CHAPTER 3: The Players
There are almost as many players in the real estate game as there are properties. Understanding how each of them fits into the grand scheme and the role each plays is essential. It is important for you as an investor to be able to utilize all of your resources to their fullest potential. You will need to know how to balance managing these people at times while humbly heeding to their advice during others. Maintaining control of your situation at all times is the key. This is your business and your money. You will need to act in the best interest of that business. At the same time, many of the individuals you will be working with will also be working in the interests of their business and money. Learning to tell the difference and leveraging the two will be the secret to unlocking your success.
Lawyers
Although attorneys are often intimidating, they are an essential part of real estate. Real estate law is complicated and bureaucratic, and it changes often. Having a professional on your payroll who is up on those changes and who can effectively keep you aware of them is invaluable. When large amounts of contract work are involved, an attorney can advise you about some of the legal aspects of contracting that you may easily overlook. Your attorney can also help you compose the necessary paperwork for buying or selling a property and make sure the right type of property exchange takes place. Therefore, finding a real estate lawyer who is knowledgeable and who can make you feel comfortable is perhaps one of the most critical moves you will make in the business. You will depend on your lawyer to review and compose contracts with your best interests in mind. Your lawyer is not only your legal eyes, but your ethical ones as well. Therefore, it is important to find an attorney who is sort of a reflection of yourself.
Start by finding lawyers in your area who specialize in real estate. An attorney who specializes in real estate will be the most educated and knowledgeable in the field. Once you locate several lawyers in your area, meet and interview them. If you can, do this in person or, if you find one or two in particular that you really like after conducting initial phone interviews, schedule a consultation with them, so that you can introduce yourself, explain your business plan, and determine if there is chemistry for a working relationship. It is crucial that you feel comfortable with your attorney. Even if you find one who seems particularly educated in the field, if you do not feel comfortable with him or her, keep looking.
Once you find a lawyer with whom you are comfortable, it is important to determine not only his rate structure, but also exactly what those rates entail. The trust in even the best working relationships can be shattered when unexpected surprises turn up on invoices. Make sure you clarify whether you are being a charged a flat or hourly rate for services. If you are being charged hourly, confirm exactly when service commences and ends. When you contact your attorney to perform a duty that he does not regularly do for you, ask him how much you will be charged or to explain how he will be billing you for the service.
Be honest with your lawyer. He can be a great tool in your success, but he must know and understand your position before he can truly do so to the best of his ability. If you have concerns about a property or project, share them with your attorney. He will be able to help you determine the best next steps, which may not always be something that you are ready for or are willing to accept right away. Your lawyer is objective. He is the one who will take the emotional aspects of the business out of the picture and advise you solely on facts.
When selecting an attorney, be careful to avoid conflicts of interest, which can exist in many forms. Real estate lawyers are often, themselves, also investors. Likewise, they may represent other investors or even local real estate brokers or agencies. It is important to locate a lawyer who is acting in the best interest of his clients, not his own agenda. You do not need to find a lawyer who does not represent others in the same field. In fact, you would probably find that task a virtual impossibility. However, you should feel confident that the attorney you select can act in the best interests of his clients independently and not according to his own agenda or the agenda of a particularly high paying client. A professional attorney should and will advise you that there are potential conflicts of interest during your consultation and provide you with any applicable information that will help you make a decision without violating the privacy of his clients. If a lawyer does express such a concern to you, give serious consideration to what he tells you. The conflict may be something that can be resolved or overcome. On the other hand, it may be best to find another attorney.
Brokers and Agents
First, we should start out by distinguishing the difference between a broker and an agent. The only real difference is that, in most states, only a broker is actually licensed to list property, whereas an agent sells property. Both titles require some form of education and training as well as a license to either list or sell property in the state in which they do business. Typically, most buyers work with an agent while most sellers work with both a broker and an agent.
To further complicate matters, in the contemporary world of real estate, you will often find yourself working with both sellers’ and buyers’ agents. A sellers’ agent is the traditional real estate professional that many associate with the purchase or sale of a home. He is simply someone homeowners contract to sell their home in exchange for a commission from the sell.
A buyers’ agent is a more recent addition to commonplace real estate transactions and is a professional hired by individuals interested in purchasing a house. Some buyers simply do not have the time or the desire to search for property themselves, so they hire an objective professional to do it for them. This can be both a good and a bad thing for sellers. On one hand, a buyers’ agent is impartial. Unlike with typical homebuyers, who can form an attachment to a piece of property based on emotion, sentiment seldom plays a role in the decisions of a buyers’ agent. Instead, the buyers’ agent has been given provided with a list of needs and wants of the buyer he or she represents and evaluates homes based solely on those guidelines. However, this can sometimes work against a seller. Sometimes, when a home appeals to the emotions of buyers, that aspect can be used as a selling tool. For instance, even though the entire house needs new carpet, if the kitchen reminds a potential buyer of her grandmother’s kitchen and evokes good memories from her childhood, she might be persuaded to buy the house, in spite of the expense and headache of having to install new carpet. A buyers’ agent, however, is simply going to make a note that the house needs new carpet. If the buyer has stipulated that the house must have new carpet or carpet that is in good condition, the house will be crossed off the list without any consideration to any sentimental appeal any other part of it might have had.
So, what is the advantage of using a buyers’ agent and how do they earn their money? For a particularly busy buyer, using a buyers’ agent simplifies the search process and significantly shortens it by quickly weeding out those properties that do not fit what the buyer is looking for. Buyers’ agents earn their commission in several ways. Sometimes, a seller’s agent will offer to divide his commission with a buyer’s agent who can produce a viable purchaser. In other situations, it is actually the buyer who is paying the agent’s fee, but be forewarned that some buyers will slip clauses into their offers stipulating that the seller will pay the commission for the buyer’s agent.
Because those who flip houses can often find themselves paying the commissions for the both the buyer’s and the seller’s agents in a single transaction, many who look to get into flipping attempt to avoid the use of professionals all together. Although this may initially net higher profits, it can be detrimental. As the sources with the most inside information about local properties, real estate professionals are your lifeline in the world of flipping. Good ones cannot only tell you what properties are on the market, they can also tell you what properties will be coming on the market. They can also tell you what neighborhoods are booming and which ones are dying. All of these are reasons why it is important to find a local real estate agent with a reputation for being dynamic in the field in the area you intend to target. Then, talk with this person. Let him or her know who you are and that you are looking to begin a career flipping houses. Chances are, he or she will be happy to give you the lowdown on local properties and maybe even give you a briefing on your competition. In the end, the commission fees of a real estate professional often pay for themselves in the form of the invaluable resourcefulness of the agent.
Finding a regular agent with whom you can form a sort of partnership can be one of the best moves you make for your business. If you work regularly with a particular agent, over time, that agent will come to know exactly what you are looking for and may even begin to tip you off about potential properties before they hit the market. To that agent, it is a guaranteed commission. This also alleviates you of much of the time-consuming burden of finding properties, because you will have someone already looking for you. Spending less time locating your next flip allows you to dedicate more time to your current one, which translates to a faster turnaround and a larger profit.
The areas of specialization in real estate are varied. For the most part, real estate investors work with residential brokers or agents who specialize in investment properties. In some regions, mostly in and around larger cities, a distinction is drawn between those professionals who deal strictly with retail residential and those who specialize in investment properties. However, in the majority of cities and towns, investment and retail property is handled by the same firm. In these cases, certain agents will often specialize in investment properties. If this is the case in your area, when you begin searching for an agent, be sure to tell those professionals whom you interview that you have a particular interest in investment property.
The truth is, finding the right real estate professional can be a bit like dating. You may have relationships of varying lengths and intimacies with several people before you find the one that you want to stick with for life. In summation, some tips to keep in mind during your search include:
• Find a visionary. When it comes to investment property, it is important to work with someone who can see beyond cosmetics. An agent who seems to recognize or comment on such aspects as the foundation, bone structure, character, woodworking, layout, etc., as opposed to one who focuses on aspects such as paint color, wallpaper, or carpeting is usually a bit more on the visionary side.
• Make sure there is no conflict of interest. The simple truth is that many real estate professionals are investors themselves. If you are only ever going to be getting hand me downs that your broker or agent has passed up, then there could be a conflict of interest. This does not mean that having an agent who is also an investor is bad. However, if you find yourself in that particular situation, it is a good idea to make sure that either the type of properties in which you invest or your target area is different from that of your realtor. This will allow you to form a healthy camaraderie without threatening your relationship or your business with unhealthy competition.
• Conversation is important. You will be doing a lot of talking to your agent. You should feel comfortable talking candidly to your agent and feel confident in the advice he or she gives you. It is difficult, though, to address the conversational aspects of your relationship with your agent without also discussing tact. Although you may become very close with your realtor, it is very important that business can also become professional and that your agent equally recognize when a decision should be primarily deferred to you.
• The agent should know your target area. This is not strictly a reference to geography. A good professional will also know if there are any government grants or tax breaks available for property improvements in the area. A particularly adept professional will also be able to offer you some useful information such as the crime rate and whether or not it is rising or declining.
• You should never feel pressured to purchase a property. The trick to being a good agent is not so much knowing how to sell a house, but to whom. In short, if your agent is a good listener, he or she will be able to recognize when a piece of property may not be a good fit for you, and will not attempt to box you into a purchase you really do not want to make.
• Find a realtor who can close the deal. Your realtor should know what motivates both buyers and sellers. A sale is a two-way street, so your professional should know how to read the needs of sellers as well as of buyers.
Accountants
Accountants are individuals who cannot only keep your money straight, but can help you take maximum advantage of governmental tax breaks. Since your accountant will be handling the money matters of your business, it goes without saying that your accountant should be someone with whom you are comfortable discussing the details of your finances. If you can, find an accountant who is also knowledgeable about real estate. These individuals will be the most current about the various tax breaks provided to those individuals who purchase investment property. We will discuss these laws in more detail in a later chapter. As in your search for a lawyer and a real estate professional, interview several accountants who have a reputation in the field and who are known to specialize in real estate, and find one with whom you click.
It is understood that being honest with your accountant is critical. Not only is it important for him to know where you stand financially, but the clearer the picture you can paint him of what is really going on the better he can advise you, not merely how to spend your money, but how to earn it and where to go to get the capital you need. Hiding big mistakes or dark spots from your financial past will hurt you and will prevent your accountant from being able to do his job accurately. He has to know what is going on and before he can make an honest and fair assessment.
Once you find an accountant with whom you work well and whom you trust, consider utilizing his talents to manage your various project budgets. He can be a great source in helping you move on from projects that can eventually become money pits. If he is controlling the reins, it is easier for him to stay firm about the stopping point in your budget than it will be for you, because your accountant is concerned only with your bottom line and has not formed the sentimental attachment to a property that you have. When you have poured sweat, tears, and lots of your own money into something, it is easy to become personally attached to a project. Your accountant, however, is concerned about your financial well-being. His attachment is to your finances, and when he starts to see them becoming unhealthy, he will draw the line at a point where you might not be able.
When seeking out an accountant for a real estate business, it is a good idea to find one who specializes in real estate. Many intricate tax laws come into play in the world of real estate, and you are going to need someone who is familiar with them and how to apply them. An accountant whose primary clientele has been manufacturing businesses, for example, may be very good in a manufacturing setting, but if he is not familiar with real estate, then his expertise may not seem so strong in handling your affairs. If an accountant tells you he is familiar with real estate laws, ask him what other clients he has that in the property investment business. If a potential accountant claims to have real estate knowledge but has no clients in that business, it is probably a good idea to keep searching.
Time is money in real estate, so it is also important to find an accountant who is responsive. When you interview accountants, tell them you expect this. If they cannot deliver, keep looking. If you hire an accountant who says he can give your affairs priority on a moment’s notice and then does not, find a new accountant. Real estate is a fast-paced environment. The difference of a few hours can cost you a property and, subsequently, potentially a rather large profit. An accountant who costs you more money than he helps you save or earn is not an asset to your business.
Lenders
There are about as many different types of lenders as there are loans they provide. The various types of loans as well as their pros and cons will be examined in a later chapter. However, securing the right type of lender can be critical, particularly for those with less than perfect credit. Large, nationally based lenders often use a standardized process for making decisions. Often times, the department making the decision is headquarter-based, and depending on whether the company’s headquarters happen to be in the city in which you are attempting to purchase property, most of those making the decisions know nothing about you or the property you are trying to assume, other than the numbers that are in front of them. They are, therefore, going to make their decision based on the risk calculated by their computer. If the formulas of the computer software they use calculate a risk for you and the property that is good, then a national lender can be a good choice. There tends to be more stability in national institutions as well. If a sense of security is important to you, you may want to seek a mortgage through a nationally based institution. However, if you are looking for a more personable relationship with your potential lender, then seek out loans through smaller, local institutions.
Smaller institutions are often more flexible in their decision-making capabilities and are more familiar with the local neighborhoods. Although a more localized institution is still going to calculate and consider the risks of granting a loan to you, they are more likely to be in a position to consider you as an individual. In short, it is often possible to plead your case and have other factors fairly considered before a decision is made exclusively based on numbers. Smaller, local lenders may also be in a position to know that the property that does not appear to be such a good risk on paper, may actually be in an area that is experiencing a rebirth or is about to boom in popularity, which may just be enough to persuade them to grant the loan.
Some companies are in the business of exclusively financing home loans. These companies often have many different styles of loans to meet the needs of very a diversified pool of clients. Because of this, they are often more willing to work with those who have had credit issues in the past or are still working to rehabilitate their credit. These types of businesses have been the saving grace for many would-be homeowners who were unable to secure financing through a traditional banking institution. The drawback to these types of institutions, however, is that because they are in the business of mortgages, they are very familiar with the various ways that investors like to bend and play with them. Because of this, mortgage companies often attach clauses to their loans that prevent them from becoming the victims of a bad investment trade off. Therefore, would-be flippers might find themselves wading through more red tape in buying and selling with financing from these companies than with traditional banks.
Be wary of newly formed lending agencies or companies. Ideally, a potential lender will have been in business for several years. If a new lender is a branch or subsidiary of a larger, well-known company, than it is probably safe to do business there, even if it is a new establishment. Nevertheless, if you do not recognize the name or a new lender is not affiliated with a larger organization, proceed with caution. In the past, national headlines and news stories have spread the tragic tales of unknowing investors who lost their life’s savings to a mortgage lending company that simply vanished one day or shut its doors with virtually no notice and no way for customers to recoup their money. Make sure a potential lender is licensed and that there are no complaints on file with the Better Business Bureau. If there are, review the files carefully to consider whether or not the issues were resolved satisfactorily.
Make sure potential lenders know their products and services. This may seem like simple common sense, but it is a large enough trap that it still manages to snare many unsuspecting consumers. For some lenders, the issue may simply be a matter of better educating their employees, or their motives may actually be questionable. However, some lenders appear to use a tactic similar to the old-fashioned bait and switch, in which they lure buyers in with one loan offer and then either talk them into a different loan or trap them into one by disqualifying them for the first. Just remember that old-fashioned rule of thumb that if something appears too good to be true, it probably is. If a lender tempts you with a great loan and irresistible interest rate, make sure you read the fine print before signing, and always have a backup plan.
When you approach a lender about a deal, it is important that they understand you are purchasing the property for investment purposes. Some loans do not work well—or at all—with flipping houses, and it is important for the lender to understand that you will not be holding on to the property for long, so that they may: 1) ensure they offer a loan program to fit you, and 2) offer the right type of loan to you. It is also important for you to do your homework and be aware of the lenders’ products and services, in order to protect your own interest and which ones might be best for you. Many lenders invoke penalties on the early payoff of traditional loans. Since lenders are in the business of making money as well, it is a good idea to have at least some idea of what your needs are in order to prevent yourself from being locked into a loan that is ultimately going to cost you money. Relying on your lender to tell you is not typically a good idea, since lenders are businesses and not philanthropists.
If you can, find a lender that has some sort of special program for investment properties. Most investment property is so categorized because it is in need of some level of repair upon purchase. Lenders like to feel assured that they are extending a loan on a property that can support those numbers. Your credit may be excellent, but that alone is not going to be enough if the property is not substantial enough to support the mortgage. You may encounter more obstacles or difficulty convincing a lender who does not have any sort of special interest in investment properties to take a gamble on a property that you have intentions to flip.
Buyers and Sellers
Of course, those with whom you may very well have the most contact with as a flipper are other buyers and sellers. There are two types of each—those who are in the business of real estate and those who are not. Retail buyers are the everyday, average Joe home seekers. They are looking for a house in which they intend to live. Although they may sometimes be willing to do minimal rehab or repair in exchange for a lower buying price, they are often looking for a home that is in move-in condition and are not willing to purchase a piece of property that is in need of extensive work. You will most likely market your renovated properties as a retail flipper to these buyers. These customers do not view a property for its potential profitability. They are evaluating it based on its potential to be a comfortable home that meets the needs of their family and is a good buy for its asking price and location. Selling points for these customers will be matters of convenience, such as the proximity to local shopping and recreation; the quality of the local school system; and the general camaraderie amongst the neighbors.
Investment buyers, on the other hand, will be competing with you to purchase properties for the prospective earnings they can produce. Dealers most often work with these buyers. They evaluate properties based solely on their potential, not as they stand in the current situation. An investment buyer can envision a house that may appear to be a wreck to a retail buyer as a refinished masterpiece. These are the buyers you want to target if you are hoping to sell a piece of property that retail buyers may not have the time, patience, or money in which to invest. However, investment buyers are going to be looking for a low, often times near wholesale, price for the property in return for assuming it in its current condition in need of repair.
In the world of selling, a retail flipper is, of course, looking for a retail buyer. This is the person who is willing to pay retail for a nice home. Other investors will not be interested in your property unless they feel they can make some improvement to it that will net them a profit over what they paid. One exception to this may be the marketing of multi-unit or rental properties. Some investors focus on rental properties. They purchase these types of properties, rent them out as landlords, and use the payments from their tenants to pay the mortgage while the property appreciates in value, and then they resell several years later for a profit.
The trick for investment buyers is to find a motivated seller with a property in need of just enough repairs that will cause retail buyers to hesitate, but is still minimal enough that renovations can be completed in a reasonable amount of time, usually within four to six weeks. A motivated seller can be many things. He can be someone who has recently been transferred by his employer and needs to sell quickly, someone who has made an offer on another property that is contingent on the sale of their current one, someone who is seeking to avoid or resolve financial difficulties, or someone who is in the process of a divorce or on the verge of foreclosure and is being forced to sell. Once a motivated seller is located, negotiating a price that leaves plenty of room for a good profit in the end is typically very realistic.
Retail sellers, however, are those individuals who are looking to make a good profit from the sale of their home and are willing to wait for the right offer to come along. They are in no hurry to sell their property if the price is not right. This type of seller is often what the retail flipper becomes upon completion of a project, since the goal has been to bring the house to a condition that places it within the average home price range in the neighborhood in which it is located.
Whether you are the buyer or seller, consider the advantages from the perspective of the other party in relation to the property. What might be motivating him? Is there something he is not telling you that could give you an advantage? If you have ever seen the movie The Money Pit, then you do not need this book to know that there is usually a reason when the price of a house sounds too good to be true. Remember, just because a property needs improvement does not make it a good investment. If you are on the buying end, bring a home inspector with you to identify problems that the seller may not be telling you, or that he may not even know about. There is a very good chance that a motivated seller is not attempting to con you at all; he is simply unaware of some of the problems with the house. If you are on the selling end, be conservative with your asking price until you know how serious a potential buyer is. He may just be fishing to see how easily you will waiver so that he can gauge how much room he has to work with. If you have a specific number in mind, do not begin lowering it until you are both absolutely certain you cannot realistically expect to get that number, and that the buyer who is attempting to wheel and deal with you is seriously contemplating making an offer and not just looking for an opening to sucker you.
Contractors
If you become a retail flipper, you will interact with contractors. Finding reputable contractors who can complete your job at a price within your budget is essential to your success in the business. Locating a contractor who can do the work and has the time to commit to your project can be somewhat disheartening and somewhat of a catch-22. Many reputable contractors are so busy that they are simply unable to commit to completing a project within your timeline. They should be honest with you about this and, when they are, it is wise to re-evaluate how important it is to you to have that particular contractor do your work. If the project can be completed by someone else, keep looking. Finding a good contractor and reusing him for all or most of your work can be a good move for you in the end. Eventually, the contractor may cut you deals or discount his regular rates in exchange for the regular work.
Contractors can be somewhat of a mystery figure for many who have never hired or dealt with one before. Use the rule of three. The rule of three is a common contracting rule in which you commit to reviewing at least three bid proposals prior to hiring a contractor. Merely flipping open your yellow pages to a random listing and calling the first number that catches your attention will not generally yield the best results. If you know anyone who has had the type of work that you need done recently, ask him who he used and if he would recommend that contractor. Many contractors will ask their clients if they can display signs disclosing that their business is doing the work on the house. Drive your target neighborhood and look for these signs. Copy the information from those signs where you find the work impressive.
Once you have gathered at least three names and numbers, call those contractors and interview them. Be sure you are fully prepared to disclose the details of the work you need, your budget, and your timeline. Anyone who is truly professional should and will immediately advise you if he cannot submit a bid that is within your budget and time frame. If this happens, ask the contractor if he can recommend anyone who could perform the job you need within your budget and timeline. If he has not already, he should also tell you if your goals are completely unrealistic. If you would really like to have a particular contractor do the work for you but his quote is not within your budget, ask him if he needs a show house. Show houses are properties that contractors agree to allow potential clients to come view their work in exchange for discounted services. However, because one contractor tells you that your budget is unrealistic, it is not always necessarily so. Nevertheless, if you call three or more contractors and you receive the same answer each time, it might be time to reevaluate your project.
If you have not seen the work of a contractor you are considering, ask him if he has a show house or location that will let you view his completed work. Then go look at it to make sure what the contractor does will fully meet your needs. Clarify how long it took the contractor to complete the job you view, and then compare it to the project he will be doing for you. Also, ask potential contractors how many other projects they will be working on while doing yours. Sometimes even the best contractors can overwhelm or overbook themselves before they even realize it. Asking them to clarify will not only give you the opportunity to know where you stand, but will help them do a mental check and balance before committing to a job they cannot fulfill.
Once you have found three contractors who can do the work within your budget and timeline, review their bids carefully. Be sure to do side by side comparisons. Are there any supplies or fees one contractor is offering to supply in his contract that another is not? Is one of the contractors offering to get the work done sooner than the other two?
Check the amount of labor each contractor promises to bring to the project. Do any of the contractors have a larger labor pool than the others? When speaking with the contractors, did you seem to click well with any of them over the others? These are all things to consider when locating a contractor.
See the Contracts section of Chapter 4: A Legal Primer for more information concerning contracts specifically.
Home Inspectors
Home inspectors are individuals who, for a fee, can inspect a home for problems that may not be obvious to the average person. They are particularly valuable when you are considering purchasing a piece of property you intend to flip, and they are almost essential if you do not have a lot of construction knowledge. In fact, many lenders will actually require a report from a professional home inspector before they will approve a mortgage for a piece of property. A home inspector can help you determine if a potential property is a stable structure, or if the termites that have almost eaten the internal beams of the structure into sawdust will cost you any chance there might have been in reaping a profit from it. A home inspector can also give you good information about the condition of the electrical wiring, roofing, drainage, and foundation. He can tell you if there are any gas leaks or the potential for any gas leaks, if there is a problem with insulation, and if condensation or climate is likely to have or has had an effect on the condition of the property. In short, he may sound like your archenemy when he is going through a home that you were rather looking forward to reconstructing, but he could be saving you lots of money and even more headaches.
If you can, find a home inspector who has been in the business for several years and who spent time as either a construction worker or contractor before becoming an inspector. These are the people who know property best. It is also important to find a home inspector who will be frank and candid with you. It is crucial that he tell you what is wrong with a potential investment, but it is equally essential that he also tell you whether the problem can be fixed, and what it is going to cost you. Just because an inspector finds problems with a property, it does not automatically mean that it is a bad investment. You should take into consideration the cost of the repairs with the value it will add to the property and the overall effect it will have on the worth of the property. It could very well be that, in the larger picture, fixing a problem, even though it may cost you several thousand dollars, will net you several thousand more in profits when you sell the house.
Look for someone who is personable yet professional, and who has preferably worked with investors. Let him know up front that you are looking at the investment potential of the property and that you are interested in the costs and time necessary to repair problems.