How to flip houses with no money down

Introduction

You guys have all heard this on the radio – “Hey free seminar on how to flip houses with no money down.  Seats are limited and going fast.  HURRY!”  Let me tell you the content of the seminar to save you 2-3 hours of your life.  You guys know me by now; I’m a hustler entrepreneur and always looking out for the next get rich scheme financial independence.  Man, just typing that sentence made me feel dirty.  This reminds me of when I was a kid and got mailed a chain letter.  You remember the ones – Print out this “letter,” and send $10 to the 10 names on this list and add your name to the bottom.  I was THIS close to doing it, but because I was just a kid, I couldn’t drive myself to a Kinko’s nor did I have the money to even print copies.  Wait.  Where was I?  Oh yeah, flipping houses.

Real Estate License

For the longest time, I wanted to be a realtor for some reason.  It’s probably because every realtor I’ve worked with have driven really nice cars.  Therefore, I just assumed they must be doing really well for themselves.  Anyway, I think to get your realtor license, you just need to take 2 weeks of classes, pass some tests, and then find a realty business to work for.  Eventually, you get big enough, you branch out and open up your own firm and hire your own realtors to do the work.  Sounds easy enough right?  I think the main reason why I never became one was that I didn’t want to waste my weekends showing people homes.  I did however attend a 1 hour session on the steps to become a realtor, and after the info session, I decided it wasn’t the career path I wanted to pursue.

Flipping Homes

I don’t remember how the topic of flipping houses came up; I think my IRL buddy told me a friend of his had been successful doing it.  Then one day, I spent hours Googling the topic, and found out there was a real estate association in my area.  I went on to their web site and attended a free session with my buddy on a rainy Saturday afternoon.  The session had a guest speaker, a guy who had been flipping houses for years now.  He basically gave us the rundown, which I will share with you now.  By the way, during the class, I looked around at the other 20+ people there.  I don’t want to stereotype anyone here, but these people looked like people you’d see at the slot machines in a casino.  It was mostly older people; no one there had on a suit unless you count a track suit a suit.  You get the picture here.  So here’s the ecosystem:

The Wholesaler

First off, you don’t buy houses on Redfin or MLS.  You have to find “desperate” sellers to get the deals.  These are sellers who would gladly sell the house for 50% of face value.  Now you’re thinking – who the hell would do that?  Examples – let’s say someone dies and the kids are fighting after the estate; they just want the house to be sold fast so they can split the money.  Let’s say the owner lives out of town and the house has 5 feet high grass, and they just want nothing to do with the house anymore.  Let’s say the house was won after a nasty divorce and the person wants to just get rid of it.  Before you think I’m nuts or these people are nuts, IT DOES HAPPEN.  Trust me.  Surely you’ve seen signs on the road, “We buy houses.  Call xxx”  Who do you think put that there?  Well, a wholesaler did!

Now where and how do you find these “desperate” sellers?  Well, for one, the road sign.  You could go down to the county clerk’s office and ask for all home owners and their current address.  You could drive around and look for houses with 5 feet tall grass – mail them a letter and it’ll probably be forwarded to the out of state homeowner.  Try Craigslist or FSBO (For Sale By Owner).  Hey, I didn’t say it was easy.

So let’s say you were able to find a “desperate” seller.  You guesstimated that his house was worth $200K, but you talked him into selling it for $140K CASH.  Now did I just make up those numbers?  No, there is a formula, which I have forgotten, but you have to factor in a couple of things.  Let’s say you paid $140K for the house.  Then you factor in $20K of costs to fix up the house to make it worth $200K.  That means you’ve spent $160k and will sell it for $200K for a profit of $40K, which is a 20% margin (40/200.)  Now 20% margin is actually not the target margin you want.  I believe you want this to be about 30%.  Now try to remember some algebra and work backwards.  You get the picture.  But what if you don’t have $140,000?  Easy.  Because you are a wholesaler, you don’t need money up front.  Your job was to find the “desperate” seller.  You now need to find a flipper who will buy the house for $145,000.  See what happened there?  You just made $5,000.

The Flipper

The flipper’s job is to buy the house for $145K.  Then find contractors to fix up the house for say $15K, and then resell it for $200K.  This is the role I wanted to play.   I didn’t want to be a wholesaler making cold calls and doing all that tedious work for $5K.  I wanted to make the $40K by fixing and flipping.   Of course flipping also increases risk – what if it costs $30K to fix up instead of your estimated $15K?  What if the market falls and you can only get $190K for the house?  That’s why you wanted the 30% margin target, for these unforeseen circumstances.  But what if you don’t have $145K?  Easy.  That’s where ‘private lending’ comes into play.  Sure, you could go borrow money from the bank, but this will dig into your profits.  Plus, this may take some time.  Time is of the essence since you don’t want the ‘desperate’ seller to change his mind.  This is where rich friends and family come into play.  Don’t have any of them either?  Become a smooth talker.  Find someone who has say $500K in a bank earning 2% interest.  Convince them to let you borrow the money instead for say 6 months and you’ll give them 5%.  Hey, I didn’t say it was easy.

Other role players

Don’t want to do either of those but you’re good at laying down hardwood?  Well, those flippers most likely don’t know how to lay hardwood, so attend those associations to get some work.  Or better yet, if you’re a realtor, well here’s your chance to get some leads.

Scaling up

Like any MS method, you always want to know how you can scale up.  In real estate, it’s pretty easy.  Commercial buildings perhaps?  Buy land and build a house from scratch?  Or just buy more expensive homes… a $1M home that you can fix and flip for $1.5M.

Conclusion

So there you have it.  This is the ‘flipping houses’ get-rich scheme.  I still want to go down this route one day, but just haven’t put in the time and effort to get started.  As you can see, similar to MSing and reselling, there is a low barrier to entry.  Anyone can do it if you put in the time.  You just have to get up off your ass to do it.