Property Flippers – Time to REFINANCE and think Buy & Hold

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Over the years I have been blessed to work with many seasoned and knowledgeable real estate investors. At the same time I've met many people starting out on the Carlton Sheets plan to wealth....or perhaps not to poverty....but either way I've met some that made it and some that lost it all.

LEGAL property "flipping" is the concept of financial investing 101....buy low, sell high.  But if you don't keep in mind economics 101....supply vs. demand...you will get burned.

Right now in the Texas market foreclosures are up over 50% over last year. That means...more foreclosures, short sales and homeowners selling to avoid foreclosure. In other words...supply is UP. That drives prices down on buying these properties.

HOWEVER, foreclosure rates means the number of buyers with eligible credit is DOWN. Add to that the erasure of sub-prime loan programs and you have a marked decrease in demand or at least demand from qualified buyers.

So just because you can buy that home for $125,000 and comparable sales tell you the market value of $170,000 is that enough information? If you are only using 4 or 5 comparable sales does that really take into account the increased number of homes on the market today vs. the past 6 months? Does it really predict future market stability with changes in the mortgage business?

Here's a strategy that several of my top clients are executing with their own specific tweaks but overall the same basic perspective.

1) Cash-out refinance existing properties now to take out equity. Create as much liquidity to handle vacancies and also to take advantage of cash sales that are more available then ever.

2) Refinance existing properties with little to no equity to improve cash flow. Create a positive cash flow situation

3) Restructure rental agreements. Offer longer term agreements with incentives for staying in the property or renewing. One such idea I heard last week was that every year the tenant renews the lease, the owner will completely repaint and refloor one room of the house.  So if you renew your lease at the end of that year, the investor will repaint and replace carpet in one room that both the landlord and tenant agree to.  Start creating a stable of happy renters.

4) Any properties you have that you wouldn't want to keep for a year or more, now is the time to try and move them to other investors. Perhaps location, perhaps the size of the property (too small....or too large). Get other investors interested in buying it from you now. Once other investors are tapped out you may not be able to move the property.

5) Take slightly stricter review of tenants before leasing. Credit guidelines are going to be tighter for some time. Just having them rent from you for 12 months to create a positive rental history probably won't be enough in and of itself to qualify them for a home loan next year. Be more selective and don't expect a return of sub-prime programs as part of your exit strategy.

This is a great opportunity to grow your real estate investment business and when the market comes back you will be sitting on a ton of real assets and equity. Develop a strategy for today's market, not last years.

©2007 Ken Stampe

Ken Stampe is a Mortgage Loan Originator, Mortgage Author and Mortgage Loan Officer Instructor living in Dallas, TX. Ken provided his first client a mortgage loan in 1996 and writes about home buying and mortgages to help clients make smart home mortgage loan decisions. Contact by email at Ken@KenStampe.com

What resource do SMART home buyers use?... Mortgage Calculator Bank.com

Comments (3)

Michael Cooper
Alliance Group Real Estate - San Diego, CA
Michael Cooper, San Diego Realtor
Property values historically have doubled or tripled every 10 years - the key is being able to hold on throughthe down times...
Aug 23, 2007 10:38 AM
Ethan Dozeman
Realty Executives Platinum Group - Grand Rapids, MI
Real Estate in Grand Rapids
I have started a couple of investment groups to deal with buy for cashflow hold for appreciation.  Now is the time to buy I feel.
Aug 23, 2007 11:18 AM
Kaushik Sirkar
Call Realty, Inc. - Chandler, AZ
Even those who plan on building equity via 'sweat'....its just hard to generate meaningful short term appreciation in this market!
Aug 23, 2007 12:40 PM