Don’t Flop! 10 Fix & Flip Tips From A Pro
TV Shows like Fixer Upper or Flip or Flop make it look like anyone can make money on a fix and flip. Rarely, if ever, do these shows highlight failed projects and the reality of renovating an existing house. As a hard money lender, I routinely get calls from folks who have no real estate investing experience and think because they’ve watched HGTV they can flip a house.
I find that good flippers are either A) real estate agents who have access to deals, know the market well, and can save on commissions or B) contractors who know construction well and can mitigate the potential of overruns and save cost by doing work themselves. Great flippers are a combination of both.
I have personally overseen the acquisition and renovation of over 125 houses in 3 states. At one point between 2011-2013, I was acquiring 20 properties a month while 30 others were undergoing renovation. Flipping houses can be fun, no doubt about it, just watch HGTV (ha!). However, as with any investment the reward comes risk. The following 10 fix & flip tips can help you maximize your profits or limit your downside when flipping property.
- Turn the Channel
The one thing you can’t forget is Flip or Flop is a reality show. If you go into a flip with the mindset HGTV wants you to have, I guarantee you will be disappointed. Rather than thinking about everything that can go right, it is better for you to anticipate that everything will go wrong.
- Find a reputable hard money lender
Hard money lenders are a great source of financing for fix and flips. Don’t get put off by private lending rates, focus on time value of money and opportunity cost. Hard money lenders are fast and can close loans in days, often times that will give you a competitive advantage as a buyer. You may even pay less for the property if you can close quicker than a competing offer that comes with conventional financing attached to it. Let’s not forget that hard money lenders also fund construction draws faster which keeps the project moving.
- Find an active real estate agent in the market
You need an agent who knows the local market well. A great local agent will be intimately familiar with market value of homes and make sure that you are seeing every house the minute it hits the market. The agent should also know exactly what the market expects for finish quality and be involved in helping you determine your renovation specs so your renovated house sells fast. If flipping houses is something you plan to do long-term, you should consider becoming a real estate agent.
- Target markets first, properties second
Become intimately familiar with the market. You should know values well so when the right property hits the market at the right price, you can act fast. Ultimately, you also need to know what buyers want/expect for finish quality and that varies market to market.
- Find the right contractor/rehab team
This is harder than you might think as contractors these days are busier than ever. Make sure you heavily vet your contractor, asking for references, reviewing past work, and validate their licenses. You may even consider partnering with the contractor to keep them focused on keeping construction costs low and maximizing profit.
- Bring the contractor into the deal as early as possible
You want the contractor to wear two hats 1) they need to replace the role of a traditional home inspector 2) they also need to assess the existing condition in the context of your planned renovation scope and specs of finishes. You need the contractor to build you a detailed budget of exactly what it will cost to complete the renovation. Then you should add 10-20% above that as a contingency to be safe! A lot of times the best flips will be purchased “as is”. If not, having a good home inspector go through the house is always recommended.
- Consult a designer
This is another one of those major misconceptions you get from reality TV. Be honest with yourself, you may not have good taste. I know I have no business picking colors. Often times you can pay just a couple hundred dollars to get a local designer to help you choose the right color palette. This is especially important when you are dealing with extensive and very expensive bathroom/kitchen renovations. You want to get it right the first time and investing in a design consult is a drop in the bucket versus trying to reverse bad decisions because the house isn’t selling.
- Visit the property often
Being active on the job site will save you time and money. I can’t tell you how many times I caught mistakes midway though a project. It happens and the sooner you catch the less it costs to fix it. Your presence will also keep the project moving forward because you can answer questions and provide direction immediately vs a contractor leaving the site and waiting for a response.
- Price the house to sell
To flip the house fast, when you put it on the market you need to price your home correctly. If you overprice the home in an attempt to try and get the most money, it will just sit on the market. As a flipper, you want the house to sell as quickly as possible so you can move on to the next project. The best investors will tell you that by pricing the home correctly (or even slightly below market), you will sell the house fast and you might even get a bidding war that could allow you achieve the higher price you wanted in the first place.
- It’s a numbers game, focus on return on investment (ROI)
You need to work in reverse. Decide what you can pay for a house after you determine the cost of the renovation based on your scope and specs, holding costs, and ultimately what the house should sell for. Assume everything will cost more and take longer. Once you know that, you know what you can pay for the house. It is important to stick to the numbers and not get emotionally attached to the house or your renovation project. Remember that this is a business and you are not renovating a house to make it look like your dream home. Focus on ROI, don’t over build!