So far in 2004 there have been at least three excellent new real estate books about “flipping real estate” for fast profits. They are “Fix It and Flip It” by Katie and Gene Hamilton (McGraw-Hill, New York); “The Complete Guide to Flipping Properties” by Steve Berges (John Wiley and Sons, Hoboken, N.J.); and “How to Be a Quick Turn Real Estate Millionaire” by Ron LeGrand (Dearborn-Kaplan, Chicago). All are available in stock or by special order at local bookstores, public libraries and www.amazon.com.
Maybe you are not familiar with the real estate terms “flipper” and “keeper.”
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A flipper property is held a few minutes, days, weeks or months and quickly resold at a higher price for a fast resale profit. But a keeper property is one held for long-term investment returns from both the rental benefits and the probable appreciation in market value.
Flipper properties hold special appeal to new real estate investors who want quick resale profits. Many investors in flipper properties have learned how to evaluate potential purchases and see the profit opportunities others have missed.
THE KING OF FLIPPER PROPERTIES
Without question, the king of flipper properties is Marco Kozlowski of Orlando, Fla. Ron LeGrand explains in his new book how Kozlowski paid $100 for an option from a wealthy home seller to acquire at $4 million the seller’s Orlando house, which had been listed for sale with a Realtor at $8.6 million for four years.
Kozlowski, a thirtysomething new realty investor, then hired a professional auction company, which, 43 days later, auctioned that house for $5.6 million cash. The result was a “quick flip,” $1.6 million gross profit. According to LeGrand, in his first year of flipping houses, Kozlowski acquired 119 deeds on flipper houses in the Orlando area. Today, he teaches others how to profitably flip properties.
HOW TO FIND PROFITABLE FLIPPER PROPERTIES
The key to acquiring potentially profitable flipper properties is to buy (or gain control with a purchase option) a property substantially below its true market value. Bargain purchase price properties, bought at least 25 percent below full value, offer the best flipper opportunities.
So-called “fixer-upper properties” are the obvious best choices for fast-flip acquisitions.
The key to success is to look for “dumpy” fix-up properties, which have “the right things wrong.” Examples include the need for cosmetic improvements, such as paint (the most profitable improvement of all), fresh landscaping, general cleaning and repair, new kitchen cabinets and appliances, and new light fixtures.
But avoid acquiring property needing costly but unprofitable repairs that add little or no value, such as foundation repairs, a new roof, and structural changes. The goal of most fix-up property flippers is to add at least $2 of market value for each $1 spent on fix-up costs.
Sources of “fast flip” properties include local realty agents, foreclosure sales, probate sales, divorces, bankruptcies, newspaper classified ads, unsold MLS (multiple listing service) listings more than 90 days old, vacant rental houses, absentee out-of-town owners, and properties with unpaid property taxes.
However, one of the best sources of finding flipper properties is to drive around neighborhoods that interest you. Virtually every neighborhood (except gated communities) has one or two vacant, run-down or abandoned houses. This happens even in the best areas.
Finding the owner can be a major challenge. But perhaps that owner will be motivated to sell to you at a below-market bargain price so you can make a “fast flip” resale profit.
A MOTIVATED SELLER IS THE SECRET TO FLIPPER PROFITS
To buy a property at least 25 percent below its market value if it were in tip-top condition, the secret is to locate a motivated seller.
Strong seller motivations include job transfers (including relocation firms, which offer discount prices), out-of-town investors, unemployment, divorce, financial difficulty, illness, death in the family, and health problems.
The longer the seller has owned the property, the greater the probability of a bargain below-market purchase price.
For example, suppose a house is worth $300,000. But you discover the long-time owner purchased it many years ago for just $50,000. That seller has a huge margin for negotiation.
Instead, suppose the same $300,000 house was purchased last year for $275,000. That seller has very little negotiation room without accepting a loss. Such a property is not a great candidate for a fast-flip profit.
HOW TO CREATE A TAX-FREE, FAST-FLIP REALTY BUSINESS
To make fast-flip property opportunities even more exciting, Uncle Sam is ready to make your profits tax-free. But there are some very reasonable conditions.
You must move into the property and make it your principal residence for at least two of the five years before you sell it. That’s all! This situation is perfect if you buy a run-down “el dumpo” house, move in to make it your home while fixing it up, and then resell after at least 24 months of ownership and occupancy.
Then you qualify for the great tax benefits of Internal Revenue Code 121. You can then claim up to $250,000 tax-free sales profits (up to $500,000 for a qualified married couple filing a joint tax return).
POSSIBLE DISADVANTAGES OF FLIPPER PROPERTIES
Although there aren’t any serious disadvantages of flipping properties, there are some “considerations:”
1–TAXABLE INCOME. If you quickly resell your profitable flipper property, the profit will be taxed as ordinary income. However, if you hold title to the property at least 12 months, then you qualify for the lower long-term capital gains tax rate.
Better yet, if you own and occupy the property as your principal residence at least 24 months before resale, then your profit up to $250,000 (up to $500,000 for a married couple filing jointly) is completely tax-free under Internal Revenue Code 121.
2–LOST POTENTIAL FUTURE PROFIT. A major disadvantage of quickly reselling a property for a fast profit is the potential loss of future profit. Over the long term, most properties gradually appreciate in market value. But a quick property resale will forfeit this potential long-term capital gain in return for an immediate resale profit.
3–MINIMAL FIX-UP WORK. Most bargain-priced properties need at least minimal fix-up work. Buyers of potential flipper properties should be prepared to fix-up their bargain-price acquisitions. Smart investors usually hire fix-up workers because it is usually fast and professionally completed.
CONCLUSION: Flipper properties offer quick potential resale profits. But the downside includes ordinary income tax, lost potential future profit from long-term holding, and fix-up work. More details are in my brand new special report, “Pros and Cons of Flipping Houses and Investment Properties for Fast Cash Flow Profits.” It is available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or immediate Internet download at www.bobbruss.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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