FIX AND FLIP
HOW TO TRANSFORM A FIXER-UPPER
T he real estate market will always have its ups and downs, but real estate is an often-profitable investment. Real estate investors do their investing for various reasons. Some see a house as a place to hang their hats for years and years, while others look at properties as nothing more than investments. Buying a home with the intent to fix it up and resell it is called a “fix and flip.”
In such situations, investors buy homes at below-market prices before refurbishing the homes with the goal of recouping their initial investment — and then some — when the homes are ultimately put back on the market. Flipping has become popular for both expert remodelers and novice investors. RealtyTrac, a source for comprehensive housing data, noted in its Year-End and Q4 2015 U.S. Home Flipping report that 5.5 percent of all single-family home and condo sales during the year were flipped properties.
This marked an increase from the same time the previous year. Investing in a fixerupper requires a leap of faith and a vision of what the home can look like in the future.
Turning a real estate lemon into lemonade requires certain skills and a good measure of patience. The following are some guidelines to get anyone started.
Don’t bite off more than you can chew.
Make an honest assessment of your abilities and which renovations, if any, you can handle. If you are unskilled or inexperienced working with your hands, then it can be easy for an investment property to quickly become a money pit. Before purchasing a property, hire a trained home inspector to tour the home with you and point out all of the areas that will need renovation. With this list, begin getting estimates on how much money the work will entail. Determine if this fits with your budget. You do not want to invest so much that it exceeds what you could feasibly recoup when it comes time to sell.
Mike Milner, First Security Bank senior vice president of mortgage lending, said if a property owner bites off more than he or she can chew, the project can quickly turn into a nightmare.
“You should always perform your due diligence when purchasing any home, including a property you intend to flip. A prime consideration when flipping a home is to ensure there are no major repairs needed,” he said.
“Foundation and structural repairs, roof replacement and plumbing problems can turn a property flip into a flipping nightmare. When possible, have someone in the home-building industry or a structural engineer look at a potential flip property.”
Overlook cosmetic problems when visiting properties.
Cosmetic issues include all of the easily replaceable items in a home, such as carpeting, appliances, interior paint colors and cabinetry. Focus on the bones of the house — the architectural integrity and those little touches that you envision having a “wow” factor.
Seek the help of experts.
Some flippers think they’ll save the most money by doing all of the work themselves. This isn’t always the case. Professional architects, designers and contractors may help you save money. Contractors have an intimate knowledge of where to buy materials and may be able to negotiate prices based on wholesale or trade costs. In addition, experts can help you avoid common pitfalls because they’ve already done this type of work time and again. It’s smart to rely on expert advice, even if it means investing a little bit more.
Milner said that without the help of experts, even on the accounting side of the project, people will start to see the cons of flipping houses.
“Just because a home is a ‘great’ buy doesn’t mean it will resell quickly. Make sure you know the marketing time in the area where the home is located,” he said.
“Work with a Realtor to help determine the best market areas. Another con to a property flip could come at tax time. Consult a CPA to ensure that you understand the tax ramifications of flipping property as they might apply to your personal situation.”
Recognize that not everything must be completely redone.
Realize that, in some instances, a coat of paint and some new accents may be all you need to transform a space. For example, if the kitchen cabinets are in good condition, see if they can be refaced or painted instead of replacing them entirely. Install new door pulls/handles to add visual interest. Look for some ready-made items, such as bookshelves, instead of installing custom carpentry.
Think about what the buyer will want, not what you want.
Renovate with an eye toward prospective buyers’ needs. Keep things neutral and accommodating. Research the latest trends to understand what buyers might be seeking in a home. You want potential buyers to envision themselves moving right in. Renovating a fixer-upper takes time, but it can be a worthwhile project and one that can help anyone turn a profit in a booming real estate market.
Milner said that overall, fixing up a home to sell can translate into a quick profit if one knows his or her market.
“Property flipping can be an excellent way to generate income,” he said. “Do your homework. Consult with a bank, Realtor and CPA to set the groundwork for getting into the property-flipping business.”