In the last few years, there have been many television programs that are about investors buying residential properties, rehabbing them and then selling them for a profit. The popularity of these shows has given many people the idea that they can easily buy, rehab and sell and make a quick dollar. While many people are successful, the reality is that it isn’t quite as easy as what we have seen on TV. There are many things that a “flipper” needs to think about before getting into the game. One must not only understand the process of taking a distressed property to its’ former glory, but also understand the local real estate market trends. I have found that the successful individuals or groups have a knack for knowing the construction side as well as the real estate side of these projects.
Starting with understanding the market for your potential flip property is important. For someone that is just a beginner in this kind of project, they need to know the potential value of a property and how much they will have to budget to get it to a point where they will make a good margin. Just because the property price looks appealing doesn’t always mean it is a good flip candidate. Here are some things that need to be considered when purchasing a property for flipping:
-Location. The old adage, “Location, Location, Location” holds true with flip properties. Although you may not be able to find that “diamond in the rough” next to a country club, you still need to be aware of the surroundings. Are the surrounding homes in good repair? Is the property next to a railroad, airport or busy street? Are there other issues that may affect value due to the location? If so, you may think twice about buying. It could affect your eventual sales price and also how long you have to hold the property.
-Market trends. Are the homes in the area going up in value? Is your area more seasonal for real estate sales? Remember, the data that you may look at for “comps” is historical data usually 1-6 months old and may not be a reflection of what is really happening in the current market. Make sure you analyze the data and try to get a good feeling of where the current market for your property is going. If you see listings selling quickly and multiple offers happening, then you will probably be in a good situation depending on how long your rehab takes. Most flippers will put a sign in the property right after they start the project and will create an interest list. If you are in a seasonal area, remember that the market will slow at certain times of year and the weather may be a factor in completing your job. Take it into consideration when buying a property in the late fall.
-Property features. Some features are great selling points and others aren’t. Some features you can easily change and some features can’t be changed. Some interior walls might be able to be moved to make a better floor plan but yard size can’t be changed. Also, some changes can be very expensive and time consuming and can cut into your margin.
Understanding the construction process is extremely important as well. Estimating costs, budgeting and knowing the order in which to complete the project are aspects of the construction side that could make or break your project. Here are some things to consider:
-Inspections. Have a thorough inspection prior to closing the deal. Remember that many inspections are non-intrusive and that there may be some hidden issues. A good home inspection should see indicators of hidden issues.
-Task list. Put together a list of things that absolutely need to be done and a second list of items that can add value but don’t necessarily need to be done. Examples of things that add value and are relatively cheap are things like crown molding and wainscoting.
-Estimate costs and put together a budget. This should be done prior to closing the deal as well. You need to figure your costs so you can determine possible margin and if it is worth taking on the project. I also recommend that buyer (especially inexperienced flippers) add about 15% to their estimate and put it in the budget for unforeseen issues. Also, many buyers forget to include possible permits, taxes and their holding costs in their budget. Always overestimate costs and be very conservative on possible sales price.
-Order of work. There is an order that should be followed to make the project go smooth and have the property look ready to sell when the last touch up is done. There is not necessarily a right or wrong way, but here is a suggestion of how it should be done (after initial inspections and task list is created):
-rough outside landscaping (grass doesn’t get green in a few days unless it is sod)
-trash out and any demolition
-fix roofing and foundation issues
-exterior doors and windows
-fix/upgrade plumbing and HVAC issues
-repair/replace sheetrock, tape and texture
-replace fixtures, appliances and flooring
-finishing interior touches
-finishing exterior touches
-finishing landscape touches
Taking on, and successfully selling a flip property can be very rewarding but is a lot of work. Make sure you understand what you are getting into before jumping in. Surround yourself with good people you can work or consult with, including good contractors and real estate professionals. Who knows, maybe you’ll have the next “fix and flip” TV show.
Give me a call if you have more questions or need advice about real estate investments. Garth Evans, 916 408-2222
Before and after picture from daytonhomeimprovement.com