Smart Money: House flipping not easy venture for amateurs

Bruce Williams is a national radio talk show host and syndicated columnist

Dear Bruce: I was talking with someone the other day about house flipping. I'm not familiar with the real estate market, so I don't know if this is a common term that you will know. Essentially, he said that you find a house in a poorer neighborhood that someone wants to sell, and you find a wealthy developer that wants to buy the house. You act as a middleman. His claim was that he made $4,000 on one house. This wasn't his full-time job, he just did this on the side. I was thinking if he can make $4,000 on one house, it wouldn't take very many houses to make far more than I would make at any other summer job while I'm in college. However, I know that nothing comes easy. I was wondering if this would be a good idea. How would I get involved and what are the risks? Scott, via e-mail

Dear Scott: All that glitters isn't gold. Flipping generally connotes entering into a contract to purchase a piece of property, condominium or something similar and then selling your interest in that contract before the closing takes place. If you can buy a contract for property at the right price and find someone to buy from you, it works. It's nowhere as easy as it sounds, though. Furthermore, you will have to be creditworthy to get the commitment for the property. If you are not able to "flip it," then you are obliged to purchase it. There's no question that money has been made flipping property, but this is no place for amateurs, particularly when you are going to school. In my view, it may be very instructive for you to look into this and other real estate endeavors, but I would put it on hold for now.

Dear Bruce: I have heard you talk about the need for an attorney when buying real estate. Do you recommend hiring an attorney even when a buyer has a buyer agency agreement with a real estate agent? I am located in Wisconsin and am looking at buying my first house soon. M.B., via e-mail

Dear M.B.: If you told me that you had a toothache and coincidently had an accountant, how would that have any bearing on anything? The real estate agent has a function to bring a buyer and a seller together. The attorney has a function to protect your legal interests. One does not supplant the other. You absolutely, positively need an attorney when buying or selling real estate; only a very foolish person proceeds otherwise. All of the talk about having an escrow company or a title company notwithstanding, you are talking about a lot of money, and not protecting yourself is downright foolish.

Dear Bruce: We recently sold our home and are holding the mortgage. When we received the paperwork, we found two additional names on the mortgage. No one seems to know where these names came from, much less who these people are. Our lawyer and custodian of records have not been able to determine how these names got onto the paperwork. What should we do? L.P. via e-mail

Dear L.P.: It seems that an error has been made. The paper trail will get to the bottom of this. Go back to the person that prepared the document. There should be support data about who bought the property, who accepted the mortgage and how these names got onto the paperwork. It should be a simple task, one that can be easily fixed if it is a mistake.

Dear Bruce: My wife and I do not want to move. We are house rich and money poor. The house is worth about $250,000 with no mortgage. We've heard about a reverse mortgage. We are going to run out of income very soon. We need money now for things like a car. We have Social Security, but it's just not enough. Reader, via e-mail

Dear Reader: Reverse mortgages are simply a mechanism whereby one can borrow money against the equity in a property. It is repaid upon their death by the sale of the property. The older the person taking out the mortgage, the more money the lender will advance. The older person has a shorter life expectancy and, based upon the age, the lender will recapture their principal and interest faster. One of the nice features is that, in the event that you do exhaust the equity, you still have a right to remain in the property for the balance of your lifetime. The Federal Housing Administration is now involved in reverse mortgages. Consult your local banker, but bear in mind that unless you are in your 70s, a reverse mortgage is not the best solution. It may be that, even though you don't want to move, a sale should at least be considered.

Dear Bruce: I'm 70, widowed, childless and debt-free. I have investments of $450,000. I have a nice home worth about $150,000. My goal is to buy a cottage in a retirement community. It will cost me about $150,000, plus $800 a month in utility fees. Will this be sufficient or should I get a reverse mortgage, stay in my home and invest the money from the reverse mortgage? My monthly income is $1,782, and my investments for the month are usually another $1,000. Tiger, via e-mail

Dear Tiger: It sounds to me like you're doing just fine. The cottage would work for you. The $800 monthly utility fee sounds like there's a little more to it than just utilities that's $9,600 a year. Taking into account just your $450,000, if you spend $10,000 a year for expenses, you'd have to live about 45 years to exhaust your assets. In addition, you've got approximately another $1,800 a month to cover your expenses. You've done well. Congratula-tions. Go and enjoy yourself.

Dear Bruce: I recall you advising people on how to determine how much rent to charge based on the value of the house. What is the formula? C.S., via e-mail

Dear C.S.: A minimum of 1 percent of the value of the building per month is the least that I would be comfortable with. Of course that number is going to change with circumstance. For example, if interest rates fall to historic lows again because the cost of the money is significantly less, that number might be reduced a tad. On average, single-family homes are much tougher to earn a decent return on than multiple-family. If you are considering investing in rental real estate, at the very least consider looking into two- or three-family homes. The 1 percent figure is not all that difficult to attain, but it does require some effort on your part. Not every property offered will generate this type of return.