We are all watching “Fixer Upper”, “Flip or Flop”, and other flip a house shows on TV. They make it look easy to take an old, run down house and turn it in to a shiny, new, renovated home most any buyer would love to purchase at a premium price.
We’ve helped buy and sell several “fixer-uppers” for our clients. Here’s what we’ve found:
- It’s not as easy as it looks. There are more buyers (including investors) than sellers in todays market. You have to be creative in finding homes that are distressed and in need of repair. You must be diligent in searching the MLS listings, create relationships with REO agents, and possibly spend time on the court-house steps in order to find the right property. You will see many houses that are overpriced and will not make a profit for you in in the long run.
- Take your projected costs and add another 10%. You should be able to project your costs on your initial visit. How much is a basic kitchen re-do? How much is a high end kitchen? Do you need to paint the entire house? What does the roof look like? Are there signs of water stains (leaks) or termite damage? Meticulously go through the home from top to bottom in order to assess the repair costs. One home recently looked fine outside until we went to one side of the house. The siding was rotting underneath the fresh coat of paint (hiding this?). New hardi-plank siding was needed on the entire exterior. That could have been an additional $20,000 in costs we may not have anticipated. Any profits could be wiped out if you make a mistake in your projected costs.
- It’s not just “lipstick on a pig”. Buyers and their agents are savvy. They are going to be “wowed” buy the new flooring, paint, appliances, tile, etc. That does not mean you can leave an un-serviced 25 year old HVAC and no one will notice. They will see water leaks in the attic, they will question any “rodent” droppings or traps, and painted cabinets sometimes add charm, but other times they look old & out of place in a newly refurbished home. Make the home “pop”, but don’t neglect the systems.
- Your construction costs can make or break you. Are you getting the best deal from your suppliers? It pays ten fold to shop around. Look for the best prices on appliances, lumber, paint, etc. The more time you spend on cutting this cost, the better you will be on your bottom line number.
- What happens if you run into unexpected set backs? The porch seemed fine when you bought the house. Now you notice it’s leaning a little too much on one side. Do you have a structural problem? Do you need to hire an engineer to help you determine the cost of repair? You may sell a home “as is”, however your agent is required to disclose any major defects the home could possibly have.
- You’re under contract? Congrats! Now it must appraise. You’ve bought at a good price, you were mindful of your expenses during the renovation, and now you are under contract at a high price! If your buyer is getting a loan, the lender will require an appraisal. Make sure the comps are close to your list price. Be ready to show your renovation costs as well if you need to justify list price as well. Appraisers are very conservative in today’s market. Make sure you can back your price in order to get to the closing table.
- More possible expenses will crop up with the buyers inspection. You’ve done a great job and the renovation is a success! Your buyer will most likely hire a professional inspector to look over the house. There is no “perfect” home. They will come back with some repair requests or ask for a concession on the contract price. Keep this in mind and realize they will be looking specifically at electrical, the roof, the heating and cooling systems, and for signs of structural issues.
- More costs…. Do you get a survey or termite bond? We will usually have our pest control person look over the home during our very short due diligence prior to purchasing. Most of these homes are sold initially “as is”. You may be able to request the seller pay for a termite bond if there are signs of termites. If not, you will know up front there is an added cost of getting rid of termites and treating the infected areas before you list. Surveys are not always ordered when buying a house. In my opinion, if the current seller does not have a survey, you should add that as an expense to your reno cost. Having a survey not only gives you peace of mind on the property lines, it also shows a potential buyer that you’ve gone above and beyond in confirming the property lines for their new home.
- This is our formula on deciding how much to offer a potential flip. Everyone has his or her own way of looking at how to cost out a reno. We take the potential lowest contract price after the renovation, deduct the realtor fees, deduct the cost to renovate, and subtract our desired profit. This gives us our offer price on a distressed property. Hopefully that is a number the seller will accept and we can start the flip!
