I interviewed four successful Real Estate flippers in the last month, and was surprised at how they all operate based on more or less the same “Real Estate Flipping Rules“. These flippers were working in the Greater Palo Alto communities of Palo Alto, Los Altos, Mountain View, Menlo Park, Sunnyvale and San Jose California, and typically completed their projects in 4-12 weeks. All had at least two “value added” skill sets including the following: Real Estate license and marketing expertise, contractor’s license, ability to make repairs and do simple tasks such as paint or tile the property, staging skills, furniture and accessories, and in some cases, a mortgage broker license. One person was the designated “interior designer”, and spent considerable time and effort in selecting and sourcing attractive materials at reasonable prices. All partnerships involved value added skill sets, and no partnerships had a partner that just brought money to the table. Successful flipper partnerships split costs, risks and value added skill sets. All flippers staged their properties, most with their own staging furniture and accessories.
The Top Ten Real Estate Flipping Rules
1. Do not buy property that you cannot afford to hold: The market could have a downswing, and you need to have the financial resources to carry the mortgage until the market turns up, or subsidize a cash negative rental if your home is caught in a protracted real estate downturn. Click here for recent home sale statistics.
2. You make the greatest profit on the buy side, not on your selling side. You must be able to evaluate the market objectively and NEVER overpay. Properties in Palo Alto, Menlo Park, Los Altos, Mountain View, Sunnyvale and San Jose California regularly have multiple offers. Do not get caught up in the frenzy of “winning” or you will lose your profit before you ever start your project.
3. Get a binder on your title insurance at the time of purchase. When you go to resell, you only have to pay title insurance on the incremental increase in the price of your property. Payment of title and escrow fees, city and county transfer taxes and escrow fees vary by Custom, county, city and region. In Santa Clara County, the seller pays title, escrow and transfer taxes. This practice differs in San Mateo County. Always know which title fees and taxes you will have to pay.
4. You want to purchase a home where you get the highest school scores for the least amount of money. California rates schools according to the California API (Academic Performance Index). Outstanding school scores are the driver of property values in the Greater Palo Alto area. Click here for School Scores in Santa Clara County and San Mateo County.
5. Only purchase a flipper property in an area where properties are still selling. Don’t buy a “bargain” in a distressed neighborhood where there are many short sales, foreclosures or even abundant inventory. San Jose, Menlo Park and Sunnyvale have great variation in their school scores, be sure you are purchasing where schools are excellent.
6. The ideal flipper property: A “dated” home with a tacky, dark interior, on a quiet street in a desirable neighborhood with good schools, good floor plan, ugly or non-existent landscaping, does not have un-permitted work, and can be easily cosmetically updated. Avoid properties that need/have the following: foundation repairs, poor drainage next to the foundation, or wet/moist crawl space, extensive dry rot or water damage, previous landslide damage, significant flood risk, new roof, new pipes, updated electrical, new furnace or water heater. Most flipper properties require at least one of the latter items, just don’t have too many of these.
7. Do as little as possible that requires permits or approvals from the city if you are not a full time contractor with working crews. One larger contractor I spoke with typically adds significant square footage in the kitchen, family room and Master suite. He has several full time crews, and his business model keeps his crew busy during lulls in his contracting business. Most flippers lose too much time (re: mortgage payments month after month) if they add square footage that requires permits, and they don’t have instant access to a reliable contracting crew. Full time contractors also have solid relationships with city building departments, and that expedites their permit process.
8. Careful material selection is the best way to manage your budget. The Aesthetics of your selections are very important, but the most common flipper mistake is to get carried away with very overly expensive materials. One flipper NEVER uses home depot. She contends that EVERYONE has seen what is in Home Depot, knows what it costs, and it cheapens the value of the visual update. She dislikes the cheap materials used in the construction of their cabinets.
9. Continuity of finishes and hardware makes your flipper project look like a new model home, and increases desirability. Most flippers strive for continuity in paint color, carpet and hardware selection. If you are using brushed pewter for the doorknobs, it should be used for all other hardware applications including light fixtures, cabinet knobs, hinges and bathroom fixtures. Limit paint colors to no more than two: one for public rooms, one for bedrooms.
10. Always use contractors and subcontractors that are licensed (always for work requiring permits) and that you trust. Typically this is not the cheapest contractor that you can find.
