Article by Steven Wyble, askalender.com
If you’re looking to invest in real estate, one way is with a rehab project, also known as a fix and flip. The process entails buying a fixer-upper, remodeling and/or renovating it and then selling it at a profit. With home prices rising across the country flipping homes can be tricky. It’s important to know what you’re doing when taking on a fix-and-flip project. If you make a mistake, your profitable investment could turn into a costly money pit.
How do you separate the winning properties from the losers? Fix-and-flip investors look at a number of factors to help determine whether a property is a good investment.
One of the most important things that investors searching for properties to flip must consider is the property’s after-repair value, or ARV, according to Nancy Wallace-Laabs, of KBN Homes, LLC.
“Typically, if you’re investing, you want to buy a house that’s 70 percent of the ARV minus the cost of the repairs,” she said.
For example, if you determine a house’s value after you make repairs will be $200,000, and you estimate the repair costs to be $20,000, you shouldn’t pay more than 70 percent of $180,000 (the ARV minus cost of repairs), or $126,000 for the property.
Wallace-Laabs said she evaluates each property she comes across and asks herself whether it’s better suited as a rehab project or a buy-and-hold (that is, a rental property). “On flipping, you really need to analyze and know your formula to know how much money you are going to make on that property.” she said.
Lucas Machado, president of house-flipping company House Heroes LLC in Sunny Isles Beach, Florida, near Miami, agrees that the flipping game is all about the numbers.
“What do you think the thing is going to be worth once you’re done fixing it up?” he asked. “What are you paying for it right now? What are you paying to buy it, and how much is it going to cost to get it to being worth that? It’s really about nailing those numbers.”
It’s important to analyze comparable sales in the area to get a good idea how much the property could sell for, he said. You need to make sure you’re comparing “apples to apples,” he added: If a property in the area sold for $300,000, but it had a pool and your property doesn’t, for example, the two properties aren’t comparable and you can’t expect to sell yours for that much money.
Doug DeShields, president of the National Real Estate Investors Association, and an active rehabber himself, said he typically looks for homes that were built between 1950 and 1975.
“They have good bones, good structure,” he said. “They’re typically brick, and we tend to do well in those houses.”
According to DeShields, part of knowing whether a house has “good bones” or not is having some familiarity with what it takes to make necessary repairs.
“You do not have to be the world’s best carpenter,” he said. “But what you need to do is have a good feel for the various aspects (of construction). You need to know a little bit about construction and whether or not you can physically do the work. You need to know what makes a good property.”
On the other hand, if you’re looking to do a less extensive flip, you should look beyond a property’s “good bones,” according to Travis Moore, owner of Fargo Home Solutions.
Moore said he sometimes prefers less extensive flips — the carpet-and-paint-fix-ups, as he calls them — that require less expensive remodeling. According to Moore, for that style of flip, the age of the house can make a huge difference.
“If I’m doing a project like that, I really like to stick to homes that are built in 2000 and after, because you’re not going to find as many surprises,” he said. “When you get into older homes, you may think it looks OK but you can expect to have a few surprises.”
To get it right on older homes, according to Moore, it’s important to do a thorough inspection.
“Before you purchase it, really do a deep dive inspection on it … really beyond just looking at what’s visible,” he said. “For any home that old that I’m considering a lighter renovation I really dig deep into its condition for everything, (such as) plumbing and electrical.”
When you buy a property, know that not every addition or feature may be permitted — and if that’s the case, it could cost you. Flippers should be cognizant of the permitting requirements for their specific location, according to Wallace-Laabs.
“If you end up doing work on a property and then (are) trying to sell it on the retail market … you have to provide proof that you pulled permits on that work,” she said.
This is not a requirement that investors should try to skirt, because it could end up costing a lot of money, she said. Wallace-Laabs mentioned that she knows an investor who bought a house and didn’t do proper due diligence before finalizing the purchase. It turned out that a previous addition to the property had never been properly permitted.
“So now my investor friends have to tear out all the sheetrock so the city can inspect the plumbing, behind the walls, the electrical, and even (check) that they put in the right size of window to call it a bedroom,” she said. “So instead of them thinking it was going to cost them $30,000 to fix this house, now it’s going to cost them $60,000.”
Get a Mentor
Then, there are the big things you should look for when evaluating a fix-and-flip property — avoid foundation issues or termites for example, according to DeShields — but there’s only so much a newbie can know. That’s why every fix-and-flip expert we spoke to recommended turning to an experienced mentor for help.
“I would ask all new investors to get with a seasoned mentor that will let them ride along and let them know how they figured out how much it would be to fix this or that,” Wallace-Laabs said. When she first started, she worked as a property manager for a real estate broker who showed her the ropes and helped her buy her first rental home before she expanded to fix-and-flips.
DeShields also extolled the benefits of finding a good mentor.
“Find somebody to partner with, or find someone…(to) just bounce ideas off of, because there are a lot of pitfalls,” he said. “There’s a lot that a mentor can help you with…because there’s just a lot of little things and nuances that you probably wouldn’t think of.”
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