Philadelphia is quickly becoming a hot commodity for local and outside investors of real estate. The Philadelphia market has become attractive due to the low and affordable acquisition prices. Philadelphia is the 6th largest city in the U.S. It’s rare that you can find properties for $50k or less in a major city with a respectable ROI such as Philly. After repair, values can be as much as $150k, $200k, or maybe even $300k. Also, other major attractive factors to the Philly housing market are the low overhead expenses such as property taxes, title, transfer taxes, and loose regulation by the city.
There are several ways to make money during this house flipping frenzy in Philly’s real estate market. Here are 3 of them:
1. Wholesale Real Estate
First there is the wholesaling method. Nothing is complicated about this process. Some people pay $100 to sit in a seat and drink coffee for what I’m about to explain. Find a homeowner who’s motivated to sell, note the price that they want (let’s say $40k). If the house is worth $40k as-is, talk the owner down to settle for $30k. Write up a contract stating that YOU… will buy the house for $30k in 45 days. Now… will you really buy the property? NO. You now have 45 days to find a true buyer.
Remember, the house is worth $40k as-is so you can easily find another investor to buy it. In the agreement of sale between YOU and the owner, there is language that says “You will buy the property or your assigned party”. The buyer that you find …is your assigned party making wholesale legal. Now, at the closing, there will be 2 transactions: 1. The sale of the property to you and 2. The sale of the property from you to your end-buyer. All funds will be paid by the end-buyer. You charged the end-buyer $40k-30k (to the original homeowner) =$10k is all yours.
2. Using Hard Money Loans
Next, we have Hard money loans. A Hard money lender is an alternative lending institution outside of traditional banks which are federally monitored. Hard money loans have more relaxed conditions to qualify for a “mortgage” as far as debt tolerance. Now, the concept of hard money lending is veryyyyy attractive. “Use someone else’s money”… “No money of your own” …”We’ll fund the entire project”. However, like all things, you must know EVERY aspect of it. There’s more to the story.
Hard money lending comes with unadvertised conditions. First, a great credit score is needed. Most alternative lenders do not prefer first time flippers because of a higher risk associated with lending. Some set a higher interest rate on the loan because of that factor. Some may not allow a first-time flipper all-together. You may need to partner with someone who has already done a flip.
A common myth is that none of your money will be used. Hard money lenders will require you to cover your own closing costs and bring 10% of the acquisition price for a down payment. Your experience determines how much of a down payment you will need. Also, initially, you will need money in reserves to start the renovation. The loan is for a set period of time (12 months…maybe shorter), all of which you will be paying the interest monthly. It’s called “hard money” for a reason. The interest rates will be higher than a traditional bank’s mortgage at about 10-15%. Interest-only payments are typically upwards of $1000 per month.
Unlike a traditional mortgage from a national bank, a hard money loan is an interest-only mortgage…meaning nothing goes toward principal. Even at settlement, you will pay back the total amount borrowed plus the prepaid interest due. What you must keep in mind for hard money lending …are your stages. You will want to have everyone on one accord to finish on-time; your demo, your clean-outs, your plumbing, electrician, your HVAC, roofers, framing, inspection, and painting. If you do not complete the project by the set monthly loan terms, time’s up! The hard money lender reserves the right to foreclose and repossess the property.
3. Buy a Property on Sheriff Sale
Lastly, utilize the sheriff sale. Many investors are going the route of the Philadelphia Sheriff sale of Mortgage Foreclosed Homes or Delinquent Tax Sale properties. Foreclosed homes are homes with mortgages that have not been satisfied. Usually these properties are sold at or above the owed amount of the mortgage. The Tax sale properties are what everyone wants. Tax sales offer properties with no mortgage, just properties with outrageous tax liens or judgments against them.
The opening bid for these properties start off low at $1500 (minimum) and are then bid up. If you’re lucky, you can snag a good property for less than $50k. However, in the current flipping market of Philly, it’s not uncommon to see the bidding go up to $80k, $90k, or even $100k for a property in a highly desirable area. Those who bid are usually working with a team of investors. You can get a gem depending on factors like the timing of a bid or maybe an overlooked property.
However, with Sheriff Sale, there comes a risk: you cannot enter the property therefore you do not know fully, the conditions of the subject property. The mortgaged properties tend to be more kept due to someone actually living in the property recently. Tax sale properties are usually heavily abandoned and in poor condition. Some houses may be deemed unsafe and can be on the demolition list.
Lastly, there is the assignment of the bid method. You could be bid up to $80k on a property, however only 10% of the bid is due for a down payment. Similar to wholesaling, you could pay $8k down at the auction, and then find an end-buyer to take care of the remaining balance if they are interested. You have exactly 30 days to complete your sale with the Sheriff.
Conclusion
These are just 3 popular ways to take advantage of the flipping going on in the booming Philadelphia Real Estate Market. There are other ways as well to get started. You can get into Real Estate investing by simply buying a home to reside in… and years later you could decide to rent it out. Investing in Real Estate can be very profitable. It can yield some of the highest returns (60% or above) in terms of investments, coupled with less risk than the stock market… when done correctly. Remember, all investments come with risk so do your due diligence.
