Flipping A House Needs a Plan
Thanks to television, one of the hottest trends in real estate investing is the idea of buying, renovating and flipping houses. I think we’ve all heard of people who have done well in this type of venture and so, on the surface, it seems like a very good idea to many people. Over the last few years, I think I’ve met many of them: the ones with very limited funds who are certain this is their ticket to freedom; the ones who have taken the “buy with no money down” courses and, the people who feel their keen eye for design or their carpentry skills are all that they need to make a quick profit in the real estate business. While it can work in many cases, flipping property is a high risk endeavor and having a solid business plan is essential.
Although it looks so easy on TV, it really isn’t. I have some clients whose own home was featured on one of these shows. The program left viewers with the impression that a little paint, some new drapes and a couple of repairs led to a very fast sale. In reality, the house languished on the market for over a year after the “renovation” was complete. I’ve seen other people buy “distress sales” privately only to realize later they paid over market value and could not recover their investment for years. I’ve seen people buy expecting a $5,000 renovation that quickly doubled or tripled. I’ve seen people forget about recouping the soft costs of buying and selling such as commissions, legal fees, land transfer tax, utility set-up, carrying costs, etc which can add up to thousands of dollars that have no direct impact on the salability of marketability of the property. So, a business plan is essential to make this work and if done well, renovating for resale can be lucrative. Without a plan, you will almost certainly lose money. Here are some key points to consider in your business plan:
Know the Market and Work With an Experienced REALTOR®. You need to know neighbourhood values and market trends in all the areas you are considering because often you will need to make quick decisions. What kinds of homes sell quickly in which areas and for what type of dollar value? How long does it typically take to sell a house in that area? Is it an area with appreciating values? Are there any major development issues looming in the near future? Any stigmas? A professional REALTOR® should be able to help you on all of these points and can guide you in assessing value and later resale values.
Focus on Cosmetic Renovations. Look for houses that can easily have their “curb appeal” transformed or that can sparkle like new with basics such as cleaning, paint, flooring, etc. Personally, I can’t say enough about the value of having a home stager on your team to assist with this area as a good stager can envision the before and after as well as establish a budget to getting there.
Set A Budget. Just like in an auction, set a firm budget for yourself based on the home you have chosen. Take into account the expected future sale price and then deduct all of your costs to buy, sell and carry. Then determine what renovations you would need to do to get your anticipated sale price and deduct the cost of these. The remaining figure is the most you should pay. Don’t let emotion get in the way, haggle a little and if the Sellers are not satisfied with your best offer, move on.
Have a Home Inspection. This is essential as it will reveal any major problems that could spell the difference between a profit or a loss. Don’t assume you or your buddy/uncle/dad/mom can do this. Hire a professional!
Decide who will do the work. You probably shouldn’t try to do everything yourself. You will want to resell the property as quickly as possible to maximize profits so, hiring a professional contractor, stager, pager, carpenter, etc is usually the fastest way to get a good job done quickly. The work should be of a good quality that will appeal to your buyers in a certain price range. Future buyers can see the difference between good or poor workmanship and good will always pay-off.
Price It Right. When you are ready to resell the property, list it at market value since any more means it will sit on the market too long eating up your investment dollars. List it for sale with your REALTOR® because a well exposed property will generate the best offers. Don’t try to be greedy stick to your business plan so you can move on to the next adventure.