Raise your hand if you love binge-watching HGTV at home, secretly dreaming that Chip and Joanna from “Fixer Upper” were your best friends, or that you were somehow the third “Property Brothers” sibling.
Now that everybody’s hand is in the air, keep them raised if Chip, Joanna, or either of the “Property Brothers” siblings inspired you to one day complete your own renovation project.
HGTV completely romanticizes flipping homes, but that does not mean that a successful flip is impossible or out of reach for savvy people with a vision and a plan.
We know that getting started on your house-flipping journey can be intimidating. The amount of information on the subject can be overwhelming, and just as overwhelming is trying to decide which information you can trust.
At Your Castle Real Estate, many of our investors and investor agents specialize in flipping homes. We highly encourage this and even offer classes on best practices, cultivated from hundreds of years of combined real estate experience. We believe in freely sharing our knowledge, so we are creating a short house flip blog series for investors. This series will be a cumulation of our favorite and most effective Flip Tips in one place.
This week, we will dive into “what to look for in potential homes to use as flips”.
Location, location, location (do we even have to say it?)
As we mentioned before in an earlier blog for first-time homebuyers, you must remember that flipping a house only updates the cosmetic details. What you cannot change, however, is the location of your home. Because of this, it is incredibly important that you choose your house for the neighborhood.
Neighborhood curb appeal is one of the most important factors to consider. After all, you have control over the exterior of your flip, but not over the exterior of the other homes in the neighborhood. An “up and coming” neighborhood is best – one where there are plans for additional and updated local amenities to be created, but homes can still be purchased at inexpensive prices. For this, you need foresight and patience.
What amenities will bring value to your flip is totally dependent on who your target buyer is (which is something you need to know well before you start your project!). For example, a young family would likely desire close proximity to good schools, which would not be a factor for a retired couple. A neighborhood full of young singles in the city would probably not be bothered by minimal parking, but in turn, would need access to public transportation.
In the same breath, these new amenities may turn into an idiosyncratic risk, which is risk specific to a particular property. As an example, let’s say that you buy a condo with a beautiful view of the city skyline. You are thrilled to find out that they are adding an updated shopping center next to your new condo… but after it is built, that shopping center blocks the view of the skyline, and now all you can see out of the window is concrete wall. Idiosyncratic risks can be difficult to predict, but we recommend talking to experienced flippers who have been through it all and can help guide you through the fray of unpredictability.
To a lesser extent, but still important, is the location of the home to you and your contracting team. You will be frequently traveling back and forth to the property, and the less time spent commuting, the better.
Find a house to which you can add value
This advice may seem a little too conspicuous, but if you buy a house at full price, then spend $50k on improvements, you likely will not make a profit. The obvious goal is to sell for more than you spend. We have found that (loosely) the ugliest house in the best neighborhood you can afford is a good investment. You can get a discount for the pea-green wall color and fluorescent kitchen lighting. These are simple, inexpensive cosmetic fixes that will add a nice ROI to the home.
It should also be a house that you can flip quickly. Remember, time is money. This tip is especially critical for new flippers who are just getting started in the business, and others who may borrow money for the reno. It is crucial to repay the loan before interest and penalties have a change to pile up.
There is a balancing act here to adding value to a flip property- when all is said and done, you do not necessarily want the nicest house in the neighborhood. In this case, there is such a thing as “over-improving”. It would be impossible to sell a highly updated property at $500k in a $350k neighborhood.
To help estimate how much additive value is feasible for your home, check out comps (comparable houses) to see what people are paying for similar homes both pre- and post- rehab. Websites such as Realtor.com and your local MLS (for Denver, that is ReColorado.com) can help you gauge price points. As always, your local expert realtor has the most comprehensive resources to help you pinpoint the numbers.
Structural issues are a HUGE reno-no. Major fixes like foundation cracks and uneven floors take a lot of time and too much money to repair. You will spend more money fixing these issues than you will get back on the sale.
This also applies to other large cosmetic issues, like layouts that do not make sense to modern day buyers. A large bedroom-to-bathroom ratio is one unappealing style you would want to avoid. Six bedrooms and one bathroom is a less than ideal use of space. According to HomeAdvisor, adding a bathroom can cost from $3,000 for a simple conversion of existing space to $25,000 for a new addition to your house. It is best to just avoid dealing with this situation to begin with.
Also making the list of undesirable layouts are low ceilings, narrow kitchens with load bearing walls, and small master bedrooms. You will want to find a house with good bones. From there, a more experienced flipper can make renovations to rooms like the kitchen or master bath and add good property value to the space.
Flipping houses is worth the risk if you make the right investment. Whether or not an investment is right is a personal choice and up to you. Talk to one of our expert agents, or read more investor tips for additional details on what it takes to find the perfect investment property.
We’ve covered the basics, so let us know what qualities make for good flipping potential in your books!
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