Trap # 2: The Buy, Fix, Flip Fiasco

There is the golden rule of business. This is not the golden rule you learned in Sunday school. The golden rule of today’s business is that he or she who has the gold makes the rules. They make the rules and then they enforce them. Banks require that when you to agree to their deal you must live or die on their restrictive and limiting rules.

I also want to address purchasing a foreclosure at a tax auction or sheriff sale. You’ll have to comply with their rules. When you’re buying a property in that venue, where you have an auction, you’re buying the property without ever seeing the inside of it. It’s boarded up, it’s papered up, you can’t get in, you’re not going to see it. You can’t bring your appraiser in. You can’t bring your inspector in. You can’t get in to do it. This is what I call Real Estate Gambling. If you buy it, pig in a poke, you have no idea what you’re getting into. Plus, you have to pay for the purchase with all cash, on the spot, no contingencies, and no title insurance.

The Flipping Straight Jacket

In 2015, HUD (Department of Housing and Urban Development) issued an anti-flipping rule. It states there’s a 90-day minimum from acquisition to disposition. If you try to flip your property prior to that 90 days, they’re not going to allow it.

When it comes to 90 days to 180 days, they will allow it on a refi if you are selling to FHA (Federal Housing Administration) borrowers, but then they require a second appraisal. Who’s paying for that? It’s you. The bottom line is that you, as the seller, are going to have to pay for a second appraiser and then the bank, or other lender, will pick the lower of those two appraisals. If the appraisal comes in lower than the purchase price, well, then the buyer will have to come up with a higher down payment to cover the gap and they’ll be offered/receive a smaller loan.

The Buy And Flip Fiasco Fix

We're not doing The Buy, Fix, And Flip, Fiasco nonsense. We're not likely buying a property which needs major Tis (Tenant Improvements). We're buying a property which is cash flowing, which is making money; whether it's an office building or an apartment building and so forth. Could you improve it over time, make it worth more? Of course, you could. When it comes to your apartment maybe you want to take a vacant unit, and fix it up, spruce it up with new paint, new carpet, but that's a minor project. It's rare you're going to have to do major work.

If you have a major tenant who is moving out of your shopping center and new one is moving in, that's more money. I agree; no question about it. However, when was the last time in your REO buy, fix, flip business that a potential buyer put up half the cash for you to do the rehab? That's what happens in a commercial retail deal. Depending on the deal, the retail tenant puts up usually 30%, 40%, 50%, 60% for new tenant improvements. That's not the case with residential property; that's not going to happen. With commercial real estate, we get out of the buy fix and flip fiasco. Improvements for commercial real estate is run by a different set of rules. And the margins are amazing. The time freedom is amazing and building true wealth is the answer for having financial security.

Want to find out how easy it is to find cash-flowing commercial real estate in 3 easy steps? Take my free mini course now. Absolutely no obligation. 

Dream Bigger! Succeed Faster!

Take Care,
~Doc Haller