Countless television shows make buying a property, renovating it, and flipping it in the marketplace for a sizeable profit look easy. It makes you think: "Can I flip a property when I have never done it before?", if you're seriously considering buying and selling a home for profit, do your homework. As a Broker Associate and real estate business owner in Colorado for more than 30 years, I've worked with hundreds of home buyers and sellers and I've done flips for myself as a developer. Based on my experiences, here is important advice to consider before flipping your first home.
Before Getting Started
First, ask yourself some important questions. Can you afford to flip a home? Can you afford to hold a home for more than a year or two if the market changes? What if you end up failing and you don't make a profit and lose money? Flipping may not be for you if you can't afford to lose any money. Another important question to ask yourself: Are you ready for a project? Some people love a project and get immense satisfaction in seeing a property turn from bad to good. If you're an indecisive person or don't want to work on something daily, flipping may not be for you.
Research the Market
If you're using an agent to find a home, use one who specializes in that area. Have the realtor do a complete market study for you showing you what a house of this size - number of bedrooms and similar lot has sold for over the past few years within a few miles. After you have reviewed those sales and looked at a lot of photographs of what has sold, it is time for your broker to show you what is currently on the market in that same area and see what those properties have to offer in interior finishes, floor plans, lot sizes, exterior conditions, locations, schools, and access to bus, shopping and recreation. You can now begin to formulate what renovations are needed to make the home competitive in the market. With a final market analysis, you may add or subtract renovations.
Grab the Property, With Due Diligence
Put the property under contract with a reasonable due diligence period that gives you an opportunity to walk away if you cannot make the numbers work. That way you grab the property before anyone else does, but you give yourself time to do detailed calculations before finalizing the purchase. Make your contingencies to walk away for any reason within a certain period. I would suggest at least a 30-day due diligence or more if you need to place financing.
If you already have cash or financing in place, you can shorten this period and use that to your advantage to buy the property at a better price because you can close quicker. Hire a home inspection company or qualified contractor to identify if there are any major issues with the home that you may not be able to see with your own eyes. Significant roof damage, outdated electrical and plumbing, as well as foundation issues could really put you over your renovation budget.
Put Together a Budget
Bring in a professional to help you create your remodel budget. Find a registered contractor and have them price out your changes and make sure that the costs include the contractor's fees, governmental fees, homeowner association fees, if required, and any building permits. Get a good feeling of how long this construction will take and if this contractor has a reputation for finishing his projects on time and on budget. I would suggest getting at least two bids. Decide ahead with your contractor on your floor plan changes, pick out your tiles, cabinets, lighting, flooring, paint, and counter tops in the beginning and stick to them. Every time you change the floor plan or a finish, you can add at least another 15 to 20 percent in cost and time onto a project.
Now, put together your budget, purchase price and closing costs, construction costs, mortgage costs and expected carrying costs for a sale, commissions and selling costs. Flippers also need to be aware of all closing costs and tax implications before assuming huge profits. It is also so important to decide what is considered a good return for you. For some people a good return is 15 percent on money invested - for others it is 25 percent. This is a number you should know ahead of time, so you can decide if you are prepared to take a risk on your money invested.
Review photographs of other homes that have sold and are for sale in your neighborhood and price range. Have a sense of the design and materials that are appropriate in your home's area. For example, if you're looking to sell a home for over a million dollars you probably should not pick a $2/per square foot laminate for your floors and opt for a more expensive real wood or marble.
- Use paint colors that anyone can see their furniture in. A nice linen white brightens up spaces and makes them look bigger.
- Removing walls will make spaces look bigger, such as opening a kitchen into a dining room or family room to expand the space.
- Today you have many choices for tiles at very reasonable prices. Pick tiles that look much higher end than they actually cost.
- Countertops come in many choices that can upgrade the look of a house without spending a lot of money. If your space is small, many marble and granite companies have leftovers from other jobs at clearance prices.
- Cabinets are available for sale that look very high end, even at Lowe's, so you don't have to spend an arm and a leg to make a kitchen a wonderful place to cook and entertain.
- Replacing doors and windows can make a house look more updated.
- Think about your entry. Does it give you a sense of arrival? If not, what could you change to make it better.
- Lighting is everything. Many people go into a house that has bad lighting or not enough natural light and they don't know why they don't like it.
- Deals on appliances and fixtures are everywhere. Visit at least five outlets online or stores before buying. Remember, if you buy your appliances or fixtures through your contractor or plumber, you will pay more. Buy these items yourself to save money.
- The exterior is the first impression. Does the paint on the front of the house invite you to want to see the interior? Is the yard green and cared for? Remove dead trees or bushes, trim, green it out, create gardens and make it charming. Fencing can create a private space.
- Be inventive.
An Example of a Flip
Let's assume you saw a three-bedroom, three-bathroom and two-car garage house for $450,000. You put it under contract for $420,000. The current market shows that neighboring houses in great condition are selling around $875,000 to $925,000 and it is taking about 90 days to sell a house. We will assume you have the cash to buy it. You do your market analysis and decide with your contractor you will redo the kitchen, bathrooms, paint interior and exterior, put in new wood floors and carpet. You need a front door and you will have to spend some money on the yard. You are going to put in better light fixtures throughout the home. The biggest structural change is that you are opening the wall between the kitchen and family room to make it one big room and putting in sliding glass doors that walk out to the back patio and yard. All of these changes plus permits are estimated by your builder to be done for approximately $90,000. Because you are being conservative and there are always surprises in a remodel, you decide to add in a 15 percent reserve, or as we call it "cover your butt costs." The remodel will take approximately four months. You are hoping to sell it for $875,000 about 90 days after listing.
Purchase Price $420,000
Due Diligence & Closing Costs $ 1,500
Remodel Costs $ 90,000
Reserve $ 13,500
Total Needed $525,000
So, what else do you need to add into these costs? Assume you redo the house, but find hidden surprises and spend the reserve. Your vision was successful, and your house sells in 8 months for $875,000.
Sales Price $875,000
Remodel Costs $103,500
Utilities $ 2,500
Property Taxes $ 3,800
Insurance $ 900
Original Purchase Price $421,500 This includes Due Diligence Costs
Commissions $ 52,500
Closing Costs $ 3,500
Total Costs $588,200
So essentially you made a 49% profit on your invested monies. Was this worth doing a flip? I would say yes!
Have a Plan B "Exit Strategy"
As you are doing your remodel, the market slows down. There is more inventory on the market and it is now taking 12 months to sell a property. Did you plan an "exit strategy"? You have done some market studies and it appears you can make about $3,000 a month plus utilities by renting it out. You will still need to pay property taxes and property insurance. Do you really want to rent it or would it be better to leave it empty so it shows well? These are hard choices. I usually go for the rental, so that I have at least some kind of a return coming in while waiting for a market to turn. But, you must put out another $20,000 to furnish it and pay over the next twelve months $4,700 in taxes and insurance. Also, to sell it you will need to do a few repairs for the buyer, as the renter caused some damage of about $4,000. The only good news is that you covered these costs in rental income and getting back approximately $30,000 while waiting for a sale. You now have $616,900 invested over 12 months and you only sell the house for $750,000. You still make $88,100 after commissions. Now a 14% return. You made a great deal either way and you thought through an exit strategy ahead of time, so you are not disappointed.
Plan for the worst and hope for the best. Study your neighborhood and market trends. Be ready to move quickly to purchase good deals and really do your due diligence when buying a property. Know as much as you can about the house you are purchasing. Work with professionals like brokers, contractors and space planners if you want to save money and not make mistakes. So, is flipping still for you? Share your stories, concerns and experiences below.
About Heidi Houston
Heidi Houston has owned her own real estate business in Aspen and the Roaring Fork Valley for more than 34 years and chose to join Compass in the Spring of 2016. She specializes in real estate sales and rentals, the overall analysis of investment real estate and ranches. Heidi has managed real estate partnerships for developing land, building homes and remodeling homes. With over three decades of experience and knowledge about all aspects of real estate, she brings a complete and professional confidential service to buyers, sellers, and developers.
Heidi's broad knowledge of the luxury property market, ranches, and investment properties allows her to bring together the best criteria for the sale or purchase of a property, this service is unparalleled in the real estate industry. It is the attention to detail that pools her refined selling skills with marketing techniques that combines digital, print, personal contacts and design that provides unparalleled service for both the seller and the buyer. But most importantly she listens, negotiates without intimidation and producing results that in the end, leaves everyone happy about their purchase or sale. Remember wisdom, honesty and transparency always makes for the best deal.
*All content provided in this blog is supplied by Heidi Houston and is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.
Image credit: Shutterstock and Randolph Ashley