permit history. The selling lendor may also reduce the inspection period to as little as seven days. So you have to do more in less time. Getting an accurate estimate of the condition of the property and what it will take to bring it to sellable condition is your first priority. REO lenders often assume you know the condition of the property when you make your offer and are unwilling to negotiate based upon your inspections. If you find unexpected, expensive fixes, you may just want to cancel your offer. That's what the inspection process is all about.

Make your offer on an REO property as "clean" as possible: don't ask for credits, offer a 15 day escrow, use the title company offered by seller, make earnest money deposits sunstantial (3%), offer to remove all contingencies within seven days, and make sure you have submitted any and all lender specific forms with the offer. 

 Making an offer on a short sale property differs in several ways. First, you will get disclosures. Also, there may be inspection reports available. Check and see if there is an approved price for the property.  See if an NOD had been filed. Is there a sale date already been set?  How many lenders are involved? Has the seller submitted a complete package to the lender(s)?  How experienced in short sales is the listing agent?

Short sales differ from REO's in another important way:  While it would be ethically wrong to make offers on several REO's simultaneously unless you planned on buying all of them, it is perfectly acceptable to have offers out on one, two, five or ten short sales and only plan on buying the first one that the selling lender accepts.  So find an agent willing to make several offers a week for you on short sales.  Remember that no time frames start on a short sale until the bank accepts your offer.  You generally don't even put up any earnest money until the bank accepts your offer.

When the bank accepts your offer on an REO transaction, you complete your inspections and you find significant new, costly troubles with the property, you can negotiate for consideration or price reduction.   You should get an answer back (accepted, rejected or countered) within a few days. However, in a short sale transaction, the entire short sale approval process may start over and you might not get an answer for weeks (or the property may go to auction while you are waiting). 

So, whether you are going after an REO or short sale, remember it's a competitive environment.  You may have to make ten offers before you get an acceptance. Also, if your offer does not get accepted, try to get into backup position. These days, about 35% of offers fall out of escrow. Most important of all, get an agent who knows what the home will sell for in rehabbed condition and has a good working relationship with the heavy hitters in the RE0 and Short Sale market in your area.

What Inspections to Perform On the Flip Property

Once you have selected a property to flip and your offer has been accepted, the next step is to perform all the inspections you need to do to confirm the condition of the property. The final purchase contract will specify exactly how many calendar days you have to remove all inspection contingencies. The default period is usually seventeen days, but often this period will be shortened to as little as seven days in an REO transaction.  The inspection period starts the date the contract is accepted by both parties.

What inspections should you do?  Before paying for any inspections, read all the disclosures that the seller has provided including the Natural Hazard Report.  REO and probate transactions usually don't provide any seller disclosures for obvious reasons. If they exist, the disclosures divulge any known deficiencies in the property the seller is aware of, such as non-functioning utilities, noise problems, or any other problems that would materially affect the value of the property.

Also, before ordering inspections visit the city or county permit department to check on violations and unpermitted work. Open violations may take a lot of extra time to clear. Unpermitted work may require partial or complete tear down of improvements.  It's a good idea to check this out before making an offer.

The minimum inspections to perform are pest, home and roof for properties on public water and sewer. The prices for these inspections vary depending on the square footage of the home.  For properties on well and/or septic, inspections on them need to be done.

The pest inspection reveals evidence of termites and other wood boring insects and what treatments are necessary. This inspection also points out areas of rotten wood that needs to be replaced. Pest inspections divide findings into two parts: 1) Section One issues where there is existing damage; and 2) Section Two issues that point out problems that, if not fixed, will cause damage in the future. An example of a section two issue would be a leak under the kitchen sink that might soften and rot wood soon. Typically, a pest inspection will give estimates for repairing the damage. A pest inspection can cost from $100 to $300 depending on the company and size of the property.

The home inspection covers the furnace (including crawl space ducting), water heater, kitchen appliances, plumbing, electrical system and other minor features such as door and draw fit, condition of flooring and walls.  This inspection can easily take several hours and can cost from $300 to $600 depending on the size of the home.

The roof inspection is pretty straightforward and should reveal problems with the roof and the expected remaining life of the roof. Have this inspection even if it appears to be a brand new roof. I have seen many, many instances of poorly installed or illegally installed roofs. This inspection should cost less than $150.

I will cover the well and septic inspections in the next blog.

Remember, you may only have seven calendar days to complete and review your inspections, so retain inspectors that not only can get the inspection done quickly (and completely), but who also can get the results back to you within 24-48 hours. 

After all your inspections have been completed and reviewed, you have to then decide whether to walk away, remove your inspection contingencies, or to negotiate a credit or price reduction based upon the inspection findings.  Before, you remove your inspection contingency, your EMD (earnest money deposit) is not at risk, but when you remove your contingencies, possibly increase your deposit and sign the liquidated damages form, you can walk, but your deposit stays with the seller.