You can make money flipping houses, but it takes a savvy investor, and a keen eye to bring in a maximum return. TV reality shows and infomercials of all styles will have you believe that flipping houses is a quick and easy way to turn a profit in real estate. This can be true when done right, but if you are considering taking on the challenge, make sure that you are prepared for the work involved to help avoid making costly mistakes.
House flip·ping – the act of purchasing a home in a state of neglect and/or disrepair, fixing it up, and selling for a profit.
The key word there is “profit.” In order to ensure a successful flip, we have outlined some guidelines to help you.
If you are planning your first flip, it’s usually best to start off with a small, mostly cosmetic flip. While the profits will be somewhat smaller on these, it will give you, the investor, an opportunity to learn to budget, set timetables, and live within those. A cosmetic flip is one that does not require any major demolition, but instead provides a facelift based on fresh paint, baseboards, light fixtures, and other non-invasive updates.
Here are some of the most common mistakes that we at BTSH have seen when it comes to flipping houses:
1. Don't make too many personal design choices
1. Don't make too many personal design choices
When planning a fix-up for the purpose of resale, you’ll want to ensure the finishes and designs selected incorporate every day function, while maintaining a neutral style that will appeal to your market. Avoid finishes that are on-trend. These will appeal to a smaller pool of buyers, and could concern potential buyers about their sustainability.
2. Avoid overly extravagant finishes that do not suit the price point of the house
It’s easy to get distracted by pretty things. We all enjoy a little glitz and glam, and so will your buyers, but be sure to check in with your budget often. Before beginning any renovations, research your neighbourhood and market, and compare what similar houses are selling for. Regardless of your updates, there will be a market ceiling that dictates how high your buyers are willing to go. Most buyers are not easily impressed by brand name window coverings, or top of the line hardwood floors, provided that they feel that the finishes and workmanship reflect quality. Take the time to find the best price, focus on value, and splurge cautiously.
3. Price the house properly to recoup unplanned expenses
This is already covered in the previous point, but remember that your budgeting errors are not your buyer’s concern, and pricing a house too high will result in a much slower sale of the house. When a house sits on the market, it becomes stale, and will eventually require a price reduction. Now you’re back where you should have priced the house initially, but a few thousand more in the hole from the extra months of carrying costs. If you go over budget, unload the house as quickly as possible so that you can free up capital to move on to the next venture.
4. Starting renovations with a clear plan and budget
Poor planning is the bane of a property flipper's existence. In order to have a successful flip (and by that I mean maximum profit-minimum investment, not any profit at all) you must carefully create a plan of action and implement that plan as quickly and cost effectively as possible. You must also realize that there are likely to be rain delays, hiccups, and disasters along the way. Proper planning can eliminate some of the disasters that may occur, but it will not eliminate every conceivable possibility that will come along. More importantly than anything else, proper planning can limit these occurrences as well as their severity to the overall time schedule and budget. Plan for at least a 15% contingency once your budget has been created, and this should help to cover most unexpected expenses.
Before purchasing any investment property, it is always a good idea to have a qualified home inspector or contractor review the property, and address any renovation plans that you may already have to determine feasibility and review anticipated costs. Knowing the problems and potential problems that exist in a property can help you to create a workable timetable and budget.
Also, when creating your budget, don’t forget to account for resale expenses – these are the fees paid to your real estate agent, lawyer, and staging. Remember that vacant properties do not evoke the emotional response that most buyers need in order to connect with a house, and motivate them to purchase. As well, empty rooms appear smaller than they actually are, and properly furnishing them will show the scale.
5. Understanding your audience
Take some time to determine what the buyer demographic is in your area, and evaluate what their wants and needs are. Keep in mind that you may not be the target buyer for your house, so what you like and dislike should not be a factor in most design decisions. This is important to all of the above points in determining what you should, and should not, do in terms of renovations. Today’s first-time homebuyers are especially motivated by move-in ready homes that require little-to-no maintenance. If your buyer is a young family demographic, you’ll want to show them the storage in the house, great lounging/entertaining areas, and of course, multiple bedrooms, preferably in close proximity to the master bedroom. Doing your research on your avatar will be key to marketing the house properly.
Some additional considerations, depending on your buyers, should be fenced in yards, landscaping, and maintenance requirements. Low maintenance lawns are in high demand these days, particularly low maintenance lawns that appear to be well landscaped. Remember, less often really is more.
6. Hiring the right trades
We have all heard nightmare stories of the contractor that failed to complete work, or simply did not complete the job properly, and TV has capitalized on these failures, but you do not want to pay this cost. Research your trades, ask for referrals, review previous work, and ensure that they are properly registered and insured before hiring them for any work.
If you are considering purchasing a property for resale, contact us for information on our Resale Consultation BEFORE you begin any work on the property. We will help you to identify and address what your buyers are looking for, and can recommend quality trades to perform any work you need.
The sheer volume of work, the time consumption, the sleepless nights and days, and the planning needed in order take a run down property to resale condition is often glossed over on the reality shows, but the fun they show is real. Like all investments, house flipping presents a number of potential risks, so do your research, plan, and follow these tips to a successful house flip.
At BTSH, we have created a consultation specially designed for our investor friends - a few hundred dollars now could save you thousands on avoided mistakes.