What Is New Tract House Flipping?

Real estate investing by its very nature is rampant with peril. As a child I experienced this firsthand with the occupation of my father, who, as a young man at the age of twenty-six, got his brokerage license in California and started selling homes. Eventually, and successfully, he sold industrial and storefront retail properties in South Central Los Angeles. As a child, I remember helping Dad hang up signs.

The signs read “Quik Realty, Malcolm Potter, Broker.” Having migrated from Ohio just a few years earlier, starting in real estate at such a young age, with three young kids intact and my kid sister on the way, one can understand the motivation to succeed quickly. Apparently this worked, since by the early 1970s, Dad was awash in cash; so much so, that we had two homes, one in Los Angeles, the other 80 miles away in the resort ski town of Lake Arrowhead, with a couple of cars to boot.

Real estate was booming, and times were good. The flip side of this nirvana was something called a recession. Unless you were bullet proof, it hit a lot of real estate professionals hard, including Dad. It’s hard to make a living when nobody’s buying, especially when you make your living selling-and when nobody’s buying, nobody’s selling. Long story short, Dad had some major highs and lows through his career, but it was those early years when I was a child that were most indelible to me.

One of the two major lessons I learned was never, and I repeat never, leverage yourself too deeply into any piece of real estate. If things go south, you don’t want to be catastrophically and economically destroyed. When applied correctly, leverage is the eighth wonder of the world, and when in the world of real estate investing, use it to your advantage, meaning use other people’s money, also known as OPM. Using OPM obviously means going to lenders, banks, and mortgage brokers to do all the heavy lifting. And as for lesson two, refer back to lesson one. Real estate investing should in fact be called “real estate leveraging” instead. Thought of in this way, real estate investing should be about the proper allocation of leverage and its use. More particularly, real estate investing in new tract housing is one of the few areas of real estate investing where the investor proactively reduces the risk of financial loss to an absolute minimum. To illustrate, the following are just a few reasons why the risk is minimized: first, most earnest money deposits are in the $2,000 to $8,000 range, with many builders at the industry standard of $5,000.

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