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Foreword
“You have to learn the rules of the game. And then you have to play better than anyone else. ~ Albert Einstein
Since I was a young boy, I always had a passion for building things, whether making go-karts out of old grocery store crates and carriage wheels or forts using old discarded building materials. I was very creative, and creating things from scratch was fun for me.
But growing up in the boroughs of New York City in the ’70s, watching as the Twin Towers of the World Trade Center were being built and gradually raise into the sky just fascinated me. I knew then that someday I would be involved with buildings and real estate in New York City (NYC).
After college, I started my career as a project manager with a major bank to renovate large office buildings in NYC. After gaining a few years of experience, I then moved onto another position with another financial institution as a project manager, responsible for constructing a large skyscraper in NYC. I then spent over 30 years in the Corporate Real Estate environment as an executive in many global capacities overseeing operating budgets in the $100’s of millions.
I started with residential Real Estate about 30 years ago when I purchased my first home and performed all the renovations with the help of a few willing relatives. While working in corporate real estate as a side gig, I bought a few properties, fixed them up, and sold them for a profit. Some I held and rented then sold after a few years.
When my time in the corporate world was up, I decided to devote all my time to the residential side and started a Real Estate Investment Company with a business partner. After several projects with contractors that were not too reliable, we came across an opportunity to start our own General Contracting (GC) business.
A General Contractor working on one of our projects had an out-of-state opportunity and was looking for someone to take on his workers after he left. My partner and I discussed it, and with our experience, we decided to take the chance to start the GC business and perform the construction solely for our projects.
Soon after contracting several of our own projects, a few investors heard what we were doing and asked us to GC their projects as well. So, now I spend most of my time working with new and experienced investors with their properties as well as ours.
While attending Real Estate Networking meetings and speaking with new investors, I realized that many watched those “Flipping” shows on television and really didn’t know what is really involved in this business. They all had false illusions of grandeur and no clue how to get started or what was really required.
Many believed all they needed to do was find a fixer-upper, decorate it with pretty tiles and paint, and the buyers would come knocking at their door to buy the house. One newbie actually said, “My wife loves to decorate our house, so I thought it would be a good idea to get into flipping houses.” I asked him if he knew anything about the real estate business, and his answer was, “What is there to know? You buy a house, fix it up and sell it for a profit.” True story…
Over the past few years, I assisted several investors with their home inspections and walk-throughs and kept them from making some pretty big mistakes in judgment. So after hearing and seeing all these issues and struggles new investors go through, and with my experiences, I decided it would be a good idea to write a book.
I hope to help those just starting out or who want to get into the Home Flipping business understand this is not a scripted TV show – this is real life. In real life, you are dealing with real money, and in this business, if you are not experienced, you can lose a lot. This is not a simple business; you need to be knowledgeable and have the time to dedicate yourself.
With the home-flipping business, there are many topics to cover. I will try to review the basics, give some insight into what to expect, and reveal some of my many good and bad experiences. This can be a very rewarding business if taken seriously with a full commitment.
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Chapter 1
The Truth
“Who you are tomorrow, begins with what you do today.
~ Tim Fargo
Have you ever watched those “House Flipping Show” on TV and said, “WOW, that looks so easy, I can do that?” Then you decide to give it a try and find out you don’t know where to get started, or you do and then lose a lot of money?
This happens with new investors all the time; they turn on the television to watch a “Flipping Show” where the couple makes tens of thousands of dollars and gets the real estate investment bug.
The truth is, this business can bring high returns but can also bring tremendous losses. Keep in mind that this is reality real estate with real money, not reality television, where the show is edited to make this look easy.
I attended a real estate seminar where the instructor starred on a reality “Flipping Show.” The premise of the show was a single mom buying and flipping homes. If you watch the show, the director made her look like she was doing all the work herself. When in reality, she did none of it! She let us in on the show’s secret; the director would have her hold a hammer, hold a paintbrush, then cut the scene and bring in the pros to do all the work. If this business were as easy as shown on television, we would all be real estate moguls.
Being a real estate investor myself, I have to say I enjoy watching these shows. It brings great satisfaction watching an old, deteriorated home being transformed into a beautifully decorated showpiece. Watching to see how much they get the property for, how they decorate, what changes they make, and the grand finale-how much money they made.
At the end of each show, no matter which it is, they all show basic investment accounting: “We paid $200,000 for the house; put $50,000 in construction; sold the house for $350,000 and made a profit of $100,000!” Wow, that is amazing! Right? Well, the problem with this is their presenting gross profit only, not net profit. What they are leaving out are the “HOLDING COSTS.” Holding costs could be an additional 30% or more of the total project cost!
Not to mention, Uncle Sam wants his cut as well; capital gains and state taxes can be another 25-30%.
So instead of a profit of $100,000, it would be more like $30-40,000. Not a bad profit but not precisely what is conveyed to the viewers. They need to glorify the outcome so viewers are astonished and will keep coming back week after week. If they were truthful and showed the actual outcome of $20-30,000 profit, it may not be as astounding.
It’s very rare, if ever they show a loss. What they will say is, “after one month on the market, we still haven’t received an offer and lowered the price by XX dollars.” In TV talk, that means they did not sell the house for a huge profit and may have taken a loss.
Also, what they fail to mention is that the characters in these shows get paid a per-episode fee. Do you really believe they have the time to find and manage all the properties they are flipping and do a show? Not without a lot of help.
These shows have really glorified the real estate investment business and make people believe all you need to do is find a property, fix it up and make a huge profit. As in the example above, in truth, it is reality television made to look easy, where they can cram entertaining content into a 1-hour show. When in reality, that is the farthest from the truth. These shows do not give the detail that goes into how difficult the process truly is.
They don’t tell you or explain how many houses they placed offers on before one was accepted. How the funding was obtained actually to purchase the house or, as mentioned, what the holding costs were.
Have you ever seen a building inspector visit the project site and fail an inspection on these shows? That part was left on the editing room floor. Or do they mention going through the building permit process or zoning? You don’t hear about these things because it is all done behind the scenes prior to shooting the show by many of the production assistants.
I can assure you it is not as easy as these shows make it seem. You may spend countless days and nights searching for properties. Then you will make offers on 15-20 or more properties before one is accepted that meets your criteria. Unless you are extremely wealthy and have a large amount of cash in the bank, you will need to get funding to pay for the property and the rehab.
The construction process can take weeks to months to complete a rehab project, depending on what repairs need to be done or if you are changing the layout of the home and adding more space. Having some knowledge of this process is paramount to flipping a home.
Before committing to a home rehab project, you need to ask yourself these questions, “Is Home Flipping for Me?” “Do I have the skills or knowledge required to complete a project from beginning to end?” “Do I have the time in my daily life to spare?” What are the requirements to run this type of business?
I am not writing this book to discourage or dissuade you from going into the real estate investing business but to give you an insight as to what you should expect when taking that leap. Points you need to know and some of the pitfalls you may come across along the way.
There is a lot that goes into buying and selling properties; if you decide this is something you want to do; you need to go into it with your eyes wide open. Again, I am not suggesting you shouldn’t do it; what I am saying is you must understand the process and educate yourself before giving it a try. There are many aspects to real estate investing, buy and hold, wholesaling, etc. This book will discuss just the buy and sell or “flipping” side.
Continued…