It’s really easy to get lost in a maze of possibilities, especially when starting out. I’d look at the Austin listings fairly regularly but it was hard to get a fix on general trends, as far as being able to quickly spot potential value, to track comps that had contracts pendings, and even simply knowing the ballpark area of town a listing was in, as I seemed to waste much time looking up properties at Google Maps, etc.

I was also floundering around in a larger sense as far as what I was after, mulling the possibilities of foreclosure auctions, REO properties, tax deed sales, duplexes, SFR fixer uppers, you name it. I just didn’t know where to start and couldn’t get a toehold in the maze of listings, as far as convincing myself I knew enough to make the leap.

Once we moved out of town, though, to a smaller community of 10,000-20,000 people a bit out in the country, things got a lot easier. I started checking the MLS listings every day and could actually stay abreast of not only what was listed but what was selling, and at what price, as there are typically only 100-125 listings total at any given time.

After getting familiar with the area I also pretty much immediately knew what part of town listings were in, and could drive by to eyeball 5 or 6 properties in half an hour, as opposed to literally spending half a day to see the same number of properties in Austin, battling traffic.

Most of what is available are SFRs, so that’s what I paid attention to. Kind of a backwards way of solving the information overload problem, but it worked for me.

The obvious downside to the above is that I’ve got a much smaller pool of potential properties to work with. It took me a few months to find something that was promising enough to go after for this first flip, largely because I simply couldn’t find anything attractive enough.

On the other hand, if you specialize in a smaller market you also have less competition in general from other investors, which balances out things to some extent.

For myself, picking a much smaller slice of the potential REI pie helped me to focus and to finally motivate to buy a property to flip and see what happens. One thing to keep in mind is that you obviously don’t have to move to a small town to focus your efforts, and it doesn’t have to be fixing and slipping SFRs that you focus on.

Much of the above is more a result from a gap in risk tolerance, as far as what I’m willing to bite off at this realtively early stage in my life, and what the “safe” thing to do is. If you think that wise investing is owning one home, paying it off completely as quickly as possible, and putting every extra penny into savings, then you’re likely always going to think I’m crazy. I can’t do much about that, other than agree to disagree.

But the above discussion about buying houses is barely half the real discussion, as it doesn’t involve a pretty crucial component: why am I buying these properties and what are my plans?

If you tell someone that you’re buying a house and give no other information, the default assumption is that you think the property is going to appreciate in value over time. In this more than a little uncertain real estate market, that’s a pretty iffy proposition, fraught with peril. That gets multiplied as you acquire more properties, especially if you’re taking on debt to purchase them. So if you stop there, it’s more than reasonable for anyone listening to think you’re crazy.

But if you’re exercising a little brain power and patience, paying less than actual value for your properties, and have multiple exit plans, well, maybe you aren’t so crazy after all.

The plan for the 1002 S. Main St. house is pretty straightforward: buy it, fix it, sell it, and make a profit. Sounds great. But what are my plans (before I even buy the property) if that doesn’t work out? It’s different for every property, based on the individual details, but here are my exit plans, roughly in order:

1) Renting the property:  One of the reasons I purchased the property is that it’d produce positive cash flow as a rental. The housing market is pretty tight in our area, especially for affordable 3-2s and 3-1s. The property was previously rented for $750/month and it would take a major economic downturn to push rental prices below that. After property taxes and maintenance expenses and other fun stuff we wouldn’t net much when it was all said and done, but it would produce positive cash flow.

2) Sacrificing sweat equity:  Let’s say that I completely misjudged the economic climate, and that even our stable, somewhat rural corner of central Texas is hit with the mother of all property value corrections, and the house not only drops in value but rents drop as well.

Since I’m buying a property in need of repairs and plan on doing the vast majority of the work myself, I’ll have a certain amount of sweat equity to play with. I can sell for a loss and not take as big a hit (if any) as someone who bought a house and paid a contractor to do all of the repairs. Yes, I know, my time and labor is in theory no different than money, but it’s a whole lot more palatable in the real world to wave goodbye to sweat equity as opposed to cold, hard cash.

Again, this needs to be accounted for before you buy the house, as far as considerations you weigh.

3)  Willingness to sell at a 10% loss: In the world of investing in equities, this is basically your stop loss. Savvy investors typically enter a position and immediately set up a stop loss order, so that if a stock they buy drops a certain percentage amount, their position is automatically sold. The amount is up to you, but many people use 10% as a good baseline stop loss.

Let’s say that I not only misjudge the economy and/or local property market conditions, but that it’s a nuclear winter scenario, and things fall off a cliff, with property values dropping quickly even in stable areas that normally take a year or more to move dramatically either upwards or downwards. If that happens, I’m willing to take a hit and sell at a 10% loss, as far as the total purchase price (plus fees, closing costs, repairs, etc.)

I wouldn’t be happy to do that, at all, but it wouldn’t be the end of the world, either.  Part of investing in anything is taking your occasional lumps. As long as you preserve as much of your investing capital as possible, the occasional times you whiff won’t cripple you, which is the whole point of setting a 10% stop loss on investments. If taking a 10% loss on a property you plan to buy would cripple you, you’re probably operating far outside your comfort zone, overleveraging yourself,  and should re-think your game plan.

4) Ability to pay the mortgage on an empty house:  Conjuring up the nuclear winter scenario again (where you can’t rent the house nor sell it soon enough to even unload it at a loss), can you simply pay the mortgage on a house sitting empty?

My wife and I have pretty simple tastes, but we like to take trips, eat out, and buy fun things. If push came to shove, we could cut out enough extra expenses each month to pay the mortgage on the 1002 S. Main St. house. I’m talking long term here, not just a few extra months until it can be sold, and as an option of last resort, in the face of economic conditions that fall off a cliff.

Would that make me happy? Of course not. But it’s something to keep in mind. If you don’t have savings or room in your budget to pay the mortgage on an empty investment house, are you willing to get a second job to produce the necessary income? If the answer is no to both those, again, you may be playing in waters that are too deep for your comfort zone. It doesn’t necessarily mean that the answer always has to be yes to both those questions for an investment to be profitable to you, but it’s a pretty good indicator.

Pulling back a bit, keep in mind that all of the above are emergency exit plans.  No one hopes to ever have to use them, and people successfully flip properties and make money without ever having a single viable exit plan. People also successfully jump out of airplanes without a working backup chute, too, but that doesn’t mean that backup chutes are unnecessary and silly.

Moral of the story: have as many emergency exit plans in place before you buy as possible, as predicting the future is always hard and every investment has the potential to decline in value.

If you watch Flip This House or Flip That House or Flip Your Doghouse (okay, I made that one up) or any other house flipping show on television, you don’t have to watch long to notice an obvious trend. Everyone makes money (and I mean everyone, even the most idiot of flippers), hardly any of them do any of the work themselves, and almost all of them are flipping properties in California during the recent real-estate boom.

It doesn’t take much brain power to realize that present day conditions are much different, with real estate values in much of the country deflating, and that while assorted flipping shows on tv are entertaining and useful for potential flippers, they’re not the most realistic of models. Not only are they short on details but most revolve around properties that are profitable flips only because of the ridiculous appreciation in the market in general.

Does that mean that present-day house flippers are doomed, and that the flipping bubble has been forever punctured? Of course not. No matter where you live, there’s probably a property for sale in your zip code that could be a profitable flip. You just have to focus your efforts on the areas that you can extract value from, in the opportunities available to you. One of the biggest opportunities for you is a very obvious one, which is buying properties at a substantial discount to their actual value.

So do you just wave a magic wand and say “Abracazam, I command you to sell your house to me for less than what it’s worth!”? Sadly, it ain’t that easy, but it’s also not rocket science. People sell their houses each and every day for less than what they’re worth, for a variety of reasons.

1) Inherited houses: This is the one I’ve seen the most, as far as finding good flip opportunities when scouting out potential investments. A parent dies, the child or children inherit the house, and all they want is to sell it and cash out, as quickly as possible. This effect is magnified by the fact that many older parents living alone in a home are no longer able to keep the house in good repair, so the houses typically aren’t in the best repair and often haven’t been updated for a number of years.

While it may boggle the mind of flippers and investors, many people who inherit these houses are unwilling to spend a single dime in improvements and repairs, despite those repairs paying off a dollar in asking price for every dime invested. They just want the money, as quickly as possible, and will often sell for far below the actual value of the property, not to mention the potential value once repairs are made.

2) Foreclosures: Nothing fun about dealing with foreclosures, but it’s another obvious way to buy a property at a discount to its actual value. I’m only talking about REO properties here, and not about buying properties at a foreclosure auction or sale (which is similar and can be even more profitable but involve much more work and research than simply buying a REO property that is listed for sale).

The bank or mortgage company just wants to move it and get it off the books, as quickly as possible. This effect, too, is also magnified by the fact that many home owners who are about to be foreclosed on trash the place or don’t otherwise try to keep it in good shape. Again, it may not make sense to investors, but banks or mortgage companies almost never spend a penny on improvements, so in effect you get an additional discount when buying these properties, as many are in a state of disrepair.

3) Frustrated Landlords: This is a much smaller opportunity, but you can sometimes get discounted properties from people who tried renting a house out but realized they weren’t up for dealing with the headache that tenants can be. There’s no real way to target this, as far as looking for particular signs, but it can be a contributing cause in why you might be able to buy an investment property for less than its actual value.

The owner is just tired and wants to be done with it, so they’ll sell it for less than they otherwise might have before dealing with the headache of tenants. If the tenants trashed the place, you might even get a more substantial discount, as the owner says screw it, let’s just sell and doesn’t make any repairs, being willing to take a hit on the sale just to wash their hands of the whole mess.

4) Pressure: Home owners may get a promotion at work that involves moving across the country, a baby might be on the way, or credit card bills might be piling up. There are all sorts of ways that life can pressure home owners into looking for a quick sale, which can lead to them selling their house for less than it’s actually worth.

5) Ignorance: Pretty obvious, but for whatever reason people sometimes sell houses for less than they’re worth. You see this more often in FSBO situations but it does happen with properties sold through agents, as well.

A subset of this is the lack of knowledge by many home owners as to what repairs will really cost. If someone hasn’t worked on houses, they just don’t know what things cost to fix, or how big an issue some problems really are. This is especially true of foundation, asbestos, and mold issues, as the media and other “experts” have trained everyone to absolutely freak out and assume that those problems will cost many tens of thousands of dollars to fix.

While that can be the case, in many cases the issue is much less expensive to f ix than most people (homeowners included) would ever imagine, leading to some nice discounts when buying a home that the previous owner assumes has major repair issues and prices accordingly.

Most successful flips can be directly tied to one simple principle: be realistic.

We live in a smallish county in central Texas, within commuting distance to San Antonio and Austin. We will never, in a million billion years, see a mad dash on property values. I’m never going to double my money on a flip, or land in the middle of a bidding war for a property I own. There’s a very small pool of potential buyers for houses priced at +$150,000, so the odds of hitting a home run and making serious money on a single flip are basically non-existent.

On the bright side, there’s very little competition from other flippers, and the real estate market continues to chug along steadily. While not much moves on the higher end, there’s a pretty steady demand for starter houses, 3-1s or 3-2s, from 1,000 to 1,500 sq. ft.

There seems to be a nice opportunity to target older properties in the $60,000-$80,000 range, many of which are simply listed as-is when a parent dies and the children simply want to move the property quickly. They need general rehabbing, but typically are solidly built, and many people moving into their first home are willing to overlook some flaws.

Realistically, I’m only looking at potential profits of $10,000-$20,000 per house, and doing this on the side in addition to my day job means that I can likely only flip 2-3 houses per year, and still maintain my sanity.

While that might be disappointing to the get-rich-quick crowd, I’d be more than thrilled to make $50,000 the first year of doing this. The wild card, of course, is while I may think this is an utterly realistic plan, the reality may be far from that, once I dive in.

So, as they say, we shall see.

More and more the house “flipper” is someone looking to get rich quick, prone to shady, 100% financed loans with cash back from the seller under the table, and generally long on greed but short on personal work ethic.

There are also plenty of stories abounding now of naive, inexperienced flippers who bought in at the top of the recent boom market, only to now find themselves underwater, staring at huge losses when they eventually cash out.

Like anything, it all boils down to context. Call it “flipping” or “rehabbing” or “skerdoodling”, in the end it’s pretty meaningless, as the proof is in the pudding, so to speak.

I’m sticking with “flipping” to describe what I plan on doing, as I’m looking to buy houses at a significant discount to their market value, rehab them, and sell them for a profit. You know, flip them.

The difference is that I’m hoping to be intelligent about it, being picky about the projects I take on, doing the vast majority of the work myself, tackle a relatively small number of projects the first two years, and only looking to average a net profit of $15,000/property.

I’m not looking to somehow magically get rich, without ever lifting a finger, or expecting to double my money in 12.7 seconds. So I’m getting more and more comfortable with calling myself a flipper, despite the fact that the current trend seems to be to decry and deride the real estate flippers of the world, with their foolish delusions of grandeur and unrealistic dreams.