Page 27 - From Ghetto to Gucci: The Basic Principles of Flipping Houses

The third rule of avoiding overleveraging is this: Never go past the maximum purchase price set
by your minimum profit. You’re in this to make money, and even if you use the first and second
rules, if you find yourself paying too much for a house you run the risk of overextending yourself.
I have seen this firsthand at the courthouse steps where the foreclosure sales take place.
Investors get too excited about the potential of a property, they get too wrapped up in the heat
of the auction.

Their blood is up as they’re in a bidding war against everyone else, and when the dust settles
they find that they’ve dramatically overpaid for a house. Even seasoned investors get caught up
in the heat of the auction. So my advice to you—never exceed your maximum price! If you’re
finding that you’re not able to buy anything for a long time, it’s time to revise your minimum
profit, NOT how you calculate the maximum price.

Whew! They’re simple tips, but they’re incredibly helpful. Don’t worry, I’ll be repeating these tips
as we go through each of the sections. They’re so important that you also need to hear them in
context. Follow these tips, and you can reap the benefits of overleveraging while avoiding most
of the pitfalls.

Loans – A Deep Dig

Well, we just talked about leverage and we briefly touched on some of the different types of
loans in our examples. Now’s the time that we’ll go in and expand on the types of loans, and talk
about other sources of money that you can use to fund your flips.
First off is the conventional mortgage. A conventional mortgage is relatively easy to get if you’ve
got good credit and a steady job.

You can inquire about mortgages by going to your local bank and starting a conversation with
your loan officer. Nowadays you can even get a quote online by going to Lendingtree.com or
other similar sites. Mortgages are simple to understand—there are origination fees and
sometimes early payment penalties. Otherwise, you’re paying an interest payment that you can
calculate by going to various online mortgage calculator sites.

If you’re not able to qualify for a traditional mortgage, don’t worry, there are other sources of
money available. The first option is available to a select few homebuyers. It’s the FHA program
for first-time homebuyers, which can also be bundled with an FHA Homepath loan for
construction. This option is fantastic for someone who’s never bought a home and can’t qualify
for a traditional loan. You have the option to buy a run-down house and flip it, but you will be
required to live in it for at least a year.

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