Houseflipping and other similar business ventures

[JaredL]

One type of show that my wife and I enjoy watching are the shows about flipping houses. In case it's not clear, the practice of purchasing a house in poor condition, ideally in a nice area, renovating it, and then reselling it for hopefully a great deal more money. These shows are on networks like TLC and Discovery maybe. Three titles are "Flip That House" "Flip This House" and "Property Ladder."

I can never get straight which show is which, but on two of them they finish by telling you for how much the house is listed, and for one of them how much it actually sold for as well as how long it sat on the market which is much more informative. For the most part, they take fairly high-end areas in California or elsewhere. A typical show they would probably buy a $600,000 house and pay anywhere from $30K to over 100K in renovations and then sell for 750-900 thousand. They tend to make a profit of anywhere from 50 to a few hundred thousand. The time period is usually pretty short, a couple of months total or so. There is a lot of variation, some projects are huge and successful (say putting in a new bathroom and creating a master suite), others are smaller (just doing superficial stuff like new cabinets, countertops, and paint).

Obviously they aren't showing everything and a great deal of unseen planning goes into everything. However, the amount of money they make is pretty substantial, especially considering that they make it in just a couple months time apparently. There is a gambling aspect involved obviously, but it's the same way with any sort of investment.

Does anybody know about or have experience with this type of operation? Is it anywhere vaguely approaching as lucrative as they indicate, or are there a ton of hidden fees and things that they don't mention (they do mention real estate fees and I believe labor is part of the costs)? It seems like the type of thing that would be very good to get into, though not as easy as they make it seem, but it also seems like there is some hidden catch. It's also pretty clear from these shows that some people do it much better than others - some are horribly disorganized and make decisions that cost them a lot of money.

I'm not looking to get into this now or anything, but it seems like something to consider for later and I thought it could generate some good discussion.

[octopi]

I've always wondered what the best time to do this is (market wise). My city has a really hot real estate market right now and anything is selling. It seems like a waste of time and money to try and renovate places, except to extract value.

That being said, I often watch the same shows OP mentions, and places like California seem to make money no matter what, and the market just never seems to die.

I think the key things to look into are:
-good contractors
-good business contacts for better products and discounted material you can store
-basic knowledge on small jobs you can do yourself
-good organization and budgeting

Anyhow, I don't know if there is a hidden catch, but knowing your city (locations and house types), the market (what people are looking for) and how bad of shape the house is in and what can be salvaged or not.

[gumpzilla]

My girlfriend owns, and I think the way it works is that if you don't have a place as a primary residence for two of the first five years you own it, you pay a pretty stiff bunch of extra tax on profit you make from its sale. So that's going to eat up a good chunk of the profit from this kind of venture.

[ThaSaltCracka]

Obviously the amount of cash needed up front is big. Either that or the amount of equity needed is large to be able to get loans all the time. If you were looking to do this, I would look at buying foreclose houses instead of listed houses because the price is generally much cheaper.

[bwana devil]

i have several friends who did that for a year. and finally threw in the towel. it's a tough racked. most of the work is done in the field scouting for houses.

you stand to turn a small profit off each house you flip if everything goes right. if one house goes wrong (wrong neighborhood, more problems w/ house than expected, softer market than expected, etc) you stand to get completely wiped out.

one thing they almost never talk about are realtor fees. if a house is $800,000 and there are seller and buy commissions involved, that's another $50,000 the flipper loses. those shows never count those as an expense.

there is tons of risk involved in doing these and a small payout possible. you have to have a lot of experience in all of the areas octopi listed above.

[BWebb]

Gump makes a very good point about taxes eating up a lot of profit. Another thing to consider is that these shows are typically filmed in very highly desirable areas during the best real estate market ever. Also, I'm sure the show does not show any sort of bank fees, interest paid, etc. that also cuts into profits. Don't get me wrong, there is money to be made in flipping properties but the shows make it seem much easier than it is.

[bwana devil]

[ QUOTE ]
My girlfriend owns, and I think the way it works is that if you don't have a place as a primary residence for two of the first five years you own it, you pay a pretty stiff bunch of extra tax on profit you make from its sale. So that's going to eat up a good chunk of the profit from this kind of venture.

[/ QUOTE ]

when you sell, you dont pay taxes on the profit if you ve lived in it for 2 of the last 5 years.

if youve never lived in it you can avoid paying taxes if you take the profit and purchase more property. that's what known as a 1031 exchange.

[hawk59]

Shows like 'Flip That House' are a sign of the times, the real estate boom that we saw over the past 5 or so years was pretty much unprecedented in scope and magnitude and probably won't be repeated in our lifetimes. It's just like how in 1999 and 2000 CNBC's ratings were through the roof and everyone was a day trader.

The thing with flipping a house in this manner is that it's only going to work when real estate is going up a lot and buyers are irrational. Because after all, if you buy a house for 500k and do 100k worth of renovations why would you expect to be able to sell it a few months later for more than 600k?(you could say the sweat equity is worth something and it is but you can estimate the cost of labor and factor that in) In normal times you won't be able to, you need a crazy market where underlying values are skyrocketing.

Now there will always be times when smart real estate investors can buy properties that are truly undervalued and do work on them to bring out their true value, but the 'house flippers' have just been riding the wave and right now the ones who bought at the top are holding the bag.

[jaydub]

[ QUOTE ]
Is it anywhere vaguely approaching as lucrative as they indicate


[/ QUOTE ]

It used to be. Now, it is a far tougher way to make money. Google "Casey Serin" for a laugh or "flippers in trouble" for more informative content.

Your perception of the risks is correct, houses are by their very nature massively leveraged investments. This can cut both ways.

[ QUOTE ]

or are there a ton of hidden fees and things that they don't mention (they do mention real estate fees and I believe labor is part of the costs)?


[/ QUOTE ]

It's real estate, there are all sorts of hidden fees and gotchas, especially for the naive. Also, keep in mind that homes have huge transaction costs so the profit must be that much higher.

[ QUOTE ]

It seems like the type of thing that would be very good to get into, though not as easy as they make it seem, but it also seems like there is some hidden catch.


[/ QUOTE ]

A few years ago it was like printing money. Now it is almost always terrible idea. Think pets.com bad.

J

[citanul]

Does anyone know of a good resource for learning about foreclosed properties (locations, prices, not the "how to flip forecloesd properties" learning)?

[Alobar]

I actually feel bad watching these shows, cuz I know lots of retards are going to lose lots of money trying this because they think its such a great profit.

My landlord started doing this. He was talking about it all excitedly a few months ago, now he calls me on the first of everymonth asking me if I deposited the rent because hes got checks out and he needs every cent he can get.

[bwana devil]

[ QUOTE ]
Does anyone know of a good resource for learning about foreclosed properties (locations, prices, not the "how to flip forecloesd properties" learning)?

[/ QUOTE ]

depends what exactly you want to learn. for example here (http://www.co.travis.tx.us/tax_assessor/foreclosure/tax_sales.asp) is my county's foreclsoure's listing. just do some googling for your county's.

years ago i read www.creonline.com (http://www.creonline.com) for a bit. it has some info on there you may find helpful. i dont endorse it either way.

[Teetster]

[ QUOTE ]
Does anyone know of a good resource for learning about foreclosed properties (locations, prices, not the "how to flip forecloesd properties" learning)?

[/ QUOTE ]

Hud.gov - Click HUD Homes

FannieMae.com - Search for REO (Real Estate Owned, the 2ndary Markets term for Foreclosed properties)

FreddieMac.com - Search for REO

[jaydub]

[ QUOTE ]
[ QUOTE ]
Does anyone know of a good resource for learning about foreclosed properties (locations, prices, not the "how to flip forecloesd properties" learning)?

[/ QUOTE ]

Hud.gov - Click HUD Homes

FannieMae.com - Search for REO (Real Estate Owned, the 2ndary Markets term for Foreclosed properties)

FreddieMac.com - Search for REO

[/ QUOTE ]

This will be incomplete as not all loans are conforming. Google it, there are several online providers of this information.

J

[Borodog]

[ QUOTE ]
Does anyone know of a good resource for learning about foreclosed properties (locations, prices, not the "how to flip forecloesd properties" learning)?

[/ QUOTE ]

The simplest way is to get a buyer's agent to set up a search for foreclosed properties in your local MLS. I just ran a search and there are 127 active foreclosures in the Triangle MLS area.

OP,

It's a hard way to may an easy living. It's simple economics. Because there are so many people who have seen these shows and read the books, the demand for distressed properties to renovate is much higher, which drives up their prices and reduces profits.

There is money to be made in distressed properties; the industry is essentially one of arbitrage. But the people who make the money are the ones who have their own real estate license, can do much of their own work (the top ones also have their General Contractor license), do the legwork to identify the properties, and do the best work. Even then it isn't like printing money anymore. Profits are about the general level of profit in the economy, which hovers somewhere below 10%.

For example, I co-listed a foreclosure last Wednesday for $225,500. My CMA on the property shows a market value (once renovated) of $281 +/- $54k. That's an arbitrage opportunity. By Friday we'd had half a dozen calls, and today we've got multiple offers on the table already; essentially a bidding war.

My real advice for real estate investors is not to renovate and flip, but to renovate and rent. Positive cash flow, accrue equity, pay off the note in future dollars (which won't be worth dick in 30 years).

[jbrent33]

I have been doing this for about 5 years. I have general contractor's licence and do a lot of the work myself.

Depending on the project it usually takes me about 3-6 months to turn one over. Some of those shows, in particular the episodes on A&E with the black guy in Atlanta and the brothers in San Antonio are really bad. They are all rushing to get in and get out because the have terrible short term loans. They do a lot of things half assed and it usually shows. 2 weeks is ridiculous for any type of major renovation.

While the market is down some in general is very location dependant. There are some neighborhoods and cities where values will always rise. The main factor that I have noticed is the quality of schools. I live in Birmingham, Alabama and there are 2-3 smaller cities that are landlocked that have their own school systems that are highly sought after. Housing in these areas is will never stagnate. Combine this with the fact that said cities are fairly old, and you will have lots of older homes prime for renovation.

I recently lost a bid I placed to a speculator who competely leveled a nice 3-2 built in the early 50's in order to build a McMansion. I offered 230 and could have gotten 300+ when I finished with it. He will easily get 500-750 for what he builds from the ground up.

As long as things like this are happening I am not to concerned about the market.

A 1031 tax exchange is a great way lower you tax burden.

Any specific questions I will answer to the best of my ability.

Someone mentioned realtor fees, I have a deal with a friend, where I get a greatly reduced rate and she gets all my business. I could get a RE licence and save myself a little money, but someone who is in a big office has a lot more resource to get people in the house. She also has found some great deals for me in the past.

[Chrisman886]

[ QUOTE ]
Shows like 'Flip That House' are a sign of the times, the real estate boom that we saw over the past 5 or so years was pretty much unprecedented in scope and magnitude and probably won't be repeated in our lifetimes. It's just like how in 1999 and 2000 CNBC's ratings were through the roof and everyone was a day trader.

The thing with flipping a house in this manner is that it's only going to work when real estate is going up a lot and buyers are irrational. Because after all, if you buy a house for 500k and do 100k worth of renovations why would you expect to be able to sell it a few months later for more than 600k?(you could say the sweat equity is worth something and it is but you can estimate the cost of labor and factor that in) In normal times you won't be able to, you need a crazy market where underlying values are skyrocketing.

Now there will always be times when smart real estate investors can buy properties that are truly undervalued and do work on them to bring out their true value, but the 'house flippers' have just been riding the wave and right now the ones who bought at the top are holding the bag.

[/ QUOTE ]

I agree with all of this.

[octopi]

Has anyone renovated an entire apartment building (like a walk up, three or so floors)? Is this something you are considering building up to after you flip enough houses?

[jbrent33]

[ QUOTE ]
Has anyone renovated an entire apartment building (like a walk up, three or so floors)? Is this something you are considering building up to after you flip enough houses?

[/ QUOTE ]

I have looked at a couple of small (6-8 units) places but I am alway scared of the potential disasters. Rewire/plumb house<<<<<<rewire/plumb 8 apartments.

Then you have to deal with managing them. I have one rental house and it's not to bad but I can see it becoming a huge pain in the ass with a bunch of tennants. The you have to hire a property management company that takes a cut off the top.

[NajdorfDefense]

[ QUOTE ]
[ QUOTE ]
Has anyone renovated an entire apartment building (like a walk up, three or so floors)? Is this something you are considering building up to after you flip enough houses?

[/ QUOTE ]

I have looked at a couple of small (6-8 units) places but I am alway scared of the potential disasters. Rewire/plumb house<<<<<<rewire/plumb 8 apartments.

Then you have to deal with managing them. I have one rental house and it's not to bad but I can see it becoming a huge pain in the ass with a bunch of tennants. The you have to hire a property management company that takes a cut off the top.

[/ QUOTE ]

While I agree with you on almost all of this, for good properties hiring a mgmt co may be the best idea as they may charge you less for better properties/less troublesome tenants, and to make some numbers up - if you're making 15% on the rental, paying 5% per year to not have to deal with it is a huge savings if it allows you to 'multi-table' 20 apts instead of just 2.
Virtually all the successful people I know in this biz use one, YMMV. Their time is better spent finding properties, lining up financings, etc.

[IggyWH]

[ QUOTE ]
[ QUOTE ]
Is it anywhere vaguely approaching as lucrative as they indicate


[/ QUOTE ]

It used to be. Now, it is a far tougher way to make money. Google "Casey Serin" for a laugh or "flippers in trouble" for more informative content.

Your perception of the risks is correct, houses are by their very nature massively leveraged investments. This can cut both ways.

[ QUOTE ]

or are there a ton of hidden fees and things that they don't mention (they do mention real estate fees and I believe labor is part of the costs)?


[/ QUOTE ]

It's real estate, there are all sorts of hidden fees and gotchas, especially for the naive. Also, keep in mind that homes have huge transaction costs so the profit must be that much higher.

[ QUOTE ]

It seems like the type of thing that would be very good to get into, though not as easy as they make it seem, but it also seems like there is some hidden catch.


[/ QUOTE ]

A few years ago it was like printing money. Now it is almost always terrible idea. Think pets.com bad.

J

[/ QUOTE ]

J,

I understand your points that you made, but why am I supposed to believe that this is more than just a scare tactic to keep less people in the know about something that appears to be very profitable?

When I casino whored, I didn't care about telling anyone about the information that I knew to help others to get free, easy money. However, I soon found out that I was in the MAJOR minority in that thinking and have taken my fair share of crap for giving away valuable info.

[WhoIam]

What would be a good way for me to learn about real estate in general? I know almost nothing about the subject but might be making some investments in the next few years. Any books you would recommend? Should I just talk to people who have been successful?

[jbrent33]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Has anyone renovated an entire apartment building (like a walk up, three or so floors)? Is this something you are considering building up to after you flip enough houses?

[/ QUOTE ]

I have looked at a couple of small (6-8 units) places but I am alway scared of the potential disasters. Rewire/plumb house<<<<<<rewire/plumb 8 apartments.

Then you have to deal with managing them. I have one rental house and it's not to bad but I can see it becoming a huge pain in the ass with a bunch of tennants. The you have to hire a property management company that takes a cut off the top.

[/ QUOTE ]

While I agree with you on almost all of this, for good properties hiring a mgmt co may be the best idea as they may charge you less for better properties/less troublesome tenants, and to make some numbers up - if you're making 15% on the rental, paying 5% per year to not have to deal with it is a huge savings if it allows you to 'multi-table' 20 apts instead of just 2.
Virtually all the successful people I know in this biz use one, YMMV. Their time is better spent finding properties, lining up financings, etc.

[/ QUOTE ]

I agree that if you have a large number of units it is the only way to go. I own a beach condo that rents by the week and I always feel like I'm taking it in the ass from the management company. Of course without them it wouldn't be rented, so what can you do. I have often thought about rental property but it has never really turned me on.

There is a poster named RiKa on here who was quite a few apartments that he manages himself. He wrote a really interesting post about it I think in BBV

[elus2]

John T Reed article (http://johntreed.com/flipthathousereview.html) on his views regarding these shows like Flip That House

Has anyone read any of the books (http://johntreed.com/REIbooks.html) he published on various real estate topics?

[AJackson]

A lot of good replies here.

Obviously you need a good market.

Beyond that there are so many things that can wrong. More wrong with the house than you anticipated. Finding someone skilled and trustworthy to do the work. The house sits costing you a couple thousand a month in interest and utilities. The market cools during construction.

In my opinion unless you have substantial cash resources and are a general contractor or have really good contacts, you shouldn't try to flip houses.

[James Boston]

I had this idea, it may be being done already. I like it because it allows you to make some money and kind of help people. It's not altruistic or anything, because I clearly aim to turn a profit, but I still think the idea is pretty good. My only set backs, as this point in time, are lack of funding (I wouldn't borrow for this. It's more of a "what to do with my first million" project), and uncertainty on how to market this/how much money I would need to market it.

Here's the idea:

Essentially, I buy people's houses when they are in pre-foreclosure, lease the house to the people, and then let them buy it back when they get their finances straight.

EX. (making up the numbers) A married couple with two kids is in financial dire straights. Their home is worth $200,000. They owe $110,000. They're about to default on the loan, they have alot of other debt, re-fi is not an option, etc... I buy the house for, let's say, $135,000. This allows them to pay off the mortgage and hopefully some other debt as well. I lease the property to them. If they get behind on the lease, they are evicted and I own the property out-right, at which point I sell for a profit. As long as they pay their rent on time, I give them the option to buy the property back after 1 year (at which point their finanes are hopefully in order) for, let's say, 20% above what I gave them for it (still an amount below appraised value). Either way, I make money, and maybe keep people from losing their home.

[BeaucoupFish]

[ QUOTE ]
[ QUOTE ]
My girlfriend owns, and I think the way it works is that if you don't have a place as a primary residence for two of the first five years you own it, you pay a pretty stiff bunch of extra tax on profit you make from its sale. So that's going to eat up a good chunk of the profit from this kind of venture.

[/ QUOTE ]

when you sell, you dont pay taxes on the profit if you ve lived in it for 2 of the last 5 years.

if youve never lived in it you can avoid paying taxes if you take the profit and purchase more property. that's what known as a 1031 exchange.

[/ QUOTE ]

You avoid capital gains on the first $250k (single) / $500k (couple) if you satisfy the terms. You defer capital gains with a 1031 exchange.

It might be worthwhile getting qualified as a realtor if you did this as a business. The days of flipping fast and furious are over though (at least for now). It is probably only really profitable if you are capable of doing the work yourself.

[Banks2334]

[ QUOTE ]


Here's the idea:

Essentially, I buy people's houses when they are in pre-foreclosure, lease the house to the people, and then let them buy it back when they get their finances straight.

EX. (making up the numbers) A married couple with two kids is in financial dire straights. Their home is worth $200,000. They owe $110,000. They're about to default on the loan, they have alot of other debt, re-fi is not an option, etc... I buy the house for, let's say, $135,000. This allows them to pay off the mortgage and hopefully some other debt as well. I lease the property to them. If they get behind on the lease, they are evicted and I own the property out-right, at which point I sell for a profit. As long as they pay their rent on time, I give them the option to buy the property back after 1 year (at which point their finanes are hopefully in order) for, let's say, 20% above what I gave them for it (still an amount below appraised value). Either way, I make money, and maybe keep people from losing their home.

[/ QUOTE ]
James,
They would have to be nuts to do something like this.
1)Any bank would give them a refi.
2)If they can't afford their current payment, how will they afford yours.
3)They can sell the house and avoid the middleman, you.

Granted, plenty of idiots out there, all it takes is one.

[jaydub]

[ QUOTE ]
Here's the idea:

Essentially, I buy people's houses when they are in pre-foreclosure, lease the house to the people, and then let them buy it back when they get their finances straight.


[/ QUOTE ]

You are not a unique snowflake.

Seriously this has been done several ways by everyone from predatory lenders to two bit hustlers.

[ QUOTE ]

EX. (making up the numbers) A married couple with two kids is in financial dire straights. Their home is worth $200,000. They owe $110,000. They're about to default on the loan, they have alot of other debt, re-fi is not an option, etc... I buy the house for, let's say, $135,000. This allows them to pay off the mortgage and hopefully some other debt as well. I lease the property to them. If they get behind on the lease, they are evicted and I own the property out-right, at which point I sell for a profit. As long as they pay their rent on time, I give them the option to buy the property back after 1 year (at which point their finanes are hopefully in order) for, let's say, 20% above what I gave them for it (still an amount below appraised value). Either way, I make money, and maybe keep people from losing their home.

[/ QUOTE ]

Put this into a coherent business plan and you have Countrywide home loans.

I don't mean to belittle you so much but this is a huge industry already. Buying people's equity for profit is not a new concept.

J

[James Boston]

Banks,

I haven't done any research here. It was just a very basic idea. That being said-

"Any bank would give them a refi."

This is where good marketing comes into play. My service is offered as a solution to clearing debt instead of going further into it.

"If they can't afford their current payment, how will they afford yours."

I own the house. I'm either going to sell it in the open market, or sell it back to the original owner at a profit. I can safely rent it for less than the payment they are currently making. Also, I could possibly buy their house below market value, and still give them enough money to pay off the mortgage AND other debt.

"They can sell the house and avoid the middleman, you."

I let them keep their residence, with the option to buy it back below market value. Selling it in the open market won't accomplish this.

[Banks2334]

James,
But you are not clearing any debt for the homeowner. By buying the house and selling it back to them they have incurred more debt, same as a refi. As Jaydub pointed out, plenty of predatory lending going on out there, its a tough racket to get into.

[jaydub]

[ QUOTE ]
Banks,

I haven't done any research here. It was just a very basic idea. That being said-



[/ QUOTE ]

You should have stopped talking here. The rest is gibberish that at least made me chuckle. I would elaborate but I doubt there is any value in doing so, just more noise.

J

[James Boston]

jaydub,

Please do elaborate. I'll explain my position later. Just tell me why it's "gibberish that at least made [you] chuckle." Again, this is not an idea I'm claiming is brilliant. I just want your thoughts on why it's so terrible.

[jaydub]

[ QUOTE ]
Banks,

I haven't done any research here. It was just a very basic idea. That being said-


[/ QUOTE ]

You make this clear below.

[ QUOTE ]

"Any bank would give them a refi."

This is where good marketing comes into play. My service is offered as a solution to clearing debt instead of going further into it.


[/ QUOTE ]

So you think you can outmarket the existing players? You think consumers are not innundated with clear your debt solutions everywher from their local bank to late night tv to the lamp posts? You wanna out market billion dollar established companies?

[ QUOTE ]

"If they can't afford their current payment, how will they afford yours."

I own the house. I'm either going to sell it in the open market, or sell it back to the original owner at a profit.


[/ QUOTE ]

You have likely never sold a house. Transactional costs are relatively massive.

Most people who go into massive debt and near forclosure do not rebound to fix their credit and make a [censored] of money.

Existing market leaders make billions by attaching ridiculous rates and penalties in an effort to slowly bleed the victim dry before the inevitable. The "you can buy it back" speel is just to ease their minds.

[ QUOTE ]

I can safely rent it for less than the payment they are currently making.


[/ QUOTE ]

After you foreclose?

[ QUOTE ]

Also, I could possibly buy their house below market value, and still give them enough money to pay off the mortgage AND other debt.


[/ QUOTE ]

No you can't, there will be a dozen other vultures circling.

Show me the math where you do the latter.

[ QUOTE ]

"They can sell the house and avoid the middleman, you."

I let them keep their residence, with the option to buy it back below market value. Selling it in the open market won't accomplish this.

[/ QUOTE ]

No, if they have enough equity it might allow them to escape debt.

J

[kemystery]

[ QUOTE ]
Essentially, I short buy people's houses when they are in pre-foreclosure, pay them a stipend towards their equity

resell house at profit+equity /images/graemlins/grin.gif

[EMc]

I know that my family did something similar to this in the current house I live it. I think we got it for like 100k, give or take, and it was in pretty poor shape. The floors were pink, and it needed a ton of work. My father is an excellent, excellent contractor, and pretty much did all the work on the house, put in another 10-15k on it (I was 10 at the time so I can't tell you exactly), and it was valued at about 650k last year. It got me to thinking about this and how profitable it really can be.

[PanchoVilla]

I have read several of John T Reeds books. They are very useful. No rah rah BS, just plain simple descriptions of various techniques. Many of them have actual examples. Some are his own, some are from readers of his newsletter. I haven't subscribed to that yet. He also has his opinion or info on many of the Guru. Carleton sheets, robert allen, etc. I have bought 5 or 6 of his books, and have learned a lot from them.

Pancho

PS If you are local to SF-SJ bay area California I might be persuaded to let you borrow one to check it out.

[SossMan]

[ QUOTE ]
A 1031 tax exchange is a great way lower you tax burden.


[/ QUOTE ]

Don't you have to hold it for a year to consider it Capital Gains and not normal income?

[jbrent33]

[ QUOTE ]
[ QUOTE ]
A 1031 tax exchange is a great way lower you tax burden.


[/ QUOTE ]

Don't you have to hold it for a year to consider it Capital Gains and not normal income?

[/ QUOTE ]

I'm not an accountant and can't explain it very well, but profit that is re-invested in another property, is not taxed (more accurately it's just defered to a later date)

[ QUOTE ]
Like-Kind Exchanges - Real Estate Tax Tips


Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.

Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.

Like-Kind Property

Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.

Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.

[/ QUOTE ]

The rule for a primary residence exemption is that the property be your primary residence for 2 out of the previous 5 years. And yes, I move every 2 years.
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Primary Residence Sales
If you are selling your primary personal residence, you don't need to use the services of a neutral third party, such as Tax Free Exchange Corporation. As of May 7, 1997, the rules for sales of primary residences were changed dramatically.

However, many people, including some tax and real estate professionals, are unaware of the changes.
The long-lived rules requiring reinvestment of sales proceeds were completely repealed. Likewise, the once in a lifetime exclusion for sellers 55 & over was also eliminated.

In their place was instituted a new law allowing up to $250,000 of profit from the sale of a primary personal residence per person ($500,000 per couple) to be excluded from taxation. The full amount is available if the seller(s) used the home as their primary residence for at least two (2) years out of the five (5) years prior to the sale. This does no mean that the property had to be owned for a full five years, as some believe.

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[mmbt0ne]

[ QUOTE ]
The thing with flipping a house in this manner is that it's only going to work when real estate is going up a lot and buyers are irrational. Because after all, if you buy a house for 500k and do 100k worth of renovations why would you expect to be able to sell it a few months later for more than 600k?

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Yeah man. It's like, why would anyone pay $150 for Windows when it's free to write your own!? And cars? Shiiit, there must not be more than $10,000 of materials in most.

[tsearcher]

I do research for people that do this.

A few things that I've observed:

The successful people are either contractors or have very good friends that are contractors.

There is a lot of collusion involved. This keeps the prices down when bidding at auction.

95% of the successful people in this business were not born in the U.S. For some reason people from former Communist and/or Third World countries have a better grasp of Capitalism than people born and raised in the U.S.

It's a lot of work and a lot of pressure.

Unlike the T.V. shows, most of these homes are in bad neighborhoods. The investors are constantly dealing with theft and vandalism. Not to mention threats to their lives.

Kicking someone out of their house isn't easy.

[fish2plus2]

OP,

This is an area where people with dual citizenship in a third world country and speak the language can excel. The problem with every business in America whether its making an independent movie or renovating houses is that tons of other people are doing it too. There were probably six independent movies made in Pakistan last year, etc.

[Ignignokt]

Something people seem to be doing more and more in the superhot Seattle condo market is buying brand new units and immediately reselling them at a profit.

I've heard of people "flipping" units before construction was completed.

[NLSoldier]

this is fluff on david's, but...
re: houseflipping, when our new house went on sale (frm the construction company), it was 300k less then my parents paid for it. 4 months later, the flippers had marked it up 300k and my parents gt stuck in a bidding war fr it /images/graemlins/tongue.gif

[whiskeytown]

interesting story -

when I bought my house in Dec., it had been dropped to 245000 from 260000 - been on the market for 2-3 months -

I googled my address recently, and found he had offered it for sale - (either without a realator or not thru the offical on the market listings) for $270K about 6 months prior - Google had cached it on a couple of those sites that allow you to post houses for sale -

I think he paid $250K for it and I had it appraised at 255K -

I'm thinking in this market, with Condos dropping left and right in price, that house flipping would be unprofitable - innerestin. It didn't work for him anyways -

RB

[ReDeYES88]

I may be wrong about this, but I seem to remember that in Oregon, if you purchase a house with the sole intent to renovate it and resell it (it never becomes your primary residence), then the work must be performed by a licensed general contractor, either you or another individual.

Now this doesn't include a simple "paint and new carpet" approach, but any work that requires a building, mechanical, or electrical permit. Generally you can legally do this type of permit work on your own house if you own and live in it without having a contractor's license, but can not perform the work on a property that someone else owns.

I think there are other states with the same requirements.

Of course, as mentioned in previous posts, there are financial/tax reasons to have the house as your primary residence for a period of time.

[natedogg]

[ QUOTE ]
I had this idea, it may be being done already. I like it because it allows you to make some money and kind of help people. It's not altruistic or anything, because I clearly aim to turn a profit, but I still think the idea is pretty good. My only set backs, as this point in time, are lack of funding (I wouldn't borrow for this. It's more of a "what to do with my first million" project), and uncertainty on how to market this/how much money I would need to market it.

Here's the idea:

Essentially, I buy people's houses when they are in pre-foreclosure, lease the house to the people, and then let them buy it back when they get their finances straight.

EX. (making up the numbers) A married couple with two kids is in financial dire straights. Their home is worth $200,000. They owe $110,000. They're about to default on the loan, they have alot of other debt, re-fi is not an option, etc... I buy the house for, let's say, $135,000. This allows them to pay off the mortgage and hopefully some other debt as well. I lease the property to them. If they get behind on the lease, they are evicted and I own the property out-right, at which point I sell for a profit. As long as they pay their rent on time, I give them the option to buy the property back after 1 year (at which point their finanes are hopefully in order) for, let's say, 20% above what I gave them for it (still an amount below appraised value). Either way, I make money, and maybe keep people from losing their home.

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If they have equity in the house, why wouldnt they just sell it and pocket the equity until they get back on their feet?

natedogg

[donkeylove]

In a similar vein, a good oppurtunity exists if you can find a college town where student housing is creeping into established, older,lower income neighborhoods. I made a lot of money in 2 ohio towns in the early 90's doing this. I was buying 2200 sq.ft homes for $6500-$8000 and putting 5k into them. I would rent these 5 bedroom houses at $250 a room and have a waiting list. I held onto them for about 5 years and sold them for 40- 50k when I moved too far away to keep them. I have seen this situation in a number of towns(never that cheaply )where colleges are expanding into established old neighborhoods. I was only like 20 at that time, and it was much easier to start with low cost housing and rent, then to try and get financed and flip. The properties often literally payed for themselves in 6 months, and it was free money after that.