Pitfalls of flipping houses

[Cooperstown]

Hello all,

I found a house that I am discussing flipping with a couple of other people.  The house was last sold in 2006 for $135,000 and is currently on the market for $63,000.  This house is located in a good neighborhood so I don't really know why it's so cheap.  That being said my wife is risk adverse and is not comfortable with us taking this on alone.  I have found two other investors so the risk would be minimal.   One of the other people is extremely hand and has tools and knowledge to fix anything that would come up.  Obviously myself and the other individual would be helping, but we'd have an experience foreman of sorts.  We are still in the discussing it stages and I am trying to find out what the major pitfalls that can come up in these situations.  Even if we would need to sink in $30,000 to fix the property up were still looking at a pretty comfortable margin.  I have never done something like this before and it just seems like the margin is to good to be true.  Any advice would be appreciated!

[Paul der Krake]

HAve someone inspect the property for hazardous chemicals. If you realize someone used the basement to cook meth after you buy the house, you're SOL. Heard on NPR a few weeks back:

http://thestory.org/archive/the_story_100112.mp3/view

[Another Reader]

The margin is likely too good to be true.  If this house were a deal, a professional investor would likely have already picked it up.  What is the house worth TODAY after it is fixed up?  That's the "After Repair Value" (ARV).  It's probably nowhere near what the property sold for at the peak of the bubble in 2006.

Since you have no experience flipping houses, a better bet would be to find a local investor and work with him or her on one of their projects.  That way you can learn the ins and outs of flipping.  Consider joining a local real estate investors association and get to know some of the successful investors.  A good internet learning site is Bigger Pockets.  Do lots of homework before you put out a lot of dollars on a speculative investment.

[Mrs MM]

Talk to the realtor and find out more.  See if they can send you comps.  How long has the house been on the market?  In this area, deals like that do come around, but they are usually under contract in 3 days or less.  There might be something wrong and it could be a cash only deal, which could work out great.  It could be a hud home that is only open to owner occupied folks for a certain amount of time... it might even already be under contract.

You definitely want to learn more about the history and see what is going on.  If you're in Colorado, I can look it up for you.  If not, a good realtor should be able to find out all the history and let you know what is going on.

On the other hand, if it is a good value, don't wait too long!!  Like I said, here in Longmont, good deals go really fast and you have to get your offer in quickly to be considered.

[arebelspy]

ARV is the key number you need.

Find what it will be worth fixed up.  (2006 price irrelevant, what is the fair market value).

Take 70% of that.  Subtract rehab costs.  That's your MAO (max allowable offer).

For example, say it's worth 100k fixed up.  70% of that is 70k.  Minus rehab costs of 30k, the most you can offer is 40k.

[fromer14]

Check out the book "Flip" by Rick Villani and Clay Davis, it has a lot of good info about flipping.  They also have a website with their checklists, flipthebook or homefixers or something like that. 

Takes into account all the angles, estimated selling price, fixing costs, quiet costs, and minimum profit you and your investors are looking for.  They have it down to science, it really opened my eyes about flipping.