|Flipping houses for a living is
a real trick
"In a business with zero income until liquidation,
what are your resources?" Kring says. "What are your abilities
to borrow? Without that, you'll never make it."
Access to large amounts of cash is the hardest part
-- and one of the biggest misconceptions -- of the business, says Raphael Isaac,
who has been rehabbing and reselling houses in the metro New York market for 14
years. For most of his deals, he puts at least 10 percent down and then has a
month to close.
"If you don't close in 30 days, they
keep your money," he says. "Then you need more cash to carry the house,
the insurance, the utilities and the maintenance. You won't get a contractor to
renovate a house for no money. People go to trade shows and buy these books and
tapes on how to buy a house with no money down. I've never seen someone actually
Working against you
Another reason that access to cash is so important is that you'll probably need
to hold on to the house for at least three months because of Federal Housing Administration
(FHA) anti-flipping regulations. Houses sold less than 90 days after they were
purchased aren't eligible for FHA mortgage insurance; those sold between 91 and
180 days are okay but require an additional, independent appraisal to make sure
the sales price is justified.
What that means for you as the
owner is additional carrying costs. Every day you own the house costs you money
in interest, utilities, taxes and insurance.
If you're taking
out a mortgage to buy the house, talk to your banker about pre-payment penalties.
"We make money when people hold loans; we lose money when they pre-pay,"
says St. Petersburg, Fla.-based banker Mark Dannenmiller. A typical pre-payment
penalty, he says, is 80 percent of the balance of the first mortgage, times the
interest rate, divided by 2. So, if you borrow $100,000 and get a mortgage for
5.75 percent, your pre-payment penalty would be $2,300 ($80,000 times 5.75 percent,
divided by 2).
Dannenmiller's advice to individuals who are
considering going full-time is to keep your job, make a little bit of money and
pay yourself back, building up your cash reserves.
by the fifth or sixth house, you don't need me anymore and you're buying houses
for cash. That's important because as soon as you (quit) your job, you can't get
To Joseph Patton, getting cash is the easy part.
The hard part is finding the properties to buy.
properties are not for sale through Realtors and they're barely available through
auctions," says Patton, who buys primarily in Philadelphia. "(Finding
them) is very time-intensive. You have to be out there on the street. It's almost
banging on doors ... It's not an insider's game but you need to put in time to
build the network."