Fix and Flip reality TV shows have glamorized the process of buying, rehabbing, and selling a property. These shows oversimplify the system of trading assets for cash and lead many first time investors to overextend themselves. Programs like HGTV’s Fix or Flop show the before and after but neglect to communicate the inherent paperwork, numbers, and decision-making ability that flipping demands.
While there are some investors that can do everything, they are the exception, not the norm. We always advise first time investors to assemble a team for their fix and flip projects. The paperwork alone in buying a property can be overwhelming at times, and that’s just the first step in a longer process of turning a home into a profitable asset. But don’t fear, we have assembled a digestible guide to make sure you’re prepared for all that’s ahead!
Selecting a General Contractor
Unless you have the craft skills to complete a major renovation project, you’re going to need a general contractor, and a good one at that. Many flippers rush into this step by punching in “contractor in my city” on Google. Their search usually stops there. This strategy is misguided: Google does not always know the best contractor nor does it know the one who compliments your investing style. In fact, these contractors might just have good web marketing agencies pushing their listing to the top of Google, thus giving the appearance of a highly skilled practice. This is not to say that Google has no value. Search engines are useful in creating an initial list that can be further narrowed down through additional research.
Spend some time eliminating contractors with publically available red flags. Red flags come in different forms: blatantly negative reviews or a bad rating from the Better Business Bureau are two warning signs to look out for. Identifying these red flags and taking the proper steps to adjust your list accordingly is important.
After making the first round of eliminations, it’s time to get a bit more involved in the process by manually screening the remaining contractors.
Screening a Contractor
Begin by emailing or calling the list you’ve compiled and allow contractors a 24 hour window to respond. Anyone who fails to meet the time frame should, for the most part, be removed from your list (If it’s a holiday or a weekend, cut them some slack!). Think twice about stepping into any business relationship with someone who lacks prompt communication skills. During the construction phase, issues are sure to come up that will require quick action. Having a less than stellar line of communication with your general contractor can be hazardous to your deal. So, use this qualifier as your first criteria for evaluating a contractor.
Contractors who promptly respond to your inquiry deserve a phone interview. Consider these questions to gauge the contractor’s overall experience and past record working with deals similar to your own:
- Have you ever contracted on a fix and flip?
- What areas do you typically work in?
- How many projects are you currently working on?
- Do you pull permits or would I need to?
If they answer these questions adequately and professionally, set up an in person meetup at the project site. This face time is extremely valuable when it comes to gauging your professional compatibility. Trust your instinct during the in person meetup. Does the contractor seem desperate to work? Did they show up on time? Did they actively listen to you, or did they mostly sell themselves? These are all things to consider when selecting a general contractor.
For those that make it through your first meeting, the next step is to request references and samples of previous projects. References are the only concrete piece of evidence vouching for the contractor in consideration. Contact them and discuss the pros and cons of their experience working with the contractor. Ask for specific things the contractor does well, and areas for improvement based on the reference’s working experience with them. Finally, ask to visit the job sites to see the work for yourself.
After you have collected references, you should have a relatively clear choice in mind, or at the very least a decision to make between 2 or 3 good options.
How to Select a Real Estate Agent
A trusted real estate agent provides an extra set of eyes and expert knowledge of the local market you’re working in. In many towns and cities, comparables vary block by block. A house might have an ARV of $400,000 on one street but the same house might only appraise for $325,000 on another. To retain solid margins, it’s in your best interest to record appraisal amounts as accurately as possible. Knowing your numbers is arguably the single most important factor in completing a profitable deal. The common saying, “you make your money when you buy, not when you sell” is is still as true as ever. The right real estate agent will help make sure you buy right.
Flipping requires a plan and an execution as close to schedule as possible. A qualified real estate agent can make sure that your plan is realistic and actionable. A good agent should analyze the market effectively while advising you on competitive purchase prices and accurate ARV’s. Real estate agents often specialize in one or two locales, granting them advantageous knowledge and experience dealing in certain areas.
You may not even need an agent: some of the most successful real estate investors we know flourish without one and do so because of their specialization and knowledge of an area. For example: we have a close relationship with an investor who works solely in one city in New Jersey without an agent. This structure works great for him. He lived in the city he invests in for 15+ years, has close relationships, and is highly engaged in the community. This combination grants him the ability to competitively buy and sell without the help of an agent. Consider consulting an agent if you do not have this type of experience, or at least some of it!
Where To Look
Real estate agents exist on a spectrum. Some work on the side while others are fully engaged: their lives revolve around their clients. Work with an agent who matches your level of commitment to the business. Use similar steps as you would to select a general contractor to locate and vet potential agents. Consider expediting the process by attending a local REIA meeting or real estate meetup. There are a ton of agents at these meetings which means you can meet more than one at a time, and get recommendations from other people in the network!
Most importantly, choose an agent you feel comfortable working with long term. If you plan on flipping multiple properties, establishing a positive working relationship with a trustworthy agent is only going to benefit you.
Finding an Attorney
Some investors believe they can manage the large amounts of paperwork and documents that pour in during a deal. Those who are highly qualified and experienced may be able to. For most of us, though, a lawyer to read through the fine print can save us hours of time and headaches.
Nothing good comes from signing a document you don’t fully understand. With potentially hundreds of thousands of dollars on the line, the ramifications can be disastrous. Real estate purchases are often the largest financial transaction a person will take on. Like having a qualified real estate agent to guide you through a neighborhood for investing, partnering with an attorney who specializes in real estate transactions is equally as important to navigate the jungle of paperwork you’ll have on your hands.
What do Real Estate Attorneys Do?
A good attorney protects your interests. He or she will sort through the documents that build up throughout the various stages of your investment and confirm that everything is fair and reasonable. Before legally binding yourself to a contract, a lawyer will grant you peace of mind that everything is in place and adequately serving you. An attorney will also negotiate on your behalf should the need present itself. One who specializes in real estate can navigate you through the processes associated with different types of real estate. For example: the paperwork for purchasing and selling a single family home from the MLS is different than the paperwork for dealing with a multi family home owned by a bank.
How to Find One
Lawyers also exist on a spectrum. Some are well intentioned and professional while others are in the practice of making a quick buck. Some are broad practicing attorneys who work in many areas of business; others practice in niche industries. You might consider asking fellow investors for recommendations of local attorneys who have specifically worked on fix and flip deals. Working with a real estate attorney who is highly focused in the niche will be beneficial: they will help you navigate any potential problems that might arise native to the real estate space.
Qualify your attorney by asking him or her some questions:
- Have you ever worked with a fix and flip investor?
- Do you work mostly in this area?
- Is it a fixed fee or an hourly fee?
- Can you write me a written engagement letter which clearly explains the information of our partnership?
Asking these questions will not only measure the experience of said attorney, but also bind them to a legal agreement that guarantees their promise on services provided.
Finding a Source of Funding
It is extremely important to build a relationship with a reliable source of funding for your fix and flip deals. Your financing partner may quite possibly be the most important member of your team; remember, no cash, no deal.
While there are many sources of funding, one of the most popular for fix and flips is a hard money loan. Because hard money lenders are quick to act and have flexibility in their underwriting process, they are ideal for fix and flip investments.
The field of available hard money lenders grows every day. With so many options to consider, it is vital to have a strategy to narrow down your search and separate illegitimate lenders from reputable ones.
Google is your ally in distinguishing a good hard money lender from a bad one. Take the first step to search for negative complaints surrounding the lender in consideration. However, don’t expect to find any one firm with a squeaky clean slate of reviews; it is hard to keep 100% of people happy 100% of the time! Continue to dive deeper into the reviews: does the lender respond to a negative review and try to ameliorate the issue? Lenders who are responsive to reviews, both good and bad, are often the ones you want to do business with. Responsiveness indicates professionalism and a commitment to long term relationships with borrowers. Unresponsiveness may be indicative of either the bait and switch or the catch and release.
Avoid the Bait and Switch
Be on high alert for this tactic. In the bait and switch, a lender will advertise unbelievably great terms for their loan programs. Inexperienced borrowers will often jump at this opportunity, not understanding that the terms are too good to be true. Once the lender has secured a borrower who has already passed on other lenders, the terms of the loan are completely restructured. New terms will include higher interest rates and less money. Unfortunately, the borrower in this scenario has already invested so much time in finding a lender that they must accept the terms or risk losing the deal. Fix and flips require speed and the borrower must make their purchase and begin renovations without wasting any more time.
Avoid The Catch and Release
Look out for the catch and release. Just as with the bait and switch, a lender practicing this strategy will offer unusually low interest rates to lure a borrower in. The lender then proceeds to collect processing and application fees to “work through” your loan. Once the fees have been submitted to the lender, all communication ties are cut with the borrower, leaving them with no other options. They must cut their losses and move on to another lender. In this scenario, the lender never had any intention to fund a loan, only to collect a fee and move on to the next eager and gullible investor.
How to Choose
Once you’ve eliminated those who are unethical, follow similar steps for finding the best lender for your deal. Ask them for areas of speciality, past experience, background information and anything else you see fit. Also consider discussing potential lenders with other investors as they are often the most valuable source of referrals and high quality information. Possibly the most important thing to consider is finding out how fast a lender can close on a loan. As a flipper, loans should be secured as quickly as possible. Speed is of the utmost importance when choosing a hard money lender.
At ABL, we know how important it is to fund our investors projects quickly and effectively. We average a 5-10 day close and have even closed loans in as little as 48 hours. We are a transparent lender. We do not bait investors by advertising extremely low interest rates. Our rates are competitive and consistent throughout the loan process. We do not collect legal and processing fees until there is a strong possibility of a loan closing. And if it doesn’t, we do our best to refund any fees that have already been paid!
So, follow this guide to assemble your first fix and flip team. If done correctly, a team will be your most valuable asset in going from property to profit. Not every team will be perfect, and some pieces may require modifications on a deal to deal basis. Your success is dependent on knowing who you work most efficiently with and who can help provide the highest ROI for flips.