With the innumerable “fix-and-flip” shows that make home renovations look so easy, many people think purchasing a run-down property and fixing it up can produce significant profits. In reality, each project needs to be analyzed carefully to ensure there is room to make a profit at all. There is risk in investing in real estate and renovating, but I hope to shed light on the issues that will help you manage that risk.
Fix-up properties can range from buying a 1,000 square-foot ranch and updating the basic systems to undertaking a major remodel with a “pop top”. The time and money it requires to renovate a property and the time it will take to sell the property are critical factors in whether or not you make a profit in your fix-up venture. The fix-up expenses will be the same regardless of what you pay for the property. The key to success is identifying and purchasing the right property!
Part of the plan should include determining the goals – to buy; fix up and hold; or buy, fix up, and sell immediately. If you are renovating larger properties, they usually don’t make much sense as rentals so those you will usually want to sell immediately. A less expensive property may make a great rental to keep for a while, then trade for a larger investment property.
To be successful in your fix-and-flip, you will need assemble the following team:
• Certified Public Accountant
• Title Company
• Insurance Agent
• Short-Term Lender
• Long-Term Lender
If you identify a property which you might want to renovate, determining your budget for the project using this Cost Analysis Worksheet is a must:
Before determining costs, here are few items to consider:
Do the work yourself or hire contractors?
If you have the skills and the time to do much of the work yourself, you have the opportunity to build “sweat equity”. However, most people will need to hire someone to do any fix-up work. If you need to hire someone, it is critical to your project to use a team of reputable contractors.
Be sure to get all bids in writing and a performance agreement as to the time the work will be done. Don’t be lured into getting a cheaper price by not getting a permit. If the work requires a permit, be sure to get one. Otherwise, when you go to sell and the buyer asks for one, getting a retro-active permit can be a real problem.
Time is money
This old saying couldn’t be any truer than in doing fix-and-flips. The whole team needs to be assembled to take action as soon as possible the day the property is purchased. If you are borrowing money to purchase, each day that goes by cuts into the potential profits.
Market analysis for resale
Investigate and go look at properties that have been fixed up and find out what their sale prices were. You will get ideas as to what type of fix-ups help sell the property – and at what price. Analyze the time of year that your property will come available. Is the market strong when your fix-up is ready to sell?
If the property is left vacant while it is for sale, it is good to at least stage the property to a certain extent. This could be as simple as putting a few kitchen and bath items in it and possibly furnishing one bedroom as well as the living room.
Another option is to use a company such as Showhomes Home Staging. The idea behind this concept is to provide a live-in professional caretaker or “home manager” in the house who will keep it “showhome ready”. There is no fee charged to the owner of the property. The Showhomes home manager pays rent to Showhomes Home Staging at a reduced rate and will typically pay for utilities. The home manager agrees to keep the property clean and ready for showings at all times, including maintaining the yard.
Finding the property
The price of the property in a certain area will usually dictate whether or not it is a fix-up property.
Minor or major fix-up?
Watch out for the major problems such as foundation and structural issues. Major problems can quickly wipe out any potential profit. Make sure to have a professional inspection done and keep tabs on the inspection of major components of the house.
Other due diligence:
• Determine if the property is in the flood plain. If the property is in the flood plain a lender would require flood insurance and it could make it more difficult to sell.
• Can the property be insured? Have your insurance agent look at the house and run a CLUE report on it and yourself.
To learn more, keep an eye out for my follow-up article next week, “What It Takes To Fix-and-Flip – Part 2.”
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor
for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.