Flipping houses seems to be all the rave now. There are new tv shows popping up on a weekly basis and everyone wants a piece of the pie. I must admit I am addicted to all the shows, however, I will tell you first hand, it’s not as glorious in real life. The reality is that it takes money (sometimes lots of money) and how to get that money is not part of the show. Well, I found a way to get that money and it didn’t come out of my own pocket. Here’s how I flipped a house (and made a profit) with none of my own money.
Buying A HUD Home
One of the best pieces of advice I’ve gotten was that you make money when you buy, not when you sell. I know this sounds contrary to the way we envision the glorious house flip, but the point is you must buy smart in order to see a profit at the end. Buying a HUD was a smart buy for this investment.
First, let me clarify exactly what a HUD home is and why this was a smart investment. A HUD home is a foreclosed home that had a FHA insured mortgage. HUD becomes the owner of the property and sells the house in order to recoup the loss from the foreclosure. Like with many foreclosures, these houses are sometimes vacant for a while or not in the best condition which means they are often priced below market value.
When a HUD home is listed for sale there are restrictions on who can buy the house. There are several buyer types, but the two I’m going to talk about are Owner Occupants and Investors. HUD will make homes available to a buyer that wants to purchase the home and make it their primary residence. The idea here is that everyone should have the opportunity to buy an affordable home and shoot for the American dream without investors getting in the way. Buying a house as an investor means you are competing with other investors. In this case, my investor and I decided I would buy the home as an Owner Occupant.
Living In The Rehab
As I mentioned, my contribution to the purchase of this house was not a financial one, but rather one that required me to be flexible with my living situation. This is certainly not something everyone can do, but I was going to live in the house while it was being rehabbed. Here’s why:
- It would allow me to buy a HUD home as an Owner Occupant, instead of as an investor.
- I could save us money by paying the interest on the loan while I’m living in house.
Buying the house as an owner meant I wasn’t competing with rich investors (who often pay cash), but instead, I would be competing with other home buyers. This put me in a category that I can compete in. I actually did pay cash for the house (thanks to my investor) which strengthened any offer I brought to the table. Everybody accepts cold hard cash and there’s no lengthy approval process or backing out of the deal. Cash offers always looks better than a pre-approval letter. The one catch was that I had to live in the house for one year because I was buying this as an owner occupant.
Now, I said I paid cash for the house which is true, but my investor actually took out a loan in order to give me the cash. To make this simple, he was able to go to a bank and get the money needed for the purchase of the house and then hand it over to me. It wasn’t a mortgage, but rather a short term loan. That’s the kind of relationship you can have with banks when you have great credit and a great reputation. I hope one day to be at that point!
Being Flexible Paid Off, Literally
Even though I wasn’t in a position to be a financial partner in this investment, I was able to live in the house and rehab the house myself. This made us more money because it significantly saved us money. Remember when I said my investor took out a loan, well, that meant there was a monthly payment due on the note each month and living in the house allowed me to pay that. It cost me about $500 a month which was a low monthly “rent payment” for me and it didn’t come out of our rehab budget, thus saving us money. My investor also footed the bill for the rehab, another cost associated with every flip that the tv shows don’t focus much on.
In the end, this investment was a success! We made a good profit and I learned you don’t always have to bring money to the table to be an investor. Often, being creative (like living in the house) and being pretty darn good at stretching a dollar can be just as important as a financial contribution.
Photo Credit: Jeffrey Turner via Flicker