Real estate, like any other commodity, is bought and sold every day of the week. Many people become real estate agents because they know a small piece of a large pie means big bucks. Agents help facilitate a sale by finding a willing buyer for a willing seller, earning a commission of approximately four to seven percent of the sales price for making the deal happen.
It is relatively simple to get a real estate license, and it is a lucrative field for many people. However, as you may expect, there is strong competition among agents, and the ones that are successful work long, hard hours. In fact, most agents are on call weekends and nights, with their cell phones glued to their ears. Furthermore, real estate agents are required to take continuing education classes and follow strict guidelines set forth by bureaucratic agencies. There are better ways for an “entrepreneur” to make a living!
Investors that “flip” houses accomplish the same basic task that real estate agents accomplish. Specifically, the “flipper” investor buys real estate with the intention of immediate resale for profit. As a flipper, he buys properties at substantially less than the going or “retail” rate. He acts as both principal and middleman, buying at one price, then reselling at a higher price. If a deal is marginal (not much profit) and he adds no value to the property, the flipper's profit is commensurate to that of a real estate agent. However, unlike an agent, the flipper may only have a few hours of his time tied up in the deal. Furthermore, the flipper's upside profit potential is much higher than an agent's commission, since an occasional bargain purchase can bring a tremendous return.
The flipper does not need a license to practice, nor is he under the oppression of a government agency. He benefits from low overhead, flexible work hours and he doesn't have to drive a Mercedes to be taken seriously (although he can certainly afford one).
Three Different Types of Flippers
There are three different types of flipper investors, usually based upon experience:
- The Scout
- The Dealer
- The Retailer
The Scout is an information gatherer. He is the “bird dog” who finds potential deals and sells the information to other investors. Many people get started as a Scout for other investors because it does not take any cash or prior knowledge to look for distressed properties. The Scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee. The fee will vary depending on the price of the property and the profit potential. The Scout can expect to make five hundred to one thousand dollars each time he provides information that leads to a purchase by another investor.
The Dealer, like the Scout, locates deals for other investors. He locates a bargain property and signs a purchase contract with the owner. He then has the option of closing on the property and selling it outright, or just selling his contract to another investor. He is providing more than just information; he is controlling the property with a binding purchase contract. The Dealer often puts up earnest money to secure the deal, so he assumes more risk than the Scout does. Since the Dealer controls the property with a purchase contract, he has greater profit potential than the Scout does.
Dealers can flip as many deals as they can find. On a full-time basis, a Dealer can make well over fifteen thousand dollars a month without ever fixing a property or dealing with a tenant. On a part-time basis, a dealer could easily make an extra three thousand dollars a month flipping a property or two. The dealer's lifestyle is that of a true “entrepreneur.” He can work as much or as little as he likes, with no boss, no employees and the freedom to do as he pleases!
The Retailer usually buys properties from a Dealer or with the assistance of a real estate agent or Scout. The Retailer's goal is to fix up the property so he can sell it for full retail price to an owner-occupant. Compared to other flippers, the Retailer puts up the most money, has the most risk and stands to make the largest profit on each deal. However, it may take the Retailer months to realize his profit, unlike the Scout or Dealer who makes his money in a matter or days or weeks.