1. Look for high appreciation markets. Your market data research will make this very evident. The highest "Top 10" or "Top 25" appreciating markets in the country will on average change every four to five months.
2. Pick the early build-out phases of a development. For example, try to buy in phase 1, phase 2, or phase 3 versus the later phases. The earlier phases, for obvious reasons are usually priced slightly lower to generate activity. Also, there can be times when the later phases are capped off at the perceived value of the homes and, as a result, create an artificially high benchmark, irrespective of what the market dictates. As a tip off, adjacent communities and developments are usually a good way to check the comparative value, as to whether or not that particular developer has priced their home at, under or above the market.
3. Target specific homes or lots that have a long build-out at a development, since this likely ensures a better chance of the home "marinating" in appreciation-so much so that you can lick it off the side of the plates. Also, by focusing on a long build-out, this is a hedge against a slowdown that may occur in the market. This could be very important, if for example you put a home under contract three months ago, and the market has slowed and to your consternation, the sales office has unexpectedly told you that the home will be ready to close in six weeks! In this scenario, you only have three and a half months of marinating, which is hardly enough!
4. Target low deposit requirement communities. Low deposit generally implies a deposit between $3,000 and $8,000, although you may see some deposits lower then that. In terms of a low deposit, always known as an earnest money deposit, I have yet to find a builder that requires no deposit, despite claims by those late night infomercials that misinform novice investors. The objective is to put down as little money as possible since this substantially reduces risk to the investor. Ultimately, it's easier to walk away from a deal when only a small deposit can be lost, than actually closing a flip deal that is questionable at best and will be the resultant cause of a painful "green" bleed.
5. The ideal price range for flip candidates is in the $200,000 to $400,000 range. These are entry-level to mid-market homes that offer sizeable returns in terms of the actual net profit on a flip, which should be in the $30,000 to $60,000 range. If the deal size were any smaller, the actual dollar amount would be exponentially lower. It is certainly better to have 20 percent appreciation on a $300,000 to $400,000 deal, then 20 percent on a $150,000 deal.
6. In-fill areas are okay. In-fill areas are normally inner-city, substandard, or community redevelopment areas located within a market area that might be qualitatively defined as C locations, as opposed to A or B locations, which are the better and higher priced areas of a city or suburbia. Also, and because in-fill areas tend to be smaller developments, there's normally a higher demand from the public, which is a good thing from an investor perspective.
7. Ask yourself: Does the new development offer an alternative for area residents? What is meant by this question is that when looking at an investment, take a broad approach to it and ask yourself some basic questions. How does this development compare to other developments? Is there a C location next to the development that doesn't make sense and will have a negative effect on its perceived value? Or maybe you're seeing a migration from a C location because there's no in-fill development to absorb new buyers at the C location. Or perhaps the area in which they're building offers an economical and reasonable alternative for area home buyers? This would be the ideal type of demand, since this demand may drive prices aggressively upward.
(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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