Shaking In Your Boots To
Suicidal Missions – Deadly Mistakes In Real Estate Investing, Part 3
By:
Matthew Trainer
Get It In Writing!
House flipping is a hot real estate
investing trend that is sweeping the nation. Especially with
television shows like Flip This House and Property Ladder, more and
more regular folks like you and me are jumping on the real estate
investment band wagon, with a dream to make some quick money. “Thars
gold in them thar hills!”
But it’s not all ice cream and lollipops. You can get yourself really
hurt if you don’t know what you are doing. I’ll address two major
issues in this arena.
I was ripped off!
I hear all the time from real estate
investors that they say they got ripped off by a contractor, but in
reality - it was THEIR fault.
Anytime one of the many investors
that I interviewed had a problem with a contractor, or the
contractor’s performance, it always went back to the fact that the
investor didn’t have a written repair bid signed by the contractor.
This is what happens: You reward a
job to a contractor and when he gets on site and begins the work, you
realize that it is not what you had expected. After you talk with the
contractor, you realize that it is exactly what he expected.
A written repair bid eliminates any
confusion because the bid states what the contractor will do, and what
materials he will use. You both know what you hired the contractor to
do.
Without a written bid, sometimes there is confusion on the price as
well. Sometimes the contractor forgets what the agreed upon price was
and needs help remembering because the figure that he now thinks is
correct is higher than his original bid price!
This is why you should always have a contract signed after you award a
contractor a bid. Within that contract will be the “Scope of Work”
addendum. This specifies what work will be performed and what
materials will be used.
This information is taken directly from the written bid sheet. The
contract will also specify the total dollar amount of the contract
(your contract should also include a Clean Up Clause, Damage Clause,
specify who is responsible for getting the permits, Late Performance
Clause, and Payment Disbursement Addendum among other clauses and
addendums).
Another reason to get repair bids in writing is so that you can
compare this contractor’s bid with the other bids that you have
received from other contractors, to make sure that you are comparing
“apples to apples”. If one contractor is lower but has omitted a
couple of items, that needs to be completed, from the bid, then maybe
he isn’t lower after all.
Always get your repair bid in writing and
save yourself a big headache.
So, how do you know when you should
buy a fixer upper and when it is beyond repair?
Never buy without an inspection: Before you purchase any
property, especially fixer uppers, engage the services of a property
inspector and have him do a thorough run-through of the house, paying
special attention to the following: foundation, plumbing, electrical,
heating and cooling systems, and structural issues.
All of these are money guzzlers and if they require fixing, it may
make the difference between a profit and a loss when you flip the
property. Keep in mind that although all of these issues are of
critical importance, they are not the issues that a potential buyer
will be looking at right away, and therefore the return on investment
in sinking money into these types of projects is not as great as a new
kitchen or bathroom.
Seek out the ugly and outdated: As a property flipper, you want
to search for properties that offer the most potential for dramatic
change. Therefore, you should look for properties that are under
priced or not moving on the real estate market because they are in bad
repair or severely outdated. These are the real gems!
Adding a state-of-the-art kitchen and a luxury bath, turning a
4-bedroom into a 3-bedroom by making a giant master bedroom retreat
from two smaller bedrooms - those are the types of benefits you should
look for. If the house is structurally sound, has a decent heating
system, the electrical and plumbing are in good repair and there are
no foundation problems, all the rest can be beautified and updated
with a little paint, a lot of imagination and hard work.
Invest in a neighborhood and lifestyle: Ultimately, when you
fix up a property for resale, potential buyers will be looking to
purchase not only a house, but a lifestyle. Therefore, it is
imperative that you research the neighborhood and schools before
purchasing a flip property. Your goal is to update the property so
that it sparkles and then find a quick buyer to take the property off
your hands, while you make a very healthy profit.
If you purchase a fixer upper in a bad neighborhood, it will be very
difficult to flip the house and you may be stuck with it for several
months. Also, you must be certain that the upgrades that you have
planned for the property are those that work financially. For example,
if the average house in a neighborhood is $150,000 and you purchase a
fixer upper for $110,000, you want to ensure that you get the most
from your money.
If you install top of the line stainless steel appliances and granite
countertops in the kitchen and a luxury spa bathroom with hopes of
asking $200,00 for the property, that is unrealistic. You need to work
within the means of the neighborhood and always keep in mind what that
market will bear. Do your homework and see what homes have sold for in
the recent path and what was included in those homes. This should be
your guide.
So, the moral of the story is get everything in writing and make wise
decisions after checking everything out.
Yours in profits,
Matt
In Part 4 of this
series I will discuss deadly mistakes made with
tenants.
Get
Part 2, "Failing to Plan is Planning to Fail", here
I have spent over $75,000 on real estate
investing seminars, tapes, books, CD's, DVD's, etc. There is only one
I found that was worth the money. I highly recommend
Nouveau Riche University
above all other
real estate investing education.
|
