Know When to Hold Them… When to Fold Them-5 Cardinal Rules for Finding, Fixing and Selling Houses
In Kenny Rogers’ song, the “Gambler,” he says, “Know when to hold ’em, know when to fold ’em.” Even though he is singing about gambling, these words are so profound for real estate investors whose primary investment strategy is to find, fix and sell houses for a profit.
Like a high stakes game of poker, there is a great price to pay if you lose at the game of flipping real estate. The choice to “hold ’em” or to “fold ’em” is a choice that a poker player, or an investor, must make after some careful and calculated analysis of the hand they have been dealt, or the house that they are considering as a flip.
Professional poker players know that it takes a certain amount of skill to win at poker. They learn how to spot the trends and calculate the odds that another player is holding a particular card or which cards have been dealt. Based on that information, they will “hold ’em” and stay in the game, or they have the discipline to “fold ’em”and wait for the cards to get reshuffled.
Any real estate investor that flips houses for a living as a means to build wealth should do no less. Flipping houses is not a game, but a business. However, relying on luck to win at flipping houses is just as risky as a professional poker relying on sheer luck instead of proven formulas for success.
Let me give you five cardinal rules to follow if your investment strategy is to find, fix and sell houses. These five rules have evolved from my having rehabbed over 225 houses in four years.
1. Finding the Right Deal
To find the right investment property, you must decide on the criteria that make for a good investment property for YOU. You must consider the price range of houses you will ultimately sell to your buyers. For example, my niche market is providing quality, affordable housing to low-to-moderate income families. Having defined my target market, I now select the neighborhoods where low to-moderate-income families live. In these neighborhoods, most of the homes are 30 to 50 years old. The homes that we target for rehab make ideal candidates with good profit potential after we fix them.
2. Analyzing Risk vs. Reward
I get most of my property leads from wholesalers because they know my investment profile. So once a legitimate lead comes my way, I have to decide what to offer on the property.
In this step, it is very important not to let your emotions tell you that the house just needs “a little bit more” rehab money to get it done right. You just cannot rely upon your emotions. Consequently, an automatic formula or process will really help you to decide if and when you should “fold them” and move on to next house.
Accordingly, I rely on the following flip-tested formula to determine my maximum offer:
After Repair Value
– Rehab (Fix-up) Costs
– Holding Costs*
– Minimum Profit
= Maximum Offer
* (closing costs, property insurance, taxes, utilities, interest, sales commissions, etc.)
Some investors resist using this formula because the calculations can take some time, but it’s more important to be right than fast.
3. Financing the Right Flip
There are two quick ways to get the financing for your prospective investment property.
a.You can get a loan that will be repaid with interest when the house is sold.
b.You can partner with another investor who will put up the money and you split the profits, generally on a 50/50 basis.
Should you decide to get a loan, private lenders are an ideal source of funds for most deals. Private lenders generally will lend money to investors based on the resale value of the house or the After Repaired Value (ARV). Most private lenders will make loans in the 65% to 75% Loan To Value (LTV) ratio.
If you do not have access to a private lender and you don’t want to lose the deal, then seriously consider partnering with another investor. After all, half the profits are better than no profits. Your local REIA is an excellent place to find other investors with the financial resources to partner with you.
4. Adding Value Rehab Strategy
Although each of the five rules is crucial to your flipping success, the rehab phase is where most new investors make some gross miscalculations. Rehabbing the house within your fix-up budget and in a timely manner is essential to earning a profit.
If you’re just starting out as a flipper, forge a relationship with a contractor that will help you create a plan for the work that needs to be done to get the house to retail standards. Next, determine the materials needed to complete the rehab. Finally, assess the cost of the labor and materials, and the time (in days or weeks) it will take to complete the rehab project.
5. Profiting From the Sale
Once you complete the rehab on the house, it’s time to sell the house and take your money to the bank. You basically have two ways to sell the house.
a. Sell the house yourself
b. Retain a real estate agent
Selling the house yourself can be time-consuming and you must have the resources to pull it off. You will be responsible for putting up yard signs, directional signs, and distributing flyers throughout the neighborhood about the property. Also, you will be responsible for all incoming phone calls from prospective buyers and showing the houses, taking the applications and submitting the applications to those lenders that you have a relationship with in your town.
On the positive side, you get to keep the commissions (usually 6%) you would ordinarily pay a real estate agent for selling the house. If you sell houses with an average price of $80,000 each, and you sell 15 houses in one year, you will save $72,000 in realtor commissions.
Conversely, hiring a real estate agent saves you a lot of time and effort because the agent will manage the entire house selling process. The agent will list the property in the Multiple Listing Service (MLS), market and show the house, make sure the necessary paperwork gets done correctly and ultimately sell the house within a mutually agreeable timeframe.
Depending on the property’s location, I have used both methods for selling houses, and they both work. In high traffic areas, I sell the house For Sale By Owner. Otherwise, I rely on an agent to get the job done.
Professional poker players insist on playing with a full deck. Anything short of that and the deck will be stacked against them. Ignore any one of these five rules and your odds of successfully finding, fixing and selling a house for a profit will be stacked against you. Apply these five rules to your real estate flipping business and your fears will no longer hold you back because you will know when to “hold ’em” and when to “fold ’em.”