There are a few things that you must be aware of and concerned with when your flip (house) is ready to sell. When you “think” you have completed rehabbing a house and are ready to put it on the market be aware of some possible pitfalls and snags.
First, you should have a punch list. Go through the house to be sure everything is complete. I have found that there is a tendency for many contractors to not be concerned with the small stuff. For example, be sure that everything is painted and touched up. Be sure all the doors close properly and all the door knobs are on correctly. Is all the trim completed?
In addition to the punch list being completed, you must get lien waivers from all the contractors who worked on the job. You should do this before you hand them their final check. This is a very important step for you so that you don’t unexpectedly have any legal issues with liens just before closing.
Two things to deal with once you have an offer on the house. One is the inspection, and the other is the appraisal. Many people will leave something obvious for an inspector to find just so he can justify his fee. You should be sure that you have checked all of the mechanicals to be sure things are hooked up properly and working. The boiler or furnace, hot water heater, all plumbing is working properly and there are no leaks, the electrical upgrade is done and the panel is properly labeled. Smoke alarms and carbon monoxide detectors are hard-wired and have been tested. Any fire prevention requirements have been completed as well.
When the appraisal is being done try to have your realtor on the premises or you be on the premises. Be sure not to get in the appraiser’s way and do not annoy them. You should be ready to answer questions and you may want to be sure that you and your realtor are prepared with comps to offer the appraiser in the event that he does not see a value as high as you have determined.
Paying attention to these things will help to prevent issues that may hold up the closing. Do what you can to help the process run smoothly and get it done as quickly as possible.
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Real estate investors should be somewhat familiar with the IRC Section 1031 like-kind exchange rules. It is important to talk to your tax professional if you are considering selling investment property and getting (replacing it) with another property. The IRC Section 1031 rules allow favorable tax treatment when a like-kind exchange of certain assets occurs. You are allowed to defer gains on the sale of an asset if it is replaced with like-kind property. It is a tax deferral, not a tax free exchange.
This exchange must be done within prescribed time periods. Basically, there are two time periods you must follow. The first requires you to identify a replacement property within 45 days of disposing of the first property. Identifying means a written agreement that should be delivered to the seller. The second time element is the requirement that you must acquire the replacement property within 180 days of disposing of the initial investment property. There is a bit of a catch to the 180 days. It must be acquired within the 180 days or before you tax return for that year is due, whichever is less.
Depending on the way the exchange is done, your transaction may require a third party intermediary or facilitator. Per an IRS release, “It cannot be someone that you have used within the past 2 years. You cannot act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) cannot act as your facilitator. ”
When you do qualify for the IRC Section 1031 like-kind exchange you must report that on your tax return using IRS Form 8824.
I am attaching a link to an IRS document which provides clarification and publications references pertaining to this issue.
Have a System for Success
If you have a system for when flipping you are more likely to be successful. Have a system for success. There are never any guarantees for success, but you can mitigate the potential for failure by having a system. I have been thinking about some people I know who have not had a very pleasant experience flipping a house. As I looked at their situations one thing became evident to me. The people who had the most trouble and who were not successful did not have a system.
Think about it. The most successful businesses are system based. McDonalds, Dunkin Donuts, other fast food restaurants that are franchises are successful in large part because they have systems. Franchisees are required to follow the system of success. Procedures and business practices are consistent within each business. These systems have been developed over time to breed success.
The same idea is a requirement for a successful flipping business. A system for flipping success gives you a leg up on others who do not have a system and reduces the chances of having a bad experience. To put it bluntly, you are reducing your likelihood of failure. Having a system increases your chances for success and improves the likelihood of having a pleasant experience.
The system for flipping must include everything from the business startup to searching for a house that will be profitable, to hiring contractors, having the required legal documents, knowing what materials to choose and selling the house when it is finished. This list is not all encompassing, but is food for thought if you are considering flipping houses.
So, before you begin to flip a house, be sure all of your ducks are in a row. Know what you are going to do before you do it. Have a system and be successful.
I am known as The Property Coach and I teach my coaching students a system that gives them a good chance of being successful. I can be reached by email at email@example.com.