10 mistakes that made flipping a flop

[thohome]

Mistake No. 1

Using 'liar loans'

In October 2005, Serin was desperate to pay off credit cards. But he was eager, too, to put his real estate training to use. He sought "a motivated seller - someone who wants to sell quick and doesn't mind giving a discount to get the deal done."

He found a Sacramento couple who'd twice cut the price on their home and were asking $360,000. Aware that the market was softening, Serin successfully bid $330,000, including his closing costs. But he also wanted to pay off his credit cards. So he took out a $360,000 mortgage and asked the sellers to give him $30,000 in cash once the deal closed.

"I was able to qualify for the loan at 100% financing," Serin says. "I used a 'stated-income loan.' It was really higher than I was making, so it was a 'liar loan' - that's what they call them in the industry."

Stated-income loans were created to help people with variable incomes, like commission-sales jobs, qualify for mortgages. Lenders require little or no proof of income, but they charge a higher interest rate to compensate for the risk. Stated-income loans have grown in pricey areas where traditional buyers are stretching past debt-to-income lending ratios, and some lenders turn a blind eye.

In California, 75% of purchase loans this year have little or no documentation of income, up from 34% in 2000, First American LoanPerformancesays.

But Serin also deceived the bank by saying he'd live in the home. Banks typically charge higher rates and require larger down payments for investment properties.

"Lying on a mortgage application is a federal crime," says Joseph Falk of the National Association of Mortgage Brokers. "It includes bank fraud, wire fraud and mail fraud and potentially a host of state offenses. This can result in jail time."

At the time, though, Falk says some lenders were willing to ease their criteria for borrowers because, with housing prices surging, they knew they likely wouldn't lose money even if the loan went bad

read on here

[JaredfromIndiana]

This is kinda fun...

1. Liar Loans <~~ Gotta do things legally and right down the middle.
2. Overpaying <~~ In my book this is the #1 mistake and is the quickest way to kill a business.
3. Lacking Cash <~~ YUP!!
4. Quitting your day job <~~ Been there, done that, got the t shirt. I advise people not to quit unless they have 6 months cash reserves.
5. Hiring an unlicensed contractor <~~ Got that t shirt too.
6. Buying sight unseen <~~Never done it but know people that have and got burned.
7. Buying out of state <~~ Heck heck heck no!!
8. Buying too many props too fast <~~ I know an investor that decided to go big or go home when he started. He bought a package of 60 rentals/flips and almost lost his a$$!!
9. Underestimating repair costs <~~ Make friends with a contractor to help you with this. I got burned a lot when I first started out.
10. Poor exit strategy <~~ This should be #1a. If you don't know what your going to do with the house why the heck would you buy it? Is it a flip or a rental? You have to know this before you buy!!!

Again, my two cents, keep the change!

[badmomma]

Well Jared it seems your 2 cents worth is worth
alot more than 2 cents. You give me some insight
into what it really takes to do a decent flip. I have
to say that by the time I am ready you will have me
fully aware and prepared. Keep it up and I just might
be able to buy the home of my dreams someday.

[flip_it_fast]

Very good thread and replies! You have mentioned some things that I have never even thought about. Definitly knowing what you intend to do with the property is important and also knowing how much all of the repair costs you are going to have is important. I am sure hiring an unliscensed contractor could be disastrous! Thanks for the info!

[JaredfromIndiana]

Update on #8 from above,the one about the investor almost losing his butt. Well, he did lose it. He had most of his property taken back by the bank and his HMLs and is now pouring concrete. Pretty sad.

[flip_it_fast]

Wow, he really must have gotten himself into a bad situation. Bit off more than he could chew. It is very sad. I hope he has learned and can find a way to bring himself back up financially and can give it another try... the right way.