Re: Investing in house flipping

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Re: Investing in house flipping

Postby Mrxyz » Sun Mar 24, 2013 9:45 am

Hi

A friend of mine just started a LLC which buys foreclosed homes and flips them for a profit. He wants me to join as a partner with investing around 50G over one year. Financing secured from a local banker with no interest for 6 months, and thereafter 3% /year. The local banker gets 4% of sales. They plan to flip around 2 to 3 homes/ month. Returns are unknown but positive based on the fact the home will be renovated for less than what they sell for (I hope!). I know I sound very naive but I am! I am not sure if this is a good investment. The local market where they plan to flip homes is good. I know a couple of other companies who are making good money doing it. The grunt work will be done by another partner, with me and my friend as the money guys with equal partnership and rights. Other than the obvious downside of losing my money, I wonder if forum members have any suggestions / recommendations on what I should be asking (other than their past data, meeting their workers, checking their homes etc) and if this is a good idea in general (probably not!).

Please let me know if there is any other information I need to provide.

As usual, thanks a bunch for reading and hopefully responding. I have learnt a lot and plan to keep learning a lot from this outstanding forum!
Mrxyz
 
Posts: 279
Joined: Wed Feb 29, 2012 7:12 am

Re: Investing in house flipping

Postby linenfort » Sun Mar 24, 2013 9:53 am

I know some people who made a lot of money by flipping. I also know a woman, my parents' neighbor, who is in debt because she got trapped doing something similar. Well, unlike what your friend's company is probably doing, she made each house her residence for short time. (What is the exact definition of flipping again?) She finally got stuck when the real estate market crashed.
The key is not so much what couch you choose, but that you stay on it. -- boglehead Random Musings. | Wolde ye bothe eate your cake, and haue your cake?(1546)
User avatar
linenfort
 
Posts: 1190
Joined: Sat Sep 22, 2007 10:22 am
Location: Cardiff Electric

Re: Investing in house flipping

Postby tibbitts » Sun Mar 24, 2013 10:10 am

Why are you involved, given:

Financing secured from a local banker with no interest for 6 months, and thereafter 3% /year.


My limited experience is that the ability to profit from flipping is partly determined by knowledge of the local market, and partly by access to extremely cheap contractors/subcontractors. You can't pay retail prices and profit from flipping.

Here's an idea: get some estimates from local contractors for renovating your kitchen and bath. Tell the LLC guys you'll invest $50k after they do they renovations to your satisfaction for 1/3rd of the lowest "retail" estimate. Maybe somebody else with more experience with have a more refined number than 1/3rd, but I think the amount should be in that neighborhood if they're going to be successful.

Paul
tibbitts
 
Posts: 4824
Joined: Tue Feb 27, 2007 7:50 pm

Re: Investing in house flipping

Postby Mrxyz » Sun Mar 24, 2013 10:39 am

tibbitts wrote:Why are you involved, given:

Financing secured from a local banker with no interest for 6 months, and thereafter 3% /year.


My limited experience is that the ability to profit from flipping is partly determined by knowledge of the local market, and partly by access to extremely cheap contractors/subcontractors. You can't pay retail prices and profit from flipping.

Here's an idea: get some estimates from local contractors for renovating your kitchen and bath. Tell the LLC guys you'll invest $50k after they do they renovations to your satisfaction for 1/3rd of the lowest "retail" estimate. Maybe somebody else with more experience with have a more refined number than 1/3rd, but I think the amount should be in that neighborhood if they're going to be successful.

Paul


Thanks for your reply.

Yes, their contractors are on hourly rates of 7$/hr, with the 2nd grunt work manager at $1000/week. This plus the materials are the expenses in the renovation. Other costs are closing cost, broker fees and listing fees. I have seen their work and they are pretty good - better than a majority of contractors I have seen. The plan is to use granite in kitchen and bathrooms, with new appliances, plumbing and cabinets, with new flooring/rugs. All material is heavily discounted by major retailers. I have looked at the products - great quality and their prices - incredibly low! In fact, I purchased tile recently which they would have got around 20 - 30% of what I paid!
So in short, yes, their renovation costs are very low due to contractors who are not expensive and material which is low price but good quality. I am surprised that houses of around 150G have such good quality materials in the houses. In fact, my friend, who is a finance partner/manager, is renovating his own house right now using the same workers and saving a bundle.

Thanks once again for your thoughts.
Mrxyz
 
Posts: 279
Joined: Wed Feb 29, 2012 7:12 am

Re: Investing in house flipping

Postby midareff » Sun Mar 24, 2013 11:01 am

Run away, don't walk!
User avatar
midareff
 
Posts: 2311
Joined: Mon Nov 29, 2010 11:43 am
Location: Biscayne Bay, South Florida

Re: Investing in house flipping

Postby MathWizard » Sun Mar 24, 2013 11:51 am

midareff wrote:Run away, don't walk!


I was just going to say that, but rather than say that again, I'll try to explain why
I would pass.

Your friend is in an LLC, with a third person doing all the work, you just supply money.

I'd check with a lawyer to make sure that you are personally protected by the LLC. For
example, my guess it would not protect in case of fraud by the LLC.

What is the advantage to the LLC of using your money versus using the banks money at 3%?
Several possibilities:
1) The profit you will get from the LLC will likely be less than 3%, so it makes sense to norrow from you.
2) The bank is backing out, and they need to come up with $50K right away.
3) They are in a cashflow problem, and they bank won't lend them money to get through it.
E.g. The contractors have done work, and are asking to be paid, and the bank will
not lend any more money.
4) They (and the others in town) have a backlog of houses, and can't borrow money to keep going.
(Similar to #3)

Maybe you should
1) ask what they plan to use your money for, (probably to cover cashflow or to buy more houses)
2) ask to look at the books with an auditor before investing. Hopefully this would clear up
any questions about why they need the money.
3) Determine if they have any legal troubles. People could be suing them, or they
could have a judgement against them that they need the money for. I would check
with the county or state court system. I'd try the county clerk of courts first.

If they get offended, let them know that you do this with any investment, and it is just prudent
business sense. They should have prepared paperwork for the bank, so they should have
at least that to show you.

The bank may actually be feeding them houses from short sales or from properties they
have forclosed on.

The $7/hour would also concern me. The cost of labor is much more than minimum wage, and $7 is about
minimum wage. You can't get good people for that amount.

The last investors in an bubble are the ones to get hurt. Your friend may just be trying to sell
you all or part of his share in the LLC.
MathWizard
 
Posts: 1399
Joined: Tue Jul 26, 2011 2:35 pm

Re: Investing in house flipping

Postby david99 » Sun Mar 24, 2013 12:23 pm

I would talk to people that have experience flipping houses and see what they think. Someone with experience can explain the pros and cons. I knew someone that was flipping houses and he got stuck with the last one --- he couldn't sell it because it came at the end of the housing boom. So timing can be a factor. I would consider that any house that I buy I might get stuck with and have to hold onto it for a number of years because the economy changes or interest rates rise.

How much experience does your friend have flipping houses? There are people with a lot of experience trying to do this so I don't think that it's so easy to buy a foreclosed property and flip it.
david99
 
Posts: 409
Joined: Sat Mar 03, 2007 12:56 pm

Re: Investing in house flipping

Postby Mrxyz » Sun Mar 24, 2013 12:42 pm

Thanks david99 and MathWizard for your insights.

david99 wrote:I would talk to people that have experience flipping houses and see what they think. Someone with experience can explain the pros and cons. I knew someone that was flipping houses and he got stuck with the last one --- he couldn't sell it because it came at the end of the housing boom. So timing can be a factor. I would consider that any house that I buy I might get stuck with and have to hold onto it for a number of years because the economy changes or interest rates rise.


I plan on talking with some other folks also. Timing is crucial and if you get stuck with a house, you will likely end up losing money

david99 wrote:How much experience does your friend have flipping houses? There are people with a lot of experience trying to do this so I don't think that it's so easy to buy a foreclosed property and flip it.


The first partner is the 'grunt' work person, who has been flipping houses for a long time, my friend just 'entered the market' (sounds bad -does it not?). My friend is quite smart in his profession, but not proven in the business market. Great ideas do not necessarily equate to good business. So I am skeptical but open to suggestions!

MathWizard wrote:
midareff wrote:Run away, don't walk!


I was just going to say that, but rather than say that again, I'll try to explain why
I would pass.

Your friend is in an LLC, with a third person doing all the work, you just supply money.

I'd check with a lawyer to make sure that you are personally protected by the LLC. For
example, my guess it would not protect in case of fraud by the LLC.

What is the advantage to the LLC of using your money versus using the banks money at 3%?
Several possibilities:
1) The profit you will get from the LLC will likely be less than 3%, so it makes sense to norrow from you.
2) The bank is backing out, and they need to come up with $50K right away.
3) They are in a cashflow problem, and they bank won't lend them money to get through it.
E.g. The contractors have done work, and are asking to be paid, and the bank will
not lend any more money.
4) They (and the others in town) have a backlog of houses, and can't borrow money to keep going.
(Similar to #3)

Maybe you should
1) ask what they plan to use your money for, (probably to cover cashflow or to buy more houses)
2) ask to look at the books with an auditor before investing. Hopefully this would clear up
any questions about why they need the money.
3) Determine if they have any legal troubles. People could be suing them, or they
could have a judgement against them that they need the money for. I would check
with the county or state court system. I'd try the county clerk of courts first.

If they get offended, let them know that you do this with any investment, and it is just prudent
business sense. They should have prepared paperwork for the bank, so they should have
at least that to show you.

The bank may actually be feeding them houses from short sales or from properties they
have forclosed on.

The $7/hour would also concern me. The cost of labor is much more than minimum wage, and $7 is about
minimum wage. You can't get good people for that amount.

The last investors in an bubble are the ones to get hurt. Your friend may just be trying to sell
you all or part of his share in the LLC.


This is very interesting. I find the money circuit to be NOT clear. As usual if you follow the money, you can find the truth (I think).

But...............


They buy a foreclosed home for $100,000, the home needs repairs to a tune of around $25 to $30,000. I have seen the home, is nearby a school and almost all home near by are above $175,000. So there is scope for a good margin of profit (so it seems to be). So if the repair work costs are lesser, there is profit, IF the houses are bought cheap (likely from foreclosure) and sold at a higher price. But that may not be sustainable over many years. So your profits may not materialize if the money you put up gets eaten up by 'holding these homes' in case they do not sell and paying contractors.

Plus, why do they need me at all ??? Why not get more money from another bank?

Thanks
Mrxyz
 
Posts: 279
Joined: Wed Feb 29, 2012 7:12 am

Re: Investing in house flipping

Postby Valuethinker » Sun Mar 24, 2013 12:45 pm

Mrxyz wrote:Hi

A friend of mine just started a LLC which buys foreclosed homes and flips them for a profit. He wants me to join as a partner with investing around 50G over one year. Financing secured from a local banker with no interest for 6 months, and thereafter 3% /year. The local banker gets 4% of sales. They plan to flip around 2 to 3 homes/ month. Returns are unknown but positive based on the fact the home will be renovated for less than what they sell for (I hope!). I know I sound very naive but I am! I am not sure if this is a good investment. The local market where they plan to flip homes is good. I know a couple of other companies who are making good money doing it. The grunt work will be done by another partner, with me and my friend as the money guys with equal partnership and rights. Other than the obvious downside of losing my money, I wonder if forum members have any suggestions / recommendations on what I should be asking (other than their past data, meeting their workers, checking their homes etc) and if this is a good idea in general (probably not!).

Please let me know if there is any other information I need to provide.

As usual, thanks a bunch for reading and hopefully responding. I have learnt a lot and plan to keep learning a lot from this outstanding forum!


If you can afford to write off the $50k then this could be fun and educational. You might even make good money at it.

If you cannot afford to write off the 50k I'd stick it in Vanguard TSM. Most likely, in 30 years time, VG TSM will give you back more than you invested (my guess is 4 to 8 times what you invest now, ie a 4-7% return pa).
Valuethinker
 
Posts: 24629
Joined: Fri May 11, 2007 12:07 pm

Re: Investing in house flipping

Postby bmelikia » Sun Mar 24, 2013 12:53 pm

Maybe you could just ask the question. . .

Why borrow 50 k from me when you can get a 6 month - interest free loan - from the bank?

That would be my question if I was in your shoes.

Then just see what he has to say. Good luck.
"I would rather die with money, than live without it...." - Bogleheads member Ron | | "The greatest enemy of a good plan, is the dream of a perfect plan." | -Bogle
bmelikia
 
Posts: 459
Joined: Mon Jun 15, 2009 10:23 pm

Re: Investing in house flipping

Postby tibbitts » Sun Mar 24, 2013 12:55 pm

How exactly would the money be returned to you? I take it you would become an LLC member? How is the LLC taxed, and how are the members compensated? How much would the $50k be of your total investments?

I'm still not clear why they want money from you when they seemingly have a source of funds from the bank.

"Wholesale" labor can be pretty inexpensive, but the $7 seems a little low for some of the skilled trades. You probably aren't getting licensed plumbers/electricians for that, and you need to make sure everything is properly permitted and up to code. Code compliance can be tricky, even for licensed contractors. And of course you'd need to be sure everybody working on the project was insured - and generally be sure you're covered from a liability perspective.

Paul
tibbitts
 
Posts: 4824
Joined: Tue Feb 27, 2007 7:50 pm

Re: Investing in house flipping

Postby Mrxyz » Sun Mar 24, 2013 1:02 pm

Valuethinker wrote:
Mrxyz wrote:Hi

A friend of mine just started a LLC which buys foreclosed homes and flips them for a profit. He wants me to join as a partner with investing around 50G over one year. Financing secured from a local banker with no interest for 6 months, and thereafter 3% /year. The local banker gets 4% of sales. They plan to flip around 2 to 3 homes/ month. Returns are unknown but positive based on the fact the home will be renovated for less than what they sell for (I hope!). I know I sound very naive but I am! I am not sure if this is a good investment. The local market where they plan to flip homes is good. I know a couple of other companies who are making good money doing it. The grunt work will be done by another partner, with me and my friend as the money guys with equal partnership and rights. Other than the obvious downside of losing my money, I wonder if forum members have any suggestions / recommendations on what I should be asking (other than their past data, meeting their workers, checking their homes etc) and if this is a good idea in general (probably not!).

Please let me know if there is any other information I need to provide.

As usual, thanks a bunch for reading and hopefully responding. I have learnt a lot and plan to keep learning a lot from this outstanding forum!


If you can afford to write off the $50k then this could be fun and educational. You might even make good money at it.

If you cannot afford to write off the 50k I'd stick it in Vanguard TSM. Most likely, in 30 years time, VG TSM will give you back more than you invested (my guess is 4 to 8 times what you invest now, ie a 4-7% return pa).


Oh yes! I have changed my financial planning - Thanks to this forum and members and recommendation etc etc. I use the 3 fund portfolio and have already done much better than before. I love the simplicity and never realized how difficult it is to NOT do anything and be LAZY!! It is incredible how much more courage and knowledge (you think) you have once you have money (to invest) !! Money gives you (me in this case!) confidence, including (false) confidence in your ability and need to take risks, and your ability to understand a business plan!
Mrxyz
 
Posts: 279
Joined: Wed Feb 29, 2012 7:12 am

Re: Investing in house flipping

Postby KyleAAA » Sun Mar 24, 2013 1:04 pm

Do you understand the business of flipping houses? If you understand the basics and don't mind doing your homework, this could be a smart investment. If you don't understand the business, just say no. Never, ever, ever invest in something you don't understand. You aren't missing out, trust me. There will always be another opportunity.
KyleAAA
 
Posts: 5361
Joined: Wed Jul 01, 2009 6:35 pm

Re: Investing in house flipping

Postby nisiprius » Sun Mar 24, 2013 1:06 pm

I think you can make money doing all sorts of things if you personally put your heart and soul into them.

I think the idea that you can just "be the money guy"--like buying a mutual fund--continue living your life without any involvement, and have someone else do all the "grunt work" and just send you money... is unlikely.

If you know enough to be an intelligent participant in this business, why aren't you in this business yourself?

If you don't know enough to do it yourself, how can you know enough to tell whether it's a good venture or a bad one, and, when you are in it, whether it is being run well or not?

All your friend wants from you is your money. If the venture is sound, why is he getting it from you, rather than a bank? And it is not even a loan. If it were a loan, then you would have an agreement, you would know whether he's late or in default, and you would have moral and legal authority to ask for payment--even if you weren't able to collect.

You are buying stock in a pico-cap company.
Last edited by nisiprius on Sun Mar 24, 2013 1:20 pm, edited 5 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 25179
Joined: Thu Jul 26, 2007 10:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Investing in house flipping

Postby Mrxyz » Sun Mar 24, 2013 1:14 pm

Thanks for the reply Nisi and KyleAAA.

nisiprius wrote:I think you can make money doing all sorts of things if you personally put your heart and soul into them.

I think the idea that you can just "be the money guy"--like buying a mutual fund--continue living your life without any involvement, and have someone else do all the "grunt work" and just send you money... is unlikely.

If you know enough to be an intelligent participant in this business, why aren't you in this business yourself?

If you don't know enough to do it yourself, how can you know enough to tell whether it's a good venture or a bad one, and, when you are in it, whether it is being run well or not?

All your friend wants from you is your money. If the venture is sound, why is he getting it from you, rather than a bank? And it is not even a loan. If it were a loan, then you would have an agreement, you would know whether he's late or in default, and you would have moral and legal authority to ask for payment--even if you weren't able to collect.

You are buying stock in a pico-cap company.


This summarizes it clearly! Thanks! I do not want any part of this venture, but do want to know/ learn about it just for my curiosity.

KyleAAA wrote:Do you understand the business of flipping houses? If you understand the basics and don't mind doing your homework, this could be a smart investment. If you don't understand the business, just say no. Never, ever, ever invest in something you don't understand. You aren't missing out, trust me. There will always be another opportunity.


No, I do not understand the business of flipping houses! When I am given the feeling of 'missing out', I know it is likely too good to be true.

Thanks
Mrxyz
 
Posts: 279
Joined: Wed Feb 29, 2012 7:12 am

Re: Investing in house flipping

Postby nisiprius » Sun Mar 24, 2013 1:20 pm

It occurs to me that there's a risk beyond losing $50,000: the risk of further participation.

I don't think the worst case is that you write a check for $50,000 and it's gone.

Say you write a check for $50,000, and no money comes in for a while, and then he comes to you with the good news that things are going really well but its seems they are just a little undercapitalized and have a minor cash flow problem, nothing serious of course... but they desperately need a cash infusion. He doesn't want to see you lose your $50,000, he'd feel terrible if that happens, but it will happen unless you can see your way to kicking in another $50,000...

I think this sort of thing could happen even if he is 100% legitimate.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 25179
Joined: Thu Jul 26, 2007 10:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Investing in house flipping

Postby rmelvey » Sun Mar 24, 2013 1:30 pm

My father is a real estate agent in Seattle. If you could open up this new business in the seattle area that would be great... :P
User avatar
rmelvey
 
Posts: 403
Joined: Sat Sep 18, 2010 6:17 pm

Re: Investing in house flipping

Postby Raymond » Sun Mar 24, 2013 1:56 pm

How long have you known your friend?

Is he a friend in the sense some people consider their stockbrokers and "financial advisors" to be their "friends"?

:twisted:

Walk away.

If you're sitting at a poker table and can't spot the sucker, then guess who is?

If you want to "...learn about it just for my curiosity", then do it here, not from the friend.
"Ritter, Tod und Teufel"
User avatar
Raymond
 
Posts: 475
Joined: Mon Apr 16, 2012 7:04 am

Re: Investing in house flipping

Postby Mrxyz » Sun Mar 24, 2013 2:10 pm

nisiprius wrote:It occurs to me that there's a risk beyond losing $50,000: the risk of further participation.

I don't think the worst case is that you write a check for $50,000 and it's gone.

Say you write a check for $50,000, and no money comes in for a while, and then he comes to you with the good news that things are going really well but its seems they are just a little undercapitalized and have a minor cash flow problem, nothing serious of course... but they desperately need a cash infusion. He doesn't want to see you lose your $50,000, he'd feel terrible if that happens, but it will happen unless you can see your way to kicking in another $50,000...

I think this sort of thing could happen even if he is 100% legitimate.


I also thought about this and that is very very scary!! Good money after bad money! Thinking about this makes me feel like I have lost the money already!

Raymond wrote:How long have you known your friend?

Is he a friend in the sense some people consider their stockbrokers and "financial advisors" to be their "friends"?

:twisted:

Walk away.

If you're sitting at a poker table and can't spot the sucker, then guess who is?

If you want to "...learn about it just for my curiosity", then do it here, not from the friend.


I have known my friend for the last 6 years and is a colleague. He is not my financial adviser. This forum/board is!!

Thanks!
Mrxyz
 
Posts: 279
Joined: Wed Feb 29, 2012 7:12 am

Re: Investing in house flipping

Postby allenneal99 » Sun Mar 24, 2013 4:06 pm

Plus, why do they need me at all ??? Why not get more money from another bank?


That is a good question and now you must find out the answers to the obvious questions.

Have you seen the business plan? What does it say beyond the Executive Summary? It should provide estimated revenue & cash flows, indicate other "owners" and interested parties, listing of competitors and provide information about the potential location(s) that will be invested in. It will also indicate why your money is needed, your potential return on investment and when you should expect to get your money back--plus interest.

You're not going to give/lend them your money for "free" are you?

I've been a "hard-money" lender in cases such as this, and I only put money into entities that provided the information (plus much much more) above.

In the house flipping business your $50k is a drop in the bucket (especially for this mythical 2-3 houses flipped per month).

For example, how are the foreclosed homes being acquired? Will it be through a county/city auction where the bidding price can start at $100k and get bid up to $300k because two bidders needed to flex their muscles?

Beyond using investor money for the usual fix up and flip stuff -- what happens if:
- a house has a bad foundation?
- the plumbing needs to be replaced?
- the electrical needs to be replaced?
- there are termites?
- there is a contractors lien on the house or houses?
- there are multiple mortgages on the home and the first wants to foreclose and the second doesn't (or isn't ready yet)?
- there are title issues?
- there are overdue property taxes?
- the house was trashed by the previous occupants and they took everything -- including the kitchen sink?
- ICE takes some of the workers away and deadlines are not being met?
- business goes bankrupt and gets sued (debt holders will come after all "partners"--including you)?

With this business all of the above are very possible scenarios.

With $50k of your hard-earned money on the line, you should be asking lots of questions and getting lots of very specific answers. This will not be a "passive" investment. You will be up at night worried sick about your $50k and the potential "other" investments you could have done with it. And then there is the fact that you could have done nothing with it and would've been better off.
allenneal99
 
Posts: 26
Joined: Fri Sep 14, 2012 12:59 pm

Re: Investing in house flipping

Postby Bacchus01 » Sun Mar 24, 2013 4:18 pm

WIth that kind of deal from the local bank, why would he need your money?

The only reason would be if he wants to pay you less than 3%, even with the 4% of sale price, you're probably still looking at a less than 10% return.

Lots of risk for that return considering you don't have any legal right to the hard assets either.
Bacchus01
 
Posts: 401
Joined: Mon Dec 24, 2012 10:35 pm

Re: Investing in house flipping

Postby GoldenPuppy » Sun Mar 24, 2013 6:49 pm

Keep in mind that a fool and his/her money are soon parted. This will be a great test. Hopefully you make the right choice. Shouldn't be too hard to make the right choice.
GoldenPuppy
 
Posts: 18
Joined: Wed Apr 27, 2011 6:29 pm

Re: Investing in house flipping

Postby DiscoBunny1979 » Sun Mar 24, 2013 7:26 pm

I don't find a problem with flipping as long as a few things are understood:

1) You could not only loose the $50,000 but unless you have insurance to cover the "workers" anyone working on your property can sue you for damages from slip and falls or any accident.

2) Any 'profit' is taxable. In my opinion, the best scenario to "flipping" is to buy a house that is your Primary Residence (yes move in) and live in it for 2 years while renovating it. Then, sell it and none of the equity/profit is taxable to you.

3) Have you calculated the actual profit? Buy a $100,000 house with $30,000 improvements/labor that sells for $175,000? You don't clear $45,000. Why? You had to pay for at least some insurance to cover the property, insurance to cover the workers (hopefully), some property taxes for being an owner, costs of selling, your time and sweat equity, division of profit to multiple people, other costs including $$ being taxable income. Do you get a W-2 from the LLC or do you get $$ under the table?

4) What's the game plan if you want out and the folks involved have your $50,000?

5) While granite counters are nice, there are flips and there are remodels. If you are flipping whereas to make a pig look pretty, then you might be setting yourself up for lawsuits unless the houses are marketed "as is". That's because someone that expects a 'remodeled" house not to have problems. So you better market the house properly and DISCLOSE issues you or others know about! For instance, if the circuit panel needs to be upgraded and you don't take care of it, but sell the house to a buyer that is unaware of a potential fire hazard AND a fire occurs, guess who gets sued?
User avatar
DiscoBunny1979
 
Posts: 1953
Joined: Sun Oct 21, 2007 11:59 am

Re: Investing in house flipping

Postby roymeo » Sun Mar 24, 2013 7:48 pm

Either way, please ask them to quit putting in things like granite counter-top. I've been looking at real estate lately; you can tell the difference between a place that was remodeled in 2004 with the black with white flecks granite and flipped in 2013 with the discount black with white flecks granite that was left over from 2004. And I'm sure my agent knows dozens of other things that are a giveaway that someone did something to look "nice".

roymeo
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo
User avatar
roymeo
 
Posts: 975
Joined: Sat Apr 28, 2007 8:19 pm
Location: SF, CA

Re: Investing in house flipping

Postby Valuethinker » Mon Mar 25, 2013 5:56 am

Mrxyz wrote:I have known my friend for the last 6 years and is a colleague. He is not my financial adviser. This forum/board is!!

Thanks!


If you go into business with someone, a friend before, it seldom stays the same kind of friendship.

It's OK to be friends with a business partner, if that evolves by being in business together. If you started as friends, you will likely be more distant by the time you have been in business together for a few years.

being in business with someone is a bit like a marriage, only you won't get the sex ;-). But it has all the other issues of a marriage except you don't take holidays together or have the physical intimacy. You can spend more waking hours with your business partner than your wife, though ;-).
Valuethinker
 
Posts: 24629
Joined: Fri May 11, 2007 12:07 pm

Re: Investing in house flipping

Postby Valuethinker » Mon Mar 25, 2013 5:57 am

nisiprius wrote:It occurs to me that there's a risk beyond losing $50,000: the risk of further participation.

I don't think the worst case is that you write a check for $50,000 and it's gone.

Say you write a check for $50,000, and no money comes in for a while, and then he comes to you with the good news that things are going really well but its seems they are just a little undercapitalized and have a minor cash flow problem, nothing serious of course... but they desperately need a cash infusion. He doesn't want to see you lose your $50,000, he'd feel terrible if that happens, but it will happen unless you can see your way to kicking in another $50,000...

I think this sort of thing could happen even if he is 100% legitimate.



Ohh this is soooo very very wise.....
Valuethinker
 
Posts: 24629
Joined: Fri May 11, 2007 12:07 pm

Re: Investing in house flipping

Postby tinscale » Mon Mar 25, 2013 9:45 am

For what it's worth - this may not apply to your situation or location. I'm in Northern Virginia/the DC area and work at a Home Depot (HD). Per the flippers and contractors I talk to and from what I see:

the inventory of homes to purchase at bargain prices is low (unlike a couple of years ago); the average small-time contractor who spends less than $10-20,000/month is lucky to get about 10% off retail/consumer prices through HD's "bid room" (high volume contractors get more, but no where near 30%); they buy the lower price (and quality) HD brand cabinets, vanities, carpet, faucets and toilets and not the name brands; the workers doing the manual work are unlicensed but make well above $7 per hour (double or triple).

Before investing I would want to see some tax records/financial statements.
tinscale
 
Posts: 115
Joined: Fri Dec 18, 2009 12:16 am

Re: Investing in house flipping

Postby Bacchus01 » Mon Mar 25, 2013 10:36 am

I hope you pay at least $7.25/hr, which is the federal minimum age requirement.
Bacchus01
 
Posts: 401
Joined: Mon Dec 24, 2012 10:35 pm

Re: Investing in house flipping

Postby Calm Man » Mon Mar 25, 2013 10:46 am

OP, I just read the whole thread. My question is: why bother? It is not like this is a superior investment opportunity as if it was the guy who has been doing this for 30 years wouldn't need your 50K as he would have it from others or himself. My greatest concern has been stated by another. They will need more and you will have to put up more or lose it all at some point.
Calm Man
 
Posts: 2688
Joined: Wed Sep 19, 2012 10:35 am

Re: Investing in house flipping

Postby stemikger » Mon Mar 25, 2013 12:08 pm

I don't think someone with no experience has any business getting into house flipping. It's like asking a plumber to perform surgery on you. If you are really serious and want to get into this as a Career, find some old guy who has been successful at it for many years and ask him to mentor you. That means you will work for free in exchange for the knowledge.

This is not a 1 week or 2 week proposition; it is at least a year or more. All professional entrepreneurs’ say the same thing with any business. Work in the field for at least a year before you even consider going out on your own.

Real Estate flipping is the day trading of the real estate field.
Stay the Course!
stemikger
 
Posts: 2265
Joined: Thu Apr 08, 2010 6:02 am

Re: Investing in house flipping

Postby MathWizard » Mon Mar 25, 2013 12:18 pm

stemikger wrote:I
Real Estate flipping is the day trading of the real estate field.


I nominate this as the quote of the day, (at least so far :) ).
MathWizard
 
Posts: 1399
Joined: Tue Jul 26, 2011 2:35 pm

Re: Investing in house flipping

Postby newtonc » Mon Mar 25, 2013 12:24 pm

A fool and his money are soon parted:)

There's a sucker born every minute and two to take him:)

Neither a borrower nor a lender be:)


Enough said.
newtonc
 
Posts: 39
Joined: Fri Jul 13, 2012 5:56 pm

Re: Investing in house flipping

Postby garlandwhizzer » Mon Mar 25, 2013 12:48 pm

Two points. First investing in "house flipping" is a concentrated and leveraged bet on a tiny slice (DC area) of a market subsegment (real estate). It utterly lacks diversification and it is therefore very risky. Second, see the work of Professor Shiller at Yale on the long term inflation adjusted and maintenance cost adjusted returns of US real estate. While very long term real returns in US stocks are about 7%, long term real estate returns are between 0 and 1%. If you think those figures are for all real estate not the "special" DC area, consider this. Current DC prices already have "special" baked into them so your investment returns may not be special going forward. I recall smart friends in prime locations of coastal California telling me authoritatively seven years ago that real estate there was so precious and special that it could never go down in price. The "impossible" did in fact happen and some of them are bankrupt now.

Garland Whizzer
garlandwhizzer
 
Posts: 581
Joined: Fri Aug 06, 2010 4:42 pm

Re: Investing in house flipping

Postby Mrxyz » Mon Mar 25, 2013 8:24 pm

Awesome responses! Thanks!!

Very interesting to note that this 'deal' is wrong in so many ways. It sounded 'iffy' (to me) to begin with and now is plain 'horrible'.

stemikger wrote:Real Estate flipping is the day trading of the real estate field.


This just sums it up!! And I personally know a close relative who day trades and has lost 10s of thousands and is still chasing his loses using some weird charts which 'tells him' when to buy or sell!! Incredible!

And for someone like me (who thinks is conservative), to even think considering such an option.................! And to be a greater fool, I was going to 'introduce' this deal to some wealthier colleagues of mine!

Again thanks to the forum members for their time and effort!

I am sticking to my lazy portfolio, and my investment plan, and on my way to be debt free (paying off my mortgage- my last debt) in less than 4 years -Thanks to all esp YDNAL, retiredjg, nisi, livesoft and many many more.

Perhaps there is a 'natural' urge to consider other (read crazier) options when one is doing just fine with a lazy portfolio. There is no need for me/my family to risk any money. I feel pretty stupid and humbled. In future I will definitely feel less judgmental and kinder when I read posts of people with similar ideas!

Thanks!!
Mrxyz
 
Posts: 279
Joined: Wed Feb 29, 2012 7:12 am

Re: Investing in house flipping

Postby Valuethinker » Tue Mar 26, 2013 5:25 am

garlandwhizzer wrote:Two points. First investing in "house flipping" is a concentrated and leveraged bet on a tiny slice (DC area) of a market subsegment (real estate). It utterly lacks diversification and it is therefore very risky. Second, see the work of Professor Shiller at Yale on the long term inflation adjusted and maintenance cost adjusted returns of US real estate. While very long term real returns in US stocks are about 7%, long term real estate returns are between 0 and 1%. If you think those figures are for all real estate not the "special" DC area, consider this. Current DC prices already have "special" baked into them so your investment returns may not be special going forward. I recall smart friends in prime locations of coastal California telling me authoritatively seven years ago that real estate there was so precious and special that it could never go down in price. The "impossible" did in fact happen and some of them are bankrupt now.

Garland Whizzer


All very good stuff but the 7% real return on US stocks is an anomaly, not likely to be repeated:

- the long run UK average (110 years of data) is about 4.1% real. The UK has many of the same characteristics of the US stock market (longevity, corporate governance, represents global multinationals, investor and equity owning culture etc.)

- part of the return to stocks in the 20th century was PE multiple expansion (I don't have exact numbers, but I suspect over the 20th century, the US PE doubled from c. 8 times to c. 16 times, stripping out the dot com bubble-- price to book ratios would show you something similar, just as it was ordinary wisdom that stocks would once yield 5% dividend yield). That cannot reoccurr (unless something has fundamentally happened to capitalism to prevent the entry of new capital depressing returns)

- the decline in interest rates of the period 1981-2012, the greatest bull market in bonds in history (following the worst bear market probably since the American Revolutionary War) cannot reoccur (interest rates can't go that negative)

- we have very little data (c. 150 years for US data, and pre 1900 or so it gets suspect) and there is massive survivor bias. The US (and UK) 'won' the 20th century as stock markets-- lots of others dropped to zero. Remember that line: the biggest stock markets in 1910? Berlin, Buenos Aires, Budapest, Vienna, St. Petersburg, Cairo, London, New York-- many of those dropped to zero at some point.

Your best bet is around 4% real. 3.5-4.5% so a prudent man would reckon on 3-4% real. At these interest rates, 3% is probably a pretty good outcome if we get it, next 20 years.

I don't disagree with anything else (although, in the coastal megalopoli of the US, real estate prices long run have far far exceeded Shiller's averages, due to economic success (think Silicon Valley, or Hollywood, or Wall Street) plus zoning restrictions on new construction.

I view owning a house as a consumption decision *but* having lived in London 20+ years, I have benefited from an incredible house price rise. Hopefully it maintains its value in real terms now until retirement. I had thought with the recession and austerity housing prices would crash-- they have fallen c. 20% in real terms across the UK as a whole.

Conversely the costs of repair, maintenance and property taxes are often ignored in these calculations, and they are significant for homeowners.

However London's status as a safe international haven, plus weak GBP sterling, means foreign capital floods into London-- Cyprus will merely compound that. And so, London housing prices continue to defy gravity.

In New York and San Francisco, similar effects may be present, at least as long as their predominant industries (Securities & Tech) remain strong.

Neil Monnery's 'Safe as Houses. 8 Centuries of Housing Prices' is instructive. He more or less confirms what you are saying with US, Australian, French, Dutch, UK data.
Valuethinker
 
Posts: 24629
Joined: Fri May 11, 2007 12:07 pm

Re: Investing in house flipping

Postby meowcat » Tue Mar 26, 2013 7:21 am

What's the old saying? Oh yea.....Never invest in anything you don't fully understand.
Investors that profit from flipping houses are experts in real estate markets in their local area. They can generally tell you what a house is worth in a matter of seconds and be pretty much "dead on". They have excellent working relationships with many contractors. They know and understand fully how the foreclosure business works. They understand the risks of investing in foreclosures. They have a complete and full understanding of the real estate market and where it's going at any given moment. Most all of them have real estate/brokers' licenses. I hope your friend knows what he's doing. If he's been doing it for years, in up and down markets, and has remained successful, I'd say go for it, but if not.............
More people should learn to tell their dollars where to go instead of asking them where they went. | -Roger Babson
User avatar
meowcat
 
Posts: 202
Joined: Wed May 09, 2012 6:46 am

Re: Investing in house flipping

Postby Random Musings » Tue Mar 26, 2013 1:25 pm

If it's such an awesome deal, why do they want you to take away part of the profit pie?

I guess they are just being benevolent........ Either that, or you are taking most (or all) of the "money-down" risk.

RM
User avatar
Random Musings
 
Posts: 5035
Joined: Thu Feb 22, 2007 5:24 pm
Location: Pennsylvania

Re: Investing in house flipping

Postby ot1138 » Tue Mar 26, 2013 1:53 pm

nisiprius wrote:It occurs to me that there's a risk beyond losing $50,000: the risk of further participation.

I don't think the worst case is that you write a check for $50,000 and it's gone.

Say you write a check for $50,000, and no money comes in for a while, and then he comes to you with the good news that things are going really well but its seems they are just a little undercapitalized and have a minor cash flow problem, nothing serious of course... but they desperately need a cash infusion. He doesn't want to see you lose your $50,000, he'd feel terrible if that happens, but it will happen unless you can see your way to kicking in another $50,000...

I think this sort of thing could happen even if he is 100% legitimate.


Well, I think I could provide you with a little insight. We bought our home from a group of individuals who did exactly this. It was very sketchy and as best as we can put it together, it worked like this:

1. Group pooled their money together.

2. They hired local contractors at very cheap rates. They did this by paying them very little and offering them some of the upside of each sale. The contractors were hit or miss. Some were pretty good... others not so much. There were lots of code violations and things tended to break a couple of years after the sale.

3. They purchased a rehab property and allowed it to get foreclosed upon. Before that happened, they ripped all of the electronics, hardware, and even the conduit out of the walls. The property sat there for a couple of years. The partners reorganized under a new LLC (with different owners) and bought the property back for $200k less than the original price.

The math worked out like this:

$40k down
+ a few months of mortgage payments (let's say $6k total)
- $25k in materials (maybe more)
= $21k net loss...

But then they bought the same property back at a discount ($200k) less a new downpayment ($40k). At this point, they hold the property and are about $140k ahead (paper profits).

4. They rebuilt the house for about $300k. Did a great job, too. That's a lot easier when you are paying minimum wage and using stolen materials for mostly everything.

5. They listed the house for $1.3M. We ended up buying it for $950k. Here's how the math works now:

$21k net loss from step 3
+ $40k downpayment
+ $25k in mortgage payments (it sat for awhile before we rented - and later purchased it)
+ $950k sales proceeds
- $400k mortgage payoff
- $300k construction costs
= $335k profit

They did well and they repeated this for at least three houses that we know of.

BTW, the realtor representing their properties was also a partner and investor.

So what happened to everyone? We got a great house at a huge discount, and they made a huge profit for a few years work. They left the country soon after (moved back to India). None of the workers were ever paid their promised amount.

You can make a ton of money but probably not legally. Just sayin'.
ot1138
 
Posts: 122
Joined: Sun Mar 10, 2013 1:46 pm

Re: Investing in house flipping

Postby Dxbinvestor » Sun Jul 14, 2013 1:23 pm

Bumping old thread...

Generally, in real estate deals where one partner has the money and the other partner has the experience, at the end of the deal the roles are reversed.
Dxbinvestor
 
Posts: 43
Joined: Mon Jan 14, 2013 4:22 pm

Re: Investing in house flipping

Postby stemikger » Sun Jul 14, 2013 3:40 pm

Stay the Course!
stemikger
 
Posts: 2265
Joined: Thu Apr 08, 2010 6:02 am

Re: Investing in house flipping

Postby WhyNotUs » Fri Mar 14, 2014 10:21 am

They are asking you to be the "Hard Money Lender" in the deal. You can google the phrase to learn more.
There are people who do really well being hard money source. The rehabbers/flippers are often trying to tie up lots of property, have bad credit history, and limited cash and thus are in need of expensive loan money.
While it is a field with plenty of broken promises, lost friendships, and private lenders who discover their second position is worthless, there are also people who make a nice return. The ability of the hard money lender to read people, properties, and markets is critical to success. Also need to understand Dodd-Frank if you want this loan as a note on the property.
Velocity of flips is not always a sign of profit, the flippers have to get in and out of deals in order to satisfy loans and keep moving. The most sophisticated flippers can create LLCs for each property so that if one goes south, you do not have access to their other properties.
In the end, flippers are in the business of making $$ from doing the work or acting s GC and/or realtor, profit on the sale is icing on the cake. Flipper relying on the icing are short-lived.
I own the next hot stock- VTSAX
WhyNotUs
 
Posts: 391
Joined: Sun Apr 14, 2013 12:38 pm

Re: Investing in house flipping

Postby Erhan » Fri Mar 14, 2014 11:17 am

I wouldn't do it this way.

I plan to flip houses in the future, around my retirement. But the way I will do is:

- Buy the house with cash to avoid mortgage related costs
- Have a real estate agent as a partner to avoid transaction costs
- Do majority of the work yourself to save money on labor

In my mind this is a 2-3 like minded people putting in equal share of money and labor, and sharing the profit equally. Then there is a good chance of profit. If you involve others, especially banks and real estate agents, you will loose too much of your profit margin.
Erhan
 
Posts: 158
Joined: Wed Aug 14, 2013 2:27 pm


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: AE81, Geologist, jgb, mindbogle, optimpessim, SnowSkier, Tanelorn and 47 guests