So, everyone watches the TV shows on how “easy” it is to flip a house for a profit. Well, not so fast! From someone that has invested in properties from $15,000 purchase price to over one million, the POTENTIAL pitfalls are endless. Many avoidable mistakes are made along the way, a few of which I will touch on shortly. In a very simplistic sense, EVERYTHING revolves around the buy of course. Sounds simple right? Well, unfortunately, may novice investors rely solely on their Agent’s recommendations. Remember, the agent(s) involved are likely to get “both ends of the stick” the purchase and the re-sale…potentially a home run for the agent involved. Frankly, many agents themselves have never done a rehab of any sorts, yet, encourage and “minimize” the project and necessary improvements.
Simplify the process. Demand comparable “post rehab” sales and more than just one. Remember, the purchasing client will very likely require a mortgage, and even more likely an “FHA” mortgage. These tend to be a touch more stringent on the property condition and appraisal. Speaking of appraisals, regardless of what your agent and you expect on the re-sale, the appraisal will dictate the transaction. So, be very conservative on your preliminary project expectations. Also, don’t forget to include ALL cost of sale figures when you sell…commissions, closing costs, transfer taxes and the like. Ask for a complete breakdown BEFORE the purchase. Now, in the end, your Agent will be the most influential guide through the process. An experienced agent will be willing to “stick their neck out” and be candid and offer necessary support throughout the process.
As for the project itself. Do yourself a favor and do things “right”…and you all know what I mean. Many, many so called investors are flooding the inventory with sub par products. What are some tell tale “short cuts?” There are a number of tricks investors rely on for the unsuspecting buyer. The new carpets with fresh paint on all of the walls certainly is attractive to many potential buyers. Another is a “new roof” , bathroom remodels, kitchen tricks etc. If you are going to replace a roof, do just that. Do not simply re-roof over existing shingles, that is never a good be in the long run for the potential buyer. Tear off the existing roof, inspect the sheathing or plywood, and do it right! Moreover, use a reputable roofer that will offer a warranty transferable to your new Buyers.
Another shortfall is “looking for the absolute best priced’ contractors, this can be an overall project nightmare. Speed, quality, and price are all factors. The last thing you need, especially as a novice, is one contractor not performing to the agreed terms. Of course you can take legal recourse, but that tends to be unrealistic. Typically, you end up just finding another to replace the derelict specific contractor…be it plumbing, electrical, flooring, etc. The biggest consequence is the other contractors simply are held up, and your project now just went exceptionally longer than anticipated. This obviously can have a massive affect on the project: more money in overall holding costs such as mortgage interest, taxes, utilities, lawn care, etc. More importantly, it can also hinder the anticipated selling period. Perhaps you planned on having the project completed in time for the spring season, but the delays left you with a August listing date versus March. This obviously can cost you some potential buyers as seasonality also affects the market.
In sum, real estate investing is a proven long term investment for many. This particular summary emphasizes the “buy and flip” approach versus the buy and rent model. Similar in many ways, but significantly different in many aspects. We will touch on rental investments in another blog. The bottom line is, do things right for your client (the post rehab purchaser) and you can’t go wrong. Remember, that Buyer is going to have an intense home inspection with expectations higher than the norm as you are offering a “like new” home. And, depending upon the state, there may be legal assurances that can go beyond the closing of sale based on stated or implied warranties. Good luck and be PATIENT!
Author: Vince Tripicchio