Fixer-upper houses are great for fixing and flipping investment, but only if you know what you're doing. The oft heard phrase "Buyer Beware" is never more appropriate than when considering the purchase of a fixer-upper. You really need to know exactly what you’re getting into before buying. At our free workshops, you will learn all about real estate house flipping.
It’s commonly believed that fixer-upper houses represent great investments - that you can buy it, do rehab on it, and then resell quickly for a profit. And this is certainly true in this economy. With proper education and foresight, good profits can be made by buying "distressed" houses at less than market value, making appropriate repairs, and updated renovations, and then reselling ("flipping") at a profit. And for many first-time buyers who intend to live in the house while working on it, buying a fixer-upper can be an excellent option. And of course, by living in the house for at least 24 months you should be able to avoid paying regular income taxes on the profits.
The 10 Commandments of Choosing a Profitable House to Flip
These days a large number of real estate investors
, both new and experienced, are looking for good houses to flip (re-sell quickly at an increase in price). But not every house, even if it’s a foreclosure, is going to be profitable as a flipper.
Buying the right kind of house on a flip
can mean the difference between making a lucrative profit versus barely breaking even, or losing money. Why toil for weeks on a property unless you can realize a substantial profit? The objective should be to maximize your profit potential from the start, while reducing overall risk. To that end, I have created the following 10 commandments to help you achieve that goal:
1. Thou shall choose a house with a good location. Location
is still the most important aspect of real estate investing. Houses that are close to major thoroughfares, good schools, nice restaurants, shopping venues, and other desirables will sell the quickest and for the best price. Other good locations include houses on or near the ocean or other large bodies of water, and houses near popular parts of town or nightlife.
2. Thou shall choose a house in a decent neighborhood.
No matter how inexpensive the house may be, very few buyers want a house in a high-crime area. Check the local crime statistics to avoid buying in a bad location
3. Thou shall choose a house that is not super unique.
While there are many beautiful houses that are unique in design or features, many potential buyers are easily scared off by houses that are too different from other surrounding houses, or so unique that they offer challenges to normal living routines. For example, if all the homes on the street are Victorian, don’t buy the one house that is contemporary design. Cookie cutter houses may appear to be boring, but they sell more quickly and for more money.
4. Thou shall choose a house that is surrounded by other nice houses with no eyesores
. Few buyers want to live next door to a house with garbage in the yard, cars parked on the lawn, or a humongous RV in the driveway. You can turn a house into a palace, but if the houses surrounding it look awful, it’s going to be a tough sell and garner a lower price. So when you are viewing houses, look carefully at the surrounding houses as well.
5. Thou shall choose a house built in 1978 or after
. Houses built prior to 1978 may contain lead-based paint, and as such will require that you adhere to the Renovation, Repair, and Painting (RRP) laws
of the Environmental Protection Agency when rehabbing. The law makes working on these houses much more time-consuming and expensive. You have to document every single renovation in case of an audit. Failure to follow the laws may subject you to substantial fines per offense! However, by flipping houses built in 1978 or later, you do not have to adhere to these guidelines because lead-based paint was no longer produced.
But even without lead-based paint issues, newer houses are just easier to sell because they have more of the features that today’s buyer wants. The closets are larger, and so are the bathrooms and master bedrooms.
6. Thou shall choose a house with a good floor plan.
A good floor plan is one which flows easily from room to room. Many people prefer the newer and more open floor plans, in which the kitchen is open to the family room, formal rooms are smaller, and the master and other bedrooms are often on opposite sides of the house. Other features I look for are houses which have a foyer, a master bedroom in the rear of the house, large closets, inside laundry area, and the garage near the kitchen for easy carrying of groceries into the house.
7. Thou shall choose a house where the purchase price plus ALL expenses will give you a comfortable margin of profit on the re-sell.
In order to make a profit, you must know the total cost of purchase price, rehabbing, carrying costs (taxes, insurance, utilities, maintenance), and closing costs for both buying and selling BEFORE making an offer. Most importantly, you must determine the after-repaired value (aka “ARV”) because you must never pay more than 65% of the ARV when purchasing a house to flip. Your Realtor can help with the ARV estimates.
8. Thou shall buy a house that targets the largest number of potential buyers by Affordability.
If you buy an expensive house with the idea of re-selling for a huge profit, that may work, but it could also take a lot longer to re-sell. If only a few people can afford to buy your house, be prepared to have it on the market for several months, while other less expensive houses sell in weeks or even days in a strong market. Conversely, if you buy a dirt-cheap house with the belief that anyone can afford to buy it on the flip, you may be fooling yourself. The likely buyers may have poor credit or too much debt to qualify for a mortgage. Your best buyer could be an investor looking for a turnkey rental house, but then you will have to settle for a much lower price than what you expected.
9. Thou shall choose a house with a good lot.
Many people prefer a rectangular lot with equilateral sides. Pie-shaped, flag lot, or other irregularly sized lots
may be a more difficult sell, and should be avoided. It is also important to make sure that the gradation of the land is such that water will flow away from the house when it rains, so there are no potential problems with flooding.
10. Thou shall choose a house that can be rehabbed within a relatively short period of time.
When it comes to flipping a house, TIME IS MONEY
. Every day the house remains unsold reduces your potential profit on the flip. Carrying costs include houseowner taxes, insurance, utilities, maintenance, and interest if you’re funding the flip with any kind of loan. So the golden rule is to get in and out of the house as quickly as you can. For that reason, I prefer to flip houses that are less than 2,000 square feet.
By following these 10 commandments, you will be more likely to minimize your risks and make a big profit on your next house flip. Good luck!
Scope of Work
The most important thing to know before making a decision on such a purchase is what needs to be fixed. Any time you are spending money on improving a home with the notion of selling it later, strive to spend your money on things that buyers can easily see. Things like new paint and removing trash from the property cost little but have instant impact on curb appeal. Houses that have only cosmetic problems like peeling paint, a trashy yard, bad carpet or wallpaper are the best bet. This is especially true for the first time buyer looking to live in the house for a while before reselling. Fixing and cleaning cosmetic issues is fairly easy and inexpensive. It virtually always gives gives a good return on investment, particularly when you can do the work yourself. Kitchen and bathroom remodeling usually pays the highest return. Don’t be afraid of buying a fixer-upper in need of this kind of repair. But properties with structural damage, or a floor plan that requires major work to remedy, usually is more problematic, so proceed with caution.
Always have an inspection for hidden damage performed by a home inspector or construction professional before buying a fixer-upper. With real estate house-flipping, make sure that satisfactory completion of such inspections are a condition of purchase in any contract you sign. Then be sure to negotiate to try and get the seller to pay for all or part of the cost of needed repairs uncovered by the inspection. In the alternative, have the Seller lower the sales price to sell the home "as is" instead of paying for the repairs.
Further, be careful that you don’t over pay. Especially if you plan to resell quickly, paying too much up front can doom your plans for quick profit. Research the market for reselling and have an exit plan for selling the house in place before making an offer.
If you are interested in attending one of our free workshops in your area, please go back to our home page, and click on the appropriate workshop, and register.