Realities of Fix-and-Flips – Part 1

Posted by Duane Duggan on Friday, November 10th, 2017 at 8:52am.

Over the years, the thought of “fixing and flipping” has become highly popular. Perhaps this is because of the array of reality TV home shows that make it look so easy.  Many people think taking a run-down property and doing some fix-up can result in reaping a huge profit. In reality, you need to analyze each project carefully to make sure there is room to make a profit at all. There is risk in investing in real estate and doing renovations, but this information will help you manage that risk.

Fix-up properties can range from buying a 1,000 square-foot ranch and updating the basic systems to undertaking a major remodel with a “pop top”. The time and money it takes to renovate the property and the time it will take to sell the property are critical factors in whether or not you make a profit in your fix-up venture. The fix-up expenses will be the same regardless of what you pay for the property. The key to success is buying right!

Part of the plan should include determining the goals: to buy; fix up and hold; or buy, fix up, and sell immediately. If you are renovating larger properties, they usually don’t make much sense as rentals so those you will usually want to sell immediately. A less expensive property may make a great rental to keep for a while, then trade for a larger investment property.

To be successful in your fix-and-flip, you will need assemble the following team:

-REALTOR®

-CPA

-Attorney

-Title Company

-Inspector

-Insurance Agent

-Short-Term Lender

-Long-Term Lender

-Contractors

-Suppliers

If you identify a property which you might want to renovate, determining your budget for the project using this Cost Analysis Worksheet is a must:

Before determining costs, here are few items to consider: 

Do the work yourself or hire contractors?

If you have the skills and the time to do much of the work yourself, you have the opportunity to build “sweat equity”. However, most people will need to hire someone to do any fix-up work. If you need to hire someone, it is critical to your project to use a team of reputable contractors.

Be sure to get all bids in writing and a performance agreement as to the time the work will be done. Don’t be lured into getting a cheaper price by not getting a permit. If the work requires a permit, be sure to get one. Otherwise, when you go to sell and the buyer asks for one, getting a retro-active permit can be a real problem.

Time is money

This old saying couldn’t be any truer than in doing fix and flips. The whole team needs to be assembled to take action as soon as possible the day the property is purchased. If you are borrowing money to purchase, each day that goes by cuts into the potential profits.

Market analysis for resale

Investigate and go look at properties that have been fixed up and find out what their sale prices were. You will get ideas as to what type of fix-up helps the property to sell -- and at what price. Analyze the time of year that your property will come available. Is the market strong when your fix-up is ready to sell?

Selling process

If the property is left vacant while it is for sale, it is good to at least stage the property to a certain extent. This could be as simple as putting a few kitchen and bath items in it and possibly furnishing one bedroom as well as the living room.

Another option is to use a company such as Showhomes Home Staging. The idea behind this concept is providing a live-in professional caretaker or “home manager” in the house who will keep it “Showhome ready”. There is no fee charged to the owner of the property. The Showhomes home manager pays rent to Showhomes Home Staging at a reduced rate and will typically pay for utilities. The home manager agrees to keep the property clean and ready for showings at all times, including maintaining the yard.

Finding the property

The price of the property in a certain area will usually dictate whether or not it is a fix-up property.

Fix-up Minor or Major?

Watch out for the major problems such as foundation and structural issues. Major problems can quickly wipe out any potential profit. Make sure to have a professional inspection done and keep tabs on the inspection of major components of the house.

Other due diligence:

Determine if the property is in the flood plain. If the property is in the flood plain a lender would require flood insurance and it could make it more difficult to sell. Can the property be insured? Have your insurance agent look at the house and run a CLUE report on it and yourself.

To learn more, keep an eye out for my follow-up article next week, “Realities of Fix-and-Flips – Part 2.”

 

About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.

For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611

 

1 Response to "Realities of Fix-and-Flips – Part 1"

The Realities of Fix-and-Flips – Part 2 wrote: [...]The following article is a summary from the book, “Realtor for Life”, written by Duane Duggan. 
Fix and flips are incredibly popular on TV home shows and make these ventures look easy and highly profitable – but are they? In my previous article, “The Realties of Fix-and-Flips – Part 1,” I discussed building a team of experts, which you will need as you move forward with any renovation of a property.  I also provided a Cost Analysis Worksheet to help you assess the costs of the fix up.
 
Here are additional areas you will need to consider as you think carefully about undertaking a fix and flip.
Picking the right neighborhood
-Is another fix-up being done there?
-Check the quality of schools and amenities such as shopping and other services.
-What is the crime rate and type of crimes?
Purchase price of the property
Once you find a property, you can analyze the cost of the fix-up and the value after the property has been renovated to determine the maximum you can pay and still make a profit.
In addition to fix-up expenses, you need to keep in mind that you will have acquisition costs, selling expenses, and taxes, if you make a profit.
You can use the form below to estimate your selling expenses.
 
Acquisition expenses for a permanent loan include:
-Loan fees
-Appraisal
-Tax service fee
-Title Insurance for lender
-Tax certificate
-Recording fees
-State doc fee
-Insurance
-Misc. Lender fees
-Interest proration
-Tax and insurance reserves
-Short-term commercial loans
Short-term financing Sometimes it is more economical to make an arrangement with a commercial banker to provide short- term financing while the property is being renovated. With a short-term commercial loan, you would hopefully be able to have the home resold before the loan comes due. This way you would never have to apply for a permanent loan on the property.
Selling the property quickly Make the potential buyer say “WOW” as they walk in the door. Almost every buyer that says “WOW” when they walk in the door will end up buying the house. Therefore, your goal should be to make them say “WOW” from the curb and then again as they walk through the front door.
Ask yourself what it will take to design the maximum amount of curb appeal? What will it take to make the kitchen and bath “sizzle”? What will it take to make the house light and bright?
Options for financing the fix-up property

       Pay cash for property and cash for fix up
       Pay cash for property, short-term loan for improvements
       Short-term loan to purchase, possibly borrow for construction expenses
       Permanent loan to keep and hold 
       Permanent mortgage to purchase, cash for improvements
       Buy with a short-term loan, fix up, hold a year, then exchange for other property
       Owner-occupied renovation financing is definitely easier to obtain, with programs such as the FHA 203k        program. 

If you missed my previous article, “The Realities of Fix-and-Flips – Part 1,” you can find it at: http://www.boulderco.com/blog/realities-of-fix-and-flips-part-1.html [...]

Posted on Friday, November 17th, 2017 at 10:40am.

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