Flipping property how it works
The Importance of Flipping Houses In Real Estate: Leona Estates
The 7 Critical Steps to Investing and Flipping Property
Leona Estates is not only fully focused on providing our clients with the classic investing options located here in Los Angeles. We also offer our investors a unique investment project that will take their real estate ventures to an entirely new level. The acquisition of real estate at a lower price in combination with the actions of subsequently improving, expanding, and redeveloping the house they purchase are all steps in the process called “House Flipping”. Flipping Houses allows investors to capitalize on the additional enhancements they conduct on the house to then experience the instant sale of their new and improved real estate.
The professional team at Leona Estates also considers the numerous fluctuations and tendencies of the real estate market when we assist clients with their real estate investments. Within the real estate industry, most potential buyers simply don’t have the time to completely renovate a property on their own. That being said, these prospective tenants usually choose to buy real estate that’s already been reconstructed and improved by the previous homeowners. This saves them a lot of time, but not necessarily a lot of money. The average price of a renovated property is always much higher than that of a property that still needs some work to be done in order to increase its value to livable conditions. As the square meters of the house increases significantly, so does the price.
Leona has full access to a wide range of exclusive investment properties as well as a professional team of qualified lawyers, tax attorneys, construction companies, and numerous handymen who are always able to assist investors with their house flipping ventures. We cooperate with large, wholesale construction stores that can provide with the materials to successfully flip new project. Our team is more than excited to work with you and guide you through this entire process. We’ve had many years of experience in the real estate industry, so starting a new real estate project together is what we do best. Once we help you successfully renovate your new investment, you don’t have to part with it immediately. Some of our investors selectively choose to keep this new real estate in their possession which gives them the freedom to rent out the property as a long-term investment option.
The 70% Rule
The 70% Rule has become an extremely common tool utilized by investors who take part in the House Flipping business. Following this rule ensures you don’t ever end up paying over 70% of the after-repair value (ARV) for any given property. This value is determined after the cost of necessary repairs is deducted. The main idea behind this rule is the fact that you must initially determine how much you are able to reasonably spend for the property including any additional repair or rehabilitation costs that may emerge during the process. After that is complete, you can use this number to choose a property on the market that’s within your budgeted price range. When you’re searching for the right property, make sure you estimate how much money you’ll need to make any additional repairs necessary as well.
For example, you can expect the median price for a home in Los Angeles to be about $775,000. If the ARV is determined to be $775,000 and you have to complete about $40,000 worth of repairs to completely renovate the property, you shouldn’t pay more than $570,500 for the initial purchase.
The example calculation is below for your reference:
$775,000 + $40,000 = $815,000
$815,000 x 0.7 = $570,500
As can be seen, the 70% Rule is quite easy to follow and calculate when you’re trying to ensure you don’t pay more money for your investment than you originally intended. Always make sure that you consider the full amount of money you’ll be needing to flip the home which includes the initial purchase price, the cost for additional repairs, the carrying costs, and any amount of money you use towards actually selling the property. Never forget two times closing expenses, when buying and selling property.
Why Investors Should Only Make Cash Purchases
Banks won’t issue a loan to a potential buyer if the house they want to purchase has a broken water heating system or significant roof damage. Minor damages add up and the bank does not want to offer loans for properties that require a large number of renovations. This makes it much harder for these properties to be sold even if a potential buyer has a stable salary in addition to an excellent credit history. The owners of the property in need of major renovations don’t have time to waste or the amount of money needed to make all the proper repairs. This presents a great opportunity for investors who want to purchase this real estate at a lower price.
STEP 1. INTRODUCTION
Contact the Leona office located in Los Angeles, California. You can enjoy a free consultation with us using the virtual conferencing platform ZOOM. If you are already located in the Los Angeles area or you’re planning to come here on a quick visit, we would love to arrange an in-person meeting with you at our office. Our professionals always observe the security measures set forth by established COVID-19 protocols.
STEP 2. THE INVESTMENT IS WORTH THE EFFORT
The Los Angles marketplace is an amazing location for prospective buyers to invest in the residential real estate that needs a bit of improvement. In order for you to have the best investing experiencing, paying for the real estate with cash will offer you better flexibility to flip the property.
Unfortunately, in most cases, banks don’t provide loans for real estate properties that need a lot of repairs and renovations. The best way to purchase real estate that has proven to be extremely effective for prospective buyers is either from auctions or when the real estate is considered to be “Real Estate Owned (REO)”. Real Estate Owned property is owned by a lender which usually takes form as a bank, the state, a private agency, etc.
The banks are usually happy with listing these homes on the MLS so they can get a reasonable offer on the property. These properties are the most sought-after by prospective buyers because you can purchase them just like you would buy any other home in California. The competition is usually really intense when people are trying to buy homes at a public auction but if you have Leona by your side, you will be able to make smart investment choices that align well with your personal and professional goals.
The Best Places to Find Houses Worth Flipping
In order to see a high potential for profit when your flipping a house, you need to ensure you purchase the home at a low price on the front end with reasonable repair costs on the backend. Below is a list of the best places to find a house that you can pay with cash and is worth the “flip”.
- Public Auction (usually Foreclosures): At these auctions, investors can have direct access to any type of home. Foreclosed homes are usually sold at public auctions so investors can purchase the property for a lower price than the typical market value.
- Real Estate Owned (REO): REO homes didn’t end up being sold at the public auction so they are currently owned by the lender. This lending entity is usually a bank who wants to sell the property as quickly as possible and they are always willing to accept cash only offers!
- Short Sale Properties: These properties are being sold by the owner at a marked down value that is lower than the amount of money still left on the original mortgage payment. This quick sale can be a great way for investors to get a good deal while paying with cash.
- Real Estate Wholesalers: When you work with Leona, she has exclusive connections with a network of real estate wholesalers who she collaborates with to find you the best houses to flip. The Office of Leona Estates is extremely knowledgeable of the Los Angeles markets and what neighborhoods have properties on sale for low prices. These investments are definitely worth the risk because you’ll be following the 70% Rule!
- Department of Housing and Urban Development Homes: The Department of Housing and Urban Development (HUD) is quite similar to banks when it comes to home foreclosures. If they use the FHA to insure the mortgage on a property that the lender has to foreclose, HUD reclaims ownership and then markets the property to the public for a much lower price to ensure a fast, all cash sale!
Please browse the more detailed Foreclosure Guide provided by the Office of Leona Estates to learn more information about this topic!
Flipping Houses: Top Investment Areas with Grade A to D ratings
There are amazing areas to invest in real estate all over Los Angeles. Below is a detailed breakdown of the common districts and which type of investors fall into each category.
- Grade A districts are representative of the richest housing markets that are purchased by professional that receive much higher incomes than the average worker.
- Grade B districts are just one step below Grade A. These areas are mostly represented by the solid middle class and other professionals within this classification.
Most prospective buyers invest in high-class districts to avoid working alongside the risks that come with D-class areas. When an investor chose to renovate a property located in a low-income area, the insurance premiums tend to be much higher than the actual purchase price of the real estate. When you’re choosing to start the incredible investment of flipping a house, the properties designated in the Grade A or B district are an excellent investment choice.
Los Angeles County is home to 51 cities with a total population of ~10,039,107 people. These numbers accurately demonstrate just how densely populated the cities are within the entirety of the county. This provides a large variety of options for potential investors when they’re deciding which property class and overall area is right for them. The amazing investment options in Los Angeles County also come with a large range of home prices. This contributes to an extremely diverse real estate market that our professional team is very aware of and we help you find investment properties that align well with the current state of the market. The average price for a home in Los Angeles rises about 25% since last year to $775,000. This is a clear representation of the high demand for these beautiful properties. Now, if you solely look at the average price for a home in Beverly Hills, this amount is already $3,535,000 million and rising. It is quite clear that the average selling price is very dependent upon the area in which you choose to invest. Leona Estates will help you find the area that fits best with your investment needs.
STEP 3. CHOOSE THE PROJECT COMPLEXITIY LEVEL
On average, the renovation cycle for any given property takes about 4 to 12 months to complete. The terms in which this process is done relies heavily on the individual who is spearheading the process and how much work is going to be needed to improve the overall state of the house. Some of this work requires the investor to obtain the necessary permits and approvals to legally get the renovation job done.
The Four Main Levels of Real Estate Improvement
There are four distinct levels associated with the real estate renovation process every investor should be aware of before they getting started on a new house flipping project. These levels are detailed below.
- Cosmetic Renovation: This describes a property that requires only surface level renovations to be completed such as painting, floor replacement, new light installations, plumbing replacements, etc.
- Advanced Cosmetic Renovation: This denotes a property that requires a deeper level of cosmetic renovations like replacing or refurbishing cabinets, plumbing, kitchens, roofs, and windows as well as the redevelopment of a residential area. These renovations can also include interior and exterior improvements as well. This is easily one of the best options for investors willing to take on a project with high profit potential.
- Structural/Technical Renovations: These types of properties need the structural and technical renovations to be completed on top of the cosmetic renovations described above. This process takes a longer time given the investor needs to get more permits and approvals to legally “flip” the house. A well-renovated house is denoted by both the interior upkeep like an upgraded kitchen with nice plumbing, as well as a solid network of the internal systems that keep the property running. These systems include electrical, heating, air conditioning, plumbing, roof, and insulation. The exterior is also important because a beautiful garden can definitely help the investor sell the property to a new owner who is pleased by the incredible aesthetic.
- Foundational Renovations: These renovations are the most difficult to complete because this means the home has structural issues that must be tended to before anyone is able to safely reside there. A major cosmetic update for the interior and exterior portions of these properties is also required. In addition, the actual physical work needed to flip this house, the investor must obtain a large number of permits and approvals from the proper legal entities which takes a lot of time. A project of this size could end up taking about 1 to 2 years to complete and the future buyers will definitely want long-term guarantees that the building structure, foundations, etc. are sound after the complex renovation is complete. The presence of these difficulties doesn’t stop this kind of property from being worth the investment.
Before the renovations begin, investors need to understand the system of laws that govern any potential increases in living space that may result from the property renovation. These laws restrict how plots of land and buildings can be used with respect to certain cities. Each city provides a different set of regulations regarding what can and cannot be built on the land as well as other specifications about the cosmetic features of the new building.
STEP 4. THE EXTENSIVE SEARCH FOR REAL ESTATE
Possessing the ability to find the right real estate is one of the most important parts of this entire process. Throughout this time period, you must present yourself with the utmost level of calmness and diligence when conducting your real estate search. The action of dealing with auctions, wholesalers, and REO properties can be very difficult if you don’t have an experienced real estate agent like Leona guiding you through the process. REO properties define the type of real estate owned by the bank. The banks usually take control and seize the homes that can’t be auctioned. Once the bank takes full control of the property, their main goal is to sell the property as quickly as possible in order to get the money back they originally loaned to the previous owner who couldn’t stay current on their payments. Quick sales completed by the owner usually happen when the family moves to a different city/stage, an unfortunate divorce occurs, there is a sudden death in the family, or the owner needs to get rid of the home due to personal financial circumstances. All of these options can end up being great opportunities for willing investors.
Leona Estates takes our task as a professional real estate service very seriously. We select a property for the investor that is not only priced below the market value, but also contains a sufficiently wide margin to completely cover any potential costs that arise throughout the process. These can include two rounds of closing costs and renovation costs as well. As a new investor, the best mindset you can have going into this process is one with a high level of patience. The search for the best deals is a complex numbers game that requires answering thousands of letters, making hundreds of calls, looking at over one hundred properties and making about twenty to thirty offers of them when the search is mostly complete. All of this will ultimately lead to the purchase of the perfect investment for your current stage of life. As the condition of the house declines, the overall price you will have to pay decreases as well. This provides you with the best opportunity to flip the house into a property ready for sale.
Step 5. PURCHASING REAL ESTATE
After conducting an extremely thorough search for our clients, Leona prepares a total of 5 till 20 different offers on you behave and ensure you provide approval for every single one. Many investors wonder why so many proposals need to be created if they are only buying one or two pieces of real estate. Interestingly, the process of buying real estate in the United States is much different than what can be seen in other countries around the world.
The first step a potential buyer must take is sending a legal letter of purchase to the seller. The California Association of Realtors draws up this document as the official offer. This model agreement contains all the conditions and contingencies that can be met before the investor is officially ready to close with the seller. Most of the property investors purchase are from a public auction or REO. Both the place of purchase as well as the possibility for an inspection are evaluated by the Office of Leona Estates to see if an inspection must be carried out. This inspection allows the professional property inspector to discover and identify any potential issues on the property that the prospective buyer should disclose as a contingency in the offer the Office of Leona Estates delivers to the seller. This additional assessment of the property is a crucial step in ensuring the investor only pays as much as the property is worth. During the inspection, all hidden problems will be revealed including any issues with the structure of the house, foundation, communications, and electrical wiring. Moreover, the professional inspector will check for indications that the following health hazards are present on the property: termites, mold, radon gas, etc.
STEP 6. BUILDING THE TEAM AND CONTRACTORS
During the process of buying and closing the deal, the Office of Leona Estates starts forming a team that is able to complete all the necessary tasks. Based on the issues discovered during the initial property inspection, Leona will also draw up a list of works to be completed. After you have approved this detailed list of worksheets, estimates, team personnel, and deadlines, the official house flipping process can begin.
Every single property has its own individual complexities which requires a different level of work based on the real estate in question. Depending on the volume and overall complexity of the repair that must occur for the property to sustain livable conditions, Leona will help you put together the best workers for the job. For large-scale projects, the house renovations can only begin once a licensed general contractor obtains every legal permit from the municipal construction department. Once this is complete, the renovations can begin.
STEP 7. THE FINAL PROPERTY SALE
As the investor, this portion of the process is arguably the most rewarding given you’re renovated property is now ready for sale and you can finally start making a profit. While the property is on the market, a cleaning company will be able to keep both the interior of the house and the exterior property extremely clean. This amazing aesthetic and well-groomed landscaping with be very appealing to prospective buyers.
In recent times, most home buyers like to shop for new real estate online. To ensure your property receives great offers, it is imperative for you to take high-quality photographs of the interior and exterior of the home. Leona is going to help you present your newly renovated home in the best light possible so prospective buyers can see how amazing it is before they are able to see it in-person. This can be successfully completed with the proper staging services. These are the company’s services used for properly preparing a home for sale. The overall goal is to present a lively and comfortable home through the use of remarkable furniture and décor elements within the home. This will make your property extremely attractive to the largest possible number of buyers, allowing your real estate to sell much faster for a large amount of money that may even exceed your original asking price. For expensive real estate located in more affluent neighborhoods, Leona will help you create drone tours and a 3D property tour. This can really give the buyer a great idea of how amazing the property looks from all angles. Traditional, still images don’t provide the high-level movement options seen when using drone videos or 3D walking tour.
The very next step includes advertising the sale in multiple locations through services the Office of Leona Estates has exclusive access to like the MLS. Most homes are sold on this national listing service in the United States. This listing in addition to physical means such as the “FOR SALE” sign being placed on your front lawn will help your property gain the attraction of potential buyers. Leona also provides you with the option to place your listing in property magazines, newsletters, etc. Also, high visibility open house parties for agents/brokers and prospective buyers will help showcase the beauty and value your renovated property has to offer.
THE 7 MOST COMMON “HOUSE FLIPPING” MISTAKES
The process of flipping a house can be quite difficult if you try to handle all the procedures on your own. The buying, improving, and reselling of your original investment can be extremely profitable if you work with an experienced team. The best way to ensure this process goes seamlessly is to avoid falling victim to the most common mistakes that will cause you to waste your time, money, and lead to large amounts of unnecessary frustration.
Mistake #1: Overpaying For An Overpriced Property
When a new investor wants to start a House Flipping business, the Office of Leona Estates is here to provide all the real estate assistance they need. Leona goes to the Multiple Listing Service (MLS) to search the market prices as well as the public auction, sale by owner, and other professional platforms. This can be a long and extensive process that many investors don’t want to deal with so they end up making a huge mistake. Over burdened by the frustration that comes along with a lack of inventory and significant competition for properties on the market, the investor will just purchase anything hoping the numbers will settle in the future. Even if the market is growing, this careless method is going to cause you to buy a property that is way overpriced considering you also need money to complete the necessary renovations that will entice someone else to purchase the home. The “70 Percent Rule” should always be used here to calculate the risk versus the reward.
Mistake #2: Understanding Cost Control
Many investors initially believe that the cheapest house is going to be the best investment because they can pay the smallest amount of money, renovate it, then upsell it to make a large amount of profit. What many investors don’t take time to understand, is the fact that the property is extremely cheap for a reason. If the final cost of renovations is going to be way more expensive than the house can be resold for, you’re actually going to end up losing money instead of making any. Being able to discern which properties are worth the hassle can be done by an experienced real estate agent. For property pre-inspection, our office uses a team of professional top experts, including appraisers, general contractors and contractors for various property inspections. Our team is committed to bringing together every professional you may need to cheek and renovate any property. This can be an extremely successful process for any investor if they have a detailed assessment strategy, a solid understanding of investment procedures, a rehabilitation list, and a full cost planning calendar.
Mistake #3: Lack of Money
Before making the significant investments needed to start your House Flipping business, you must first analyze your own financial situation to ensure you have the necessary funds to both purchase the initial property and then pay for renovation expenses on the tail end. There are always unplanned problems that you must have extra funds to take care of due to the additional costs that will arise.
For example, say you’ve already purchased the property and began work on the needed renovations. You begin repairing the floor and find a new problem, corroded pipes that need to be partially replaced. This could also emerge in the form of a cracked foundation, damaged electricity, a termite infestation, the appearance of dangerous mold, etc. There is no way to be completely certain about what additional costs may arise so you should also have a cash fund on reserve. Experiencing a severe lack of funds in the middle of a large project like this can lead to a terrible situation and an extreme loss of money for you as the investor. An urgent sale is never ideal.
Mistake #4: Making Excessive Improvements
The investor needs to complete research on the most common features being sold in the other homes within the same neighborhood. Premium features such as marble countertops, natural wood floors, and a spa area are amazing improvements. Unfortunately, most buyers aren’t willing to pay extra money just for these installments if the house next door is cheaper and contains exactly what they need. To avoid this mistake, every investor should conduct extensive research on the local market to see exactly what improvements most buyers expect for each specific area. Leona will complete the comparative market analysis you need to make an educated decision. Prospective buyers want to get a property that has everything they need at the best possible price. As an investor, you must complete accurate assessments on the front end about what buyers will most likely want and how you can provide this in a way that allows you to profit from the transaction. An appraisal opinion is necessary in order for an investor to make the best decisions about what improvements need to be made for a successful transaction with their new buyer.
Mistake #5: Building the Right Professional Team – General Contractor and Subcontractors
Working with professional builders who have experience working with all the renovations you need is extremely important to your success in flipping the house. Paying for the right job to be completed the first time will help you save a lot of time and money.
Mistake #6: Completely the Correct Time Estimation
Many new investors severely underestimate how much time and effort it’s really going to take to complete the full renovation process. Even after a lot of planning is completed to estimate a reasonable time for the project to be complete, the project deadline must be extended in most situations. Property renovations require a lot of time and complex solutions on the end of the investor who is spearheading the project. Additional work causes more delays which also may result in new permits and required approvals to continue. Investors should also plan for the need to add additional time onto the original completion date of about one to three months.
Mistake #7: Overpricing the Property After Repair and Improvement
You should quote your remarkable new home slightly below the market value to pique the interest of a large number of prospective buyers and ensure a quick sale. If your property stays on the market for too long, the overall profiting potential will decrease given you must continue to pay maintenance costs such as utility bills, staging, taxes, insurance, maintenance of the garden, pool, cleanliness, etc. The market will always continue to fluctuate, so smart investors should make conservative estimates based on these inevitable shifts. Leona is responsible to ensure that the improvement process runs flawlessly for her clients. For each new renovation project, Leona Estates assembles a qualified team of licensed professionals who have many years of experience in their industry and value what their positive reputation stands for. We are excited to work with you and be the reliable partner for your new, House Flipping business.The Leona’s Office starts searching for great real estate investment opportunities for client right after signing the contract. Properties with high profit potential tend to sell very quickly after being placed on the market so we ensure you have the best chance at securing these properties. Ensure your funds are confirmed will provide the seller with confidence in your financial responsibility which will make them feel comfortable accepting your proposal.