(Article originally published July 14, 2016)
Real estate themed reality television shows are ubiquitous these days. Real estate is a fast-paced, competitive world, chock full of drama and emotional intensity - it's exciting, which is why I love my job! But far and away, my favorite "realty reality" programs are “flipping” shows. To watch a tired, disheveled mess of a house become transformed over the course of half an hour into a fresh, vibrant, gorgeous space is immensely satisfying and inspiring. The idea of something old made new resonates with me, and with most people I think. We all love a good comeback story.
The great thing about these shows is that they’re inspiring people to go out and do likewise - seeking out rough homes which, with vision and some hard work, are made beautiful again. Whole neighborhoods are being revitalized. I think this is flipping awesome.
I’ve worked with several real estate investors who “flip” homes for a living. When we say “flip”, we’re talking about purchasing a property that's in disrepair, fixing any defects, remodeling the home, and putting it back on the market as soon as possible, with the goal of maximizing profit. People who do this for a living are vastly different than a homeowner who decides to take on a project house with the intent of making it their home and a long-term investment.
For the flipping newb, I have a few pieces of advice - wisdom gained from mistakes made having “flipped” a few properties myself, and from my experiences working with clients who flip homes.
Establish clear goals.
Start by answering this question: is your goal to make a profit, or is it to create a great home for you and your family? Most of the buyers I work with want a little of both - to have a nice place to live and a solid investment for the time that they stay in the home. If you’re all about making money – and there’s nothing wrong with that – that’s a vastly different approach. If you’re going to be living there for a while, you’ll likely be less flexible on certain elements: school districts, neighborhoods, floorplans, etc. If you’re strictly looking to fix it, and turn around and sell it in a short time frame, you’re primarily interested in getting a great dealon a house with profit potential. Either way, no one wants to purchase a house, spend heaps of money making repairs, only to lose money when it’s time to sell.
The basic law of investing is to buy low and sell high. I’ve got a few different strategies for you here to find the best deal possible on a home purchase:
Look for distressed properties.
A “distressed” property is one that is a foreclosure (when the homeowner fails to pay his/her mortgage payments, or taxes, and the lender or government takes possession of the house and lists it for sale), or short sale (when the loan exceeds the value of a home and the lender has agreed to take a loss on the home). In my experience, these homes are almost always in rough condition. If the homeowner can’t afford to make their payments, they usually don’t have the money to maintain their home properly. Mold, pet odors, holes in drywall, rotted floors, plumbing leaks, and general sanitation issues are common in these homes. The good news is that these are generally outside the scope of what a typical homebuyer is willing to take on in terms of repairs. (But you're not typical are you? No, you're beyond typical *wink*). The buyer pool for distressed properties is much smaller, and since the banks often have already written these properties off as a loss and are in a hurry to get the property off their books, they typically sell for far below market value.
Look for “stale” properties.
In Springfield, MO, where I sell real estate, the median days on market for properties is 32 days*. If a home has been on the market for over 120 days, chances are, the seller is getting antsy. They’re starting to get exhausted with keeping the house show ready at all times, they’re continuing to pay interest on a house that they no longer want, they may be paying for lawn services or other maintenance, and they’re just starting to lose hope that their home will ever sell. Almost always, the reason the home has been on the market for that long is that they priced it too high from the beginning. If they’re desperate, you as a buyer are negotiating from a position of strength, and are likely to settle on a price that is below market value.
*as of June 2016, data taken from GSBOR
If possible, buy in a low market.
I was fortunate enough to be able to purchase my house in 2010. America was in a recession, it was a tough time for a lot of people, but if you were fortunate enough to be able to purchase real estate at that time, chances are, your investment has appreciated considerably. Now, I’m not suggesting you wait until the next recession hits until you buy a home, but what I am suggesting is that there are certain market conditions that lead to a dip in the market. This occurs when supply outpaces demand. When housing inventory is high, and the buyer pool is small, this is the time to buy. Real estate really is seasonal. Generally, buyers flood the market in the summer months, as many buyers have families and don’t want to move while their children are in school. As the holidays approach, the real estate market slows considerably. Most sellers list their homes in late spring, as school is letting out for the summer, and most listing agents will take a 6 month listing. So, if the house doesn’t sell, by the time November and December come around, and the buyer pool has shrunk, both the seller and the listing agent may be desperate to sell that home. For those reasons, October - December is the best time to buy if you’re looking for a good deal.
Do your homework.
If you’re going to take on a flip project, you not only need to get the best deal possible on a home, but you need to have an idea of what that home would sell for once it has been completely restored. You should also do some research as to how much certain repairs, updates, and upgrades cost in your area. Know the cost of paint, hardwood flooring, carpet, drywall, subfloor, tile, concrete, roofing, and the associated labor costs. Some of this will vary depending on the specific project, but having a general idea will help you decide if it makes sense to purchase a specific home.
Do your home work. (see what I did there?)
In order to ensure you don’t lose money on a project, and to maximize profit, do as much work yourself as you can. Labor is expensive and the more of that cost you can eliminate, the better. However, never take on a task if it’s dangerous, or beyond your scope of ability. While tasks like painting, flooring, basic carpentry, demolition work, drywall, and landscaping may be within your skillset, electrical, plumbing, and HVAC work is usually best left to the professionals. Ensure that you take time to do the work well, and hire competent contractors. Be wary of the cheapest bid. Poor quality shows and will cost you money when it’s time to sell.
Maximizing the sales price will obviously put more money in your pocket. Here’s how to do that.
Create a beautiful, but blank canvas.
What I mean by "create a blank canvas" is that you should leave room for the potential buyer to personalize the home. When you’re envisioning what your house will look like once it’s completely remodeled and fixed up, try to take yourself and your tastes out of the equation as much as possible. What I mean by that is that your goal should be mass appeal. Don’t tailor the house for a specific buyer, make sure it appeals to what the majority of buyers are looking for. Being too bold with the design or the colors of the home will turn off many buyers. By appealing to as many buyers as possible, you are driving up the demand for the home, which will drive up the price you will ultimately get for the home. This doesn’t mean the house has to be bland, in fact, bland is almost as bad as being too bold. It needs to be a happy medium - contemporary, but not avant garde. Eye-catching, but not off-putting.
Sell at the top of the market.
As I stated earlier, most sellers will list their homes in late spring/early summer. They know that this is the time of year that the buyer pool is largest. However, a lot of buyers really start looking in early spring after the weather warms. The buyer pool may not be as large at this time of year as late spring, but inventory is low. This is something you can use to your advantage. The buyers are there, but the homes are not. If you beat the rush of listings, yours will stand out, and you’ll maximize your profits. March and April tend to have the highest sales price to list price ratios.
The process of flipping a home may look easy on the 30 minute television episode, and it may appear lucrative, but the reality is that flipping a home is a very difficult process, and many times, the profit margin is slim, or non-existent. You shouldn't be afraid of taking on a project home, but do be prepared and seek counsel from those who have experience remodeling homes. If you're in the Springfield, MO area, I'd love to talk to you more about it! Just click here, and send me a quick message!