Flipping Homes in Hawaii: A How-To Guide
Learn the secrets of flipping houses with our next course, a $5,000 value for just $2,000!!!! Or do the research and grunt work on your own, build property wealth judiciously and keep the $2,000.
– or even get-rich-soon schemes – are almost always what our parents warned us about.
While attending a Success Path Education weekend session in Waikiki (a $149 value, for free!), I was promised the real estate flipping secrets of HGTV’s “Flip or Flop” stars Tarek and Christina El Moussa. Their full-size cutouts flanked the stage (the only appearance they made all weekend) while two of their associates laid out this sure-fire plan for success.
The sound bites were good, promising “accelerated profits” and reminding attendees, “We don’t panic. We prepare and predict.” They reinforced how smart we were, showing up that muggy Saturday morning: “Amateur investors get stuck with distressed properties. Professional investors (like us, after this program) look for the distressed seller.” They also promised the capital needed to make these investments, tapping into their private line of investors – but only after signing up for the next course, a $5,000 value for only $2,000.
The ballroom was packed with people from across the Island, from Millennials to young couples to retirees – plus the homeless guy next to me, who seemed pretty hip to the value of free seminars, AC and cold water. The long line of people plunking down credit cards for the next session suggested “The Music Man’s” promise of solving the troubles of River City was prescient. Perhaps Honolulu residents struggling to make their fortunes might find their “76 Trombones” in overlooked and undervalued properties, all with the help of promises and secrets that $2,000 can reveal.
When Success Path seminars popped up in St. Louis a few weeks before the Honolulu ones, the St. Louis chapter of the Better Business Bureau warned local consumers to be wary of their “misleading and manipulative marketing practices.” The BBB links Success Path to Premier Mentoring (given their shared address and business model) and reports over 150 claims against the company over the last three years. On everything from Yelp to the investment blog Bigger Pockets, stories abound of angry Success Path consumers sinking big money into a scheme they say delivered nothing but a big credit card bill and dashed dreams. A national Yelp page listed 26 reviews: three five-star reviews and 23 one-star reviews; there was no middle ground.
Even so, the notions Success Path peddles have merit. Real estate does produce some of the nation’s greatest wealth and, even in a state where the average single-family home is already pushing $800K, there’s money – good money – still to be made. But, like most other ways to make money, it takes hard work, good research and data, and the staying power to see it through. To make it happen, you don’t need Success Path’s Buyers Club, their “list of cash buyers” or their “guaranteed funders” – all of which come only after continued training, reportedly costing as much as $40K.
Honolulu-based real estate broker Trevor Benn likes to keep one or two flipping projects in his portfolio every year, making sure to balance his work for his clients against his own real estate investment projects.
“Our model is to add value beyond just renovating something,” he says. “We try to add density with a CPR, subdividing a parcel, and we tend to build ground up more than renovate.” CPR refers to Condominium Property Regime, which means turning a single-family home into two independently owned homes on the same lot – a mini-condominium.
Just as the Success Path pros recommend, Benn suggests focusing on off-market properties rather than competing with the mass buying market, and finding ways to work with the seller to sweeten the deal, maybe allowing them to remain in the home for a time or facilitating a quick close if they need the cash fast.
Success Path’s mantra, “Run the numbers,” also holds true. Real estate will never love you back, so falling in love with a property is the worst reason to buy it as an investment. Benn says his sweet spot is a home where those around it, albeit nicer homes, have sold for 30 to 40 percent more.
“We know we’re not hitting a ceiling after the rehab,” he says. “We also renovate as if we’re going to live there. No use doing shoddy work. The Island is too small to get a bad reputation.”
The Success Path sales strategy might be questionable, but its basic counsel seems solid; Success Path also recommends that the rehab be quality work without breaking the budget – new appliances, an updated bathroom, new paint and even a staging so buyers can imagine it as their home.
“I always put a flat-screen TV on the living room wall,” the guru explains. A free TV gets them every time.
Karen Mayer, a broker with Elite Pacific Properties, recommends that investors be realistic about both the market and their competition for properties that are potentially flip-worthy.
“You’re often competing against contractors and builders, who can sometimes pay more for the property because they know their renovation costs will be less than the casual investor’s costs,” she says. While many of Mayer’s clients flock to Kailua for investment properties, she recommends expanding your search area. “Makaha and the Leeward Coast seem really hot right now,” she says.
Benn, on the other hand, prefers to stick to urban Honolulu and the Windward Side, while long-time Oahu real estate broker Ralph Foulger has invested in properties across the Island. For investors with a “day job,” proximity is important. Flipping a property requires hands-on attention to the budget, contractor work and other details – attention that’s tougher to provide when it requires a two-hour commute before and after work to check on the project.
Keep your pencils sharp and your mind focused. “We keep a keen eye on the market, so we don’t get hurt,” Benn says. “It only takes one loss to wipe out years of winners.” Akamai investors often remain flexible in their exit strategy, flipping the property when the market is hot and putting it into the rental market when sales are sluggish.
While investors like Benn prefer to flip properties for the big payout, others swear by the passive income of a rental portfolio. Foulger has been collecting rental properties since he first got his license in 1972. Now in his 70s, he is finally liquidating some of the properties he’s collected over the years to fund his quasi-retirement, while his daughter has picked up the baton and is following in her father’s investment footsteps.
While national training companies are often pyramid schemes designed to separate you from your money, don’t toss the real estate baby out with the bath water. Seminars and networking opportunities to promote informed buyers and sellers in the market can be a good way to learn the tricks of the trade. As with real estate investing, do your homework, look into their standings with business organizations, ask probing questions before handing over your cash and check their online reviews.
Foulger, who also teaches real estate licensing classes throughout the year, puts it simply: “Knowledge is always advantageous.” While it’s not part of his regular teaching schedule, he once held a three-hour seminar for a group of seniors looking to better understand the investment market in Hawaii. “Don’t get hooked into somebody’s program where you have to make monthly payments and have to buy their software and other stuff,” he advises.
Michael Mazzela agrees. He knows the national program strategy well because he started with it, running programs across the country similar to the Success Path program. Today, he makes his living investing in properties in Hawaii and Florida, and runs his own real estate investment training program, Honolulu Mentor, teaching others how to get started. Asked how his program differs from the national ones, his answer is simple. “I have nothing else to sell. Take the course, then get out there and do what I taught you.” He acknowledges that much of what is taught in his classes can be found in many books on the subject and through online resources, but he likens his classes to time with a personal trainer. “Sure, you can go to the gym and get in shape on your own. But a trainer motivates you, mentors you, helps you see success faster.”
While a real estate license is not required to invest in real estate, the training can be helpful. Foulger suggests investors consider taking the licensing classes, even if they never plan to get active licenses. An investor who has the knowledge, understands how sales transactions work, and knows the possible pitfalls and complications will have an edge over other investors.
Real estate licensing classes can be taken online, but the real-world applications and exchange of tips and information might make the in-person classes offered around the state more useful to investors. First-time-homebuyer seminars abound, often sponsored by mortgage companies, banks and real estate professionals. At press time, Mazzella’s Honolulu Mentor training program has no red flags in its BBB files or its business registration with the state Department of Commerce and Consumer Affairs. Also check out networking groups such as REI MasterMind and others easily found on MeetUp, which are terrific places to connect with other developers, make contacts for contractors, find funding sources, and share tips and ideas.
For many investors, up-front cash for a first project is the biggest hurdle. Programs like Success Path attract attendees with promises of providing that initial funding, but often with a heavy price and, judging by the scathing online reviews, without delivering much cash to the investor. Many local investors have built their portfolios by focusing first on leasehold properties that have significant time remaining on their leases. These properties are generally much cheaper than fee simple properties and can offer good returns.
Others look for private investors or partners in the project, while others might use their personal home equity to make their first deals. Mazzela says one of his motivations in teaching his classes is the opportunity to find new partners and network within the community.
“I enjoy teaching and many of my students become partners, finding good deals that I can then invest in with them,” he says.
➥ Local investors who build wealth through real estate have different perspectives about many things, including where to buy, exit strategies and their depth of commitment. Nonetheless, three common threads emerge:
1. When someone promises it’s quick and easy, run. “It’s not either,” says Mazzela, who points out that each project he undertakes requires significant cash and work before he makes a dime. “It’s a minimum of nine months from buying the property to actually getting paid,” he says.
2. Do the math, and don’t get carried away. The Success Path guru was right about this one: “Think like an investor.”
3. Don’t get greedy. It’s karma, and there’s always another deal down the road. “We always leave some money on the table,” says Benn. “We like to know the next guy is happy, too.”