Eric Karrfalt - realtor/broker

Matt,
I will give a quick description of what I put together for my investor clients.
First, the whole goal of flipping is to turn a profit. They have set a goal of 10-20% return, after fix up expenses, carrying costs and marketing costs. For homes needing less fix up or those they can flip quicker, they will adjust their goal. To achieve this goal you need to find a less expensive home in a more expensive area. Pretty simple so far. They have also defined a geographic area, Hamilton county. The reasoning was simple. It is a great area to live and there is a demand for homes. Population is increasing. The communities there have consistently been in local and national headlines as being a great place to live. To sum this up, location is always key. Next I break down pricing for any subject home. I am using the board of realtors sold information. It is the actual sales pricing of comparable homes. It's available to brokers who are members. I can determine what the home last sold for, how long it took to sell, what year it closed, basically the whole history of pricing for that home. I can then compare this to the surrounding community and answer these questions. Is it the lowest priced home in a more expensive area, is there demand for homes in that community, are there any limiting factors that would slow a sale? (Located beside a commercial building or on a busy intersection, etc.) If pricing is right, location is right and it's in an area of demand, We go to the next step. What is our cost to fix up? Now this is where experience pays off. I can name a handful of pitfalls you will run into once you start rehabbing that you find out about once you start tearing into a home. They just cost money and hit your bottom line. If you don't factor them in, your profit margin shrinks. I have seen many rehab projects bought by well-intentioned people. They invested too much and were upside down. Some went back into foreclosure.........after being fixed up. Examine your estimating skills and factor in what your labor is worth. What good is flipping a home you bought for $80k, put $20k of materials in, and sold for $100k. You’re just breaking even. There are cost tables that break out cost for different repair/remodel projects but I have found those usually tend to be on the high side for rehab projects I have been involved with. Organizing a good crew of contractors is key. If you’re doing it yourself it’s your labor, just make sure you factor it in.
To answer your question, "What data/statistics are there to help me determine the risk in losing money when flipping a house?", you need to pull information from all the areas I have discussed and evaluate each home you are considering. It's just not as simple as looking at a statistical table and assessing the risk. Right now there are areas in the Indy market that are doing quite well. Some pricing is moving upward in various communities. It is not in a downward trend in all areas or gloom and doom, as you might believe in the news. My clients are flipping them now, they have just been more selective about their projects. They are not waiting 2 years for the general market to recover. Don't take my next question the wrong way, just asking it to provoke thought. Why buy a home in a perceived down market? Why take 2 years for the market to come back? There are good buys now that can be turned much more quickly.

There are many sources of info available, but I would argue that the best source is the realtors BLC database with actual sold prices and market data. You need to get hooked up with a real estate agent who knows the rehab market. Even today you can buy a home in a less than prime location, but still profit quickly if it's bought right. The only way to do that is experience. The next chapters on my book of flipping will involve financing, buying materials, negotiating with contractors, obtaining permits, structuring sales, renting vs. leasing, creative financing, working with neighbors, timing the sale, and the list goes on. There is just so much more to putting together a successful project. Now you might be just looking for a quick paint/recarpet and replace some fixtures type project. All the previous lessons apply. You might be taking a longer view since you will be living there. I still believe you need to focus on the fundamentals. You can’t buy now and wait for markets to change. They may not. As the expression goes, “don’t pay tomorrows price, for something today”. Examine the market and pay what it’s worth today, hopefully at a discount and stack the deck in your favor.

I really enjoy this aspect of my career and enjoy talking to people about it. If you really have an interest in doing this, I would be willing to share stories of mine and my clients of various projects I have been involved with. Call or email any time with your thoughts on prospective property -Eric - Thu Jul 24 2008, 07:30

I would consider Indianapolis/Fountain square area, Broad Ripple Village, Carmel Arts district. Indy and Broad Ripple are primarily an urban area of Indy. There are always bad influences in urban areas when it comes to safety. I would always advise to check with the local police for crime statistics. The following is the link to Indiana’s sex offender registry as another source.
You did not mention if you are going to buy or rent. There are many options.

http://www.insor.org/insasoweb/initAdvancedSearchForm.do

I would consider them all hip places with activities from nightclubs and dancing, fine dining to dive bars, duck pin bowling, to shops, galleries and museums. Just depends what you’re looking for. Carmel arts district is the newest. Located outside of Indianapolis in what could be argued as one of Indiana’s top Cities. I would say for a single girl, Carmel might be safer than Fountain square or Broad Ripple. Having said that, I have never had a problem in any of the mentioned areas, but know people who have. (Homes broken in to, cars stolen, assaults, and stuff you hate to read or hear about)
Carmel and Broad Ripple are located on the Monon Trail. A rails to trails project that has been wildly successful. Biking, jogging, rollerblading etc. Very popular. They both have shops set up along it at major intersections.

I might also consider Noblesville. The downtown area is really quaint with dining, antique shops, artist studios, an old-time hardware store and ice cream shop. Car cruises on weekends. You can even walk to the city park from downtown. Putt Putt, a working carousel, city pool, golf course, and railroad museum are located there. If you’re into canoeing or kayaking. White river is close by if you like those activities.

With Noblesville and Carmel, you get away from the urban setting somewhat and the older character of the city, but still have things to do. Clay terrace, and the new mall in Noblesville are both open concept shopping malls where you walk outside to all the stores vs. being enclosed. Verizion Amphitheater is located in Noblesville. Lots of parks and trails as well.

Broad Ripple has been known for a long time as a hip area of Indy. Nightclubs, artsy, trendy, are all good descriptors. It's also located close to Butler University so there is pretty active college nightlife.

It would be a pleasure to answer any more questions you might have. I have clients in all areas referred to so I get my references from people who are actually living there.
All the best. -Eric - Sun Jul 20 2008, 09:47

Kevin,
After 16 years in sales, I have seen many descriptions of property that may not exactly fit the actual home. Some agents take a "salesman’s license" and fluff the property making it out to be more than it is. Others try to accurately describe it given the limited amount of ad space available. I don't have any quick reference as to any "legal" authority, although an appraiser would probably be a good source. Many terms/calculations/descriptions have been commonly used through the years and there meaning have sometimes changed as new styles of housing have been developed. Terms are also regional in nature. Something commonly referred to on the east coast may be referred to differently on the west coast. When reading ads, remember they are designed to get your attention and hopefully get you to view the property. If you don't believe what is in the ad, you probably won't want that home. Read ads with a grain of salt. They provide good information, but may not always be entirely accurate.

I guess my definition of a bedroom would be 4 walls a ceiling and door plus it would need a closet and a window. Now here are some examples of what might be construed as a bedroom. Lets say you have a finished room in a basement with no window. Is it a bedroom? In many communities, the "loft" is actually a bedroom in a different floor plan. The loft version gave an open room. It is a simple construction project to wall it off if you want a "true" bedroom instead of the loft. While I'm thinking of it, there are other areas of home description open to interpretation. What constitutes a 2/2.5/or workspace area garage? What constitutes sq/ft? Is it gross living area? do you include the basement?, Is it your floor plan? What constitutes a deck? Is it an 8x8 minimal slab, or should it be bigger? Is a covered porch just a slight bump out over the door, or should it be a full canopy?

I guess to sum things up, there are no "ad police". The board of realtors reviews the BLC ads for compliance for fair housing laws, but actual descriptions can vary in accuracy.

Welcome to Hamilton County! Forbes magazine just ranked Hamilton County as the #1 place in the country to live and raise a family. I'm sure you will find we have a lot to offer here. - Fri Jul 18 2008, 08:36

Yes. It impacts your investment. Although it may be popular and there are many rehabs up and down the street, Vacant homes detract from an otherwise good community. It indicates an area still in transition. Now if your a trend setter, you might be able rehab the home and hope that the others get rehabbed also. There may be a track record of this or some economic incentives being offered to fix up those area homes. I know people who have done this and things went well for them. The flip side is that I also know investors who rehabbed in a transitional area and got burned since the area did not change as planned, and the other homes needing rehabbed, still sat vacant. With the real estate market the way it is today, a slight slow down from a few years ago, and the mortgage market the way it is, financing on homes and rehabs is not as easy as it was a few years ago, I would stay on the connservative side of my investment. With the abundance of repos available in more stable communities, and many newer repos, I would look for a more safe bet for a fixer upper. Look at it this way, you can fix up your property but may have no control over those that are vacant and are waiting for another like minded fixer upper to take on the projects, which may or may not happen. All the time the vacant home next to yours sits empty, unmowed, boarded up and ripe pickings for copper thiefs if it has not already been hit. - Thu Jul 17 2008, 08:51

If you just have a pre approval, you should be under no penalty to shop around, But hey, this is America and capitalism rules! You are always free to move to a better deal if it presents itself. Just realize their might be penalties. You might loose an application fee, your appraisal might not transfer to a different lender and you might be under time limitations in your contract to get your deal closed. Even with those penalties, if rates droped 1.25%, it still might be in your interest to pay the penalty and cut your losses to move on to the lower program. Keep in mind that Rates are only one part of the formula. You have points and closing costs as well to consider. Lets say you have a 6.5 % zero point loan now. You get offered a 6% loan. Sounds good so far.....But what if that 6% loan will cost you 3 points. Not looking so good now is it. Make sure you are compairing apples to apples. Should you pay points to lower your rate? Sometimes it's a good idea. You need to break down the difference in your payments, your savings if you will. Then figure how long you will realistically be in the home. If your savings recoups the money you paid in points in a relativly short time, the rest of the years you are there, you are saving that money. Good loan officers and real estate agents will point this out to you and present your options.

Additionally, make sure your new lender offering the low rate is legitimate. You could in fact be low balled, only to find out later the lender cannot commit to his rate/ program that he offerend you. Classic bait and switch. Use reputably lenders, get it in writing, buy and enjoy your home! - Sat Jul 12 2008, 07:29