Quite obviously, potential profits are enormous. More specifically-and I prefer to be specific as opposed to sounding like some get rich real estate infomercial that are intentionally vague and leave potential investors dazed and confused-the potential annualized income should and can fall between $100,000 and several hundred thousand dollars a year. The potential for this type of money is contingent upon how many flips are turned a year, with the expectation that the average, properly executed flip should yield $30,000 to $60,000 a hit. Thus, earning $100,000 to $200,000 a year is not unreasonable. Once again, your typical bread-and butter, Grade A, shelf-ready, by-the-book flip will yield the investor $30,000 to $40,000 on average per deal.
The following is a prototype transaction: The value of the home when you buy it is $300,000. You're able to secure a LTV of 95 percent on a new loan. That equates to $15,000 down. It takes nine months to build. Let's say at the end of the nine-month period it's worth $350,000. You put this property on the market, which you had originally purchased at $300,000 nine months ago, for $365,000, just to add a little margin in case you have to go down in price. You sell this property, put it under contract, and close it for $355,000. Your expenses are approximately $10,000 for escrow, commission, title insurance, etc., (minus the $15,000 you have sunk into the 95 percent LTV loan). That's a total of $25,000 in expenses. Minus this $25,000 from the sale price of $355,000, nets you $330,000. Consequently, since you bought the property for $300,000, that's a $30,000 net profit. This should be your minimal threshold, because anything less than that starts to have a diminishing point of return. And as stated earlier, you're getting in very shaky territory when you're netting less than $30,000 a transaction, because if anything goes wrong, like a shift in the market or unexpected price reductions, you could potentially be at a loss.
Other factors, such as market duration for a particular flip and where you buy your product, are determinative of profit as well. Luckily, this multitude of situational basics are controllable by you the investor. Since I'm based in Pasadena, California, I traverse the Green Triangle, a self-described geographical market region consisting of Phoenix, Las Vegas, and Riverside, California. Working multiple markets can be a critical hedge given that some markets may outpace other markets in appreciation.
To bring this into perspective as it relates to not making repeatable mistakes and by being dependant on only one market, I hearken back to my days as a commercial real estate broker in the Los Angeles office of Marcus & Millichap (M&M). The succinct adage I remember the most was "surprises kill deals." Those memorable words are attributable to the sales manager at M&M at the time, a guy named Ron Kotick. Mr. Kotick was a menacing and brutally honest sales manager who was more intimidating than likeable.
More agonizing, Ron Kotick was the type of person that, if at any time if he thought you might be coming close to putting a wrench in one of your own deals, you had second thoughts of that happening if for no other reason than to avoid the wrath of Kotick. Hence "surprises kill deals," and killed deals mean no paycheck-not only for you, but for good ole M&M as well. And if for any reason Mr. Kotick thought you were the least bit responsible for this screw-up, you would never hear the end of it.
To give you a better sense of the office politics and overall environment in which I thrived in back then, let me be a little bit more specific. Mr. Kotick and I shared a connection in that we both come from a Jewish heritage. There was a cadre of Jewish professionals at Marcus & Millichap in the Los Angeles office. In a positive way, I always considered it a sort of Jewish Mafia of Brokers, Inc. Mr. Kotick, I always thought, considered me his bastard child given my longitudinal split between the Christian and Jewish worlds. (And as luck would have it, my stepmother, Maxine VanVoorst, is Jewish as well). Nonetheless, despite our love/hate relationship, Mr. Kotick instilled into me the importance of details in real estate investment transactions, and how the lack thereof (meaning not knowing the details), kills deals and contributes to many a lost potential profits. In so many ways, Mr. Kotick's demeanor was like that of the character Alec Baldwin in the movie Glengarry Glen Ross-the greatest movie of all time about real estate brokers-and made a lot of us at Marcus & Millichap succeed early in our careers. For this contribution, I thank Mr. Kotick tremendously.
Since being meticulous and detail oriented in your deal structure-whether it be in house flipping or commercial brokerage-is critically important if you want to reap the potential profits that await you, then it is vitally important in allowing the least amount of deal slippage as possible. As a result, pipeline management is a skill set not to be underestimated. It behooves you to be engaged as much as possible in the marketing, due diligence, and loan structuring of your escrowed deals. To be non-attentive is foolhardy. Remember surprises kill deals.
(The latter passage was an excerpt from the recently released book, The Flip: The True Life Story of How a Successful New Tract Home Investor Went from Zero to Hero, Back to Zero. To learn about Mr. Potter's expertise, go to http://www.theflip.tv/ and discover why New York Times bestsellers, PhD's, and HGTV hosts have raved about The Flip, a real estate docu-fiction which chronicles the real estate crisis before, after, and now. The book was also an Amazon Kindle reader bestseller).
As a member of the National Association of Realtors and the National Association of Home Builders, D. Sidney Potter began his real estate career in 1992 as a mortgage operations consultant for Synergy Consultancy Group, and proceeded to work for Marcus & Millichap and Sperry Van Ness as a commercial real estate broker selling shopping centers and storefront retail. In addition to being a former member of the International Council of Shopping Centers, he holds a BA, 2 MBA's and part of a Doctorate from Pepperdine University. Most recently he served on the Board of Directors for two major HOA's in Las Vegas.
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