We are all attracted to the idea of flipping houses. People who are professional or amateur, designers, decorators and builders think they can make money buying and flipping houses.
It sounds and looks like an interesting challenge when we watch people do it on videos. It might still be possible to make money flipping houses.
But this is more difficult to do in real life. Sincere investor’s real goal is to make a profit, not remodel houses. As my Grandmother used to say, “Remember you must make money.”
Three factors control how much money you can make on a flip.
These three VERY logical factors control things far more than decorating and staging. It’s not that decor doesn’t matter. A well-staged house will sell better than most houses that need work.
But whether will it sell for enough money to offset your costs and pay you for your time are two entirely different factors.
The difficulty happens when you start working with lenders and appraisers.
Flippers are at a disadvantage in that banks don’t want to loan money for remodels. What looks easy on TV is not what happens in real life. So you get a loan, buy the house and then want to fix it up.
Where are you going to get money for the fix up?
Do you have the cash? Are you going to put it on credit cards at 18% interest or more? Do you have the money to make house payments on a house that is sitting empty?
If you don’t have the skills or the cash or the income you could be in trouble
Most lenders cynically doubt that any house will significantly increase in value within a few months to sell for a lot more money no matter what remodels happen.
There are lots of houses that look like good possibilities for flipping. They appear to need a few cosmetic repairs and decorating. If we could get them enough below current value they could pay off well and mean we might make a lot of money.
But the house you bought at what you considered a bargain may bring down appraisal values in the area.
You look for a house you can afford to purchase and then buy it on credit and start remodeling. Was it cheap because all the houses on the street are cheap, or is it in a very good location where houses generally sell for more money? Remember location still rules.
If all the houses are worth $25,000 like some in Detroit or Birmingham then no amount of remodeling will make a house worth more in a comparative appraisal.
And a comparative appraisal is what the lenders will use as a decision making tool when they decide how much they will loan on a house.
Your buyer will only get an average price of nearby recent sales.
All the recent sales (30 to 60 days) in your immediate neighborhood will determine how much your potential buyer can borrow.
But appraisal prices are just one of the issues flippers have to see clearly and logically.
You find a good house that you feel you can repair and stage for a reasonable price.
Then another reality hits.
Paint and décor are the least of what many houses need.
An appraiser once told me to look for houses that are not too old, if you only want to make cosmetic repairs.
You want the systems…HVAC, plumbing, appliances, electrical, roof…to be in good enough shape that these expensive things still work adequately. Any of them could cost somewhere between $5,000 and $10,000 each to replace, if not more.
Then you might find other big expenses like foundation problems, mold, and even sagging framing that must be repaired before you can decorate and stage for resale.
Homes that need repair are often not very old either. Many heat pumps malfunction within three years… past the date of the warranty just long enough to be worthless to you.
There are other problems that might come up, too.
Just a few years ago lots of houses were built with carpet, popcorn ceilings, and wall paper that buyers don’t want…in fact hate. So a flipper who wants to find a buyer quickly will have to deal with any and all of these issues to have a marketable product.
It’s neither easy nor cheap to fix these things. Either you do it to save costs or you have to pay someone to do it.
Most buyers have the same list.
“Oh, we have to have hardwood floors, an open floor plan, a gourmet kitchen with granite and stainless steel, at least 4 bedrooms, etc., etc.”
None of this stuff is cheap.
And then there are the delays. Everything takes longer than you expected and your credit costs go up every day.
That’s you profit margin slipping into the banks’ pockets, sucker.
There are too many flippers who crash and burn. Buying the right kind of property can work, but the whole flipping thing is WAY more complicated than many people realize. Even at the top of the housing boom many people failed at flipping. Foreclosures are not good for struggling flippers.
Flippers with deeper pockets can invest in the best properties, in the best locations and do remodels for high end properties and customers. Any buyer who does not need a loan will buy if you have the right house and do the right remodel. But potential buyers with this kind of buying power are demanding and not common.Read More
Location is an important consideration for investors. Investing in condos or apartments requires a desirable area in order to attract buyers and/or renters.
While the chance exists that your development may improve a specific location, it may not be enough to guarantee that you will find customers. You have to get it right.
But what do customers or renters want?
They want many of the same things any other real estate customer wants.
They want a location that seems safe. We know of a condo development in a repurposed factory building. Many units have been sitting empty for years because it is right next to public housing and cars in its gated parking lot are regularly vandalized. Walking is also not very safe, though downtown restaurants and other entertainment are just a few blocks away. If this developer got a commercial bridge loan, they may lose the property.
Renters and potential buyers do want to be close to entertainment but they also want to feel safe walking to those things. If they have to run to the laundry facilities at night is it going to be a problem? Many renters and buyers want laundry facilities in their own quarters just for this reason.
If they want to run out for a snack at night is it going to be a problem or a danger? You don’t want to invest in an area where shady stuff goes on where anyone can spot it. Some locations are rife with criminal activity. In one beautiful vacation city the known location to buy drugs…whatever kind you want…is in the alleyway directly behind the police station!
The location needs to feel safe enough to make potential customers feel secure.
Next, potential customers look for locations that are close to work. They don’t want long commutes. Look for properties that are near clusters of employers. You might have to tear down something else but it can be done. Buyers will accept city locations where there is a lot of cultural diversity, but not ones where they feel unsafe. It’s sort of a difficult thing to detect, but look for crime statistics in public records. Most locals will know if a particular area is a problem and guess what? They won’t buy what you are offering.
Potential renters or buyers also want a home that is attractive, both in the interiors and exteriors. Landscaping, parking, interior and exterior finishes, the right number of bedrooms and baths, an attractive kitchen: all of these things matter and need to be addressed by an investor on the design and planning end. Certain styles may have appeal in one location but not in others.
For example Tudor cottage design is not an attractive style in most locations, but is almost required in one city we have studied. They are copying a historical estate that is popular in the area.
If there is no public transportation you might need to offer parking that is also safe and secure. In some places you can acquire all the land you want to offer this perk, but in others it is not possible or even necessary…as long as you are near public transportation. You have to ask and answer this question. What will customers expect and how can you give it to them?
Many people also want a bit of prestige in the location where they will choose to live. They want it to give them an aura of success. People don’t buy Rolexes because they are cheap! They buy them to make themselves look like a success and…more importantly…feel successful. They don’t want to feel like they are living in a dump. If you want the good customers and not a lot of turnover you have to address their egos, too.
Appeal…the attractiveness of a structure…is one of the things many developers just don’t ever seem to get right. But this in so important. In apartments it is also very important that a structure be sturdy which makes many apartment owners want only masonry construction that can take the wear and tear and remain in better shape to make money for years to come.Read More
Are you looking for the best business strategy to ensure higher returns? If yes then you can invest in commercial real estate. The real estate business is very promising if you can plan it correctly. However, this business is quite tough. It is not that easy and convenient as it seems. There are few essential factors that are involved with this business. If you know these factors, you can reap higher return at the end of the day. If you want to start the business with your entire boost then you should know the essential; factors which are involved in the business.
Important Tips For Business
Some of the important factors regarding real estate business are mentioned here. Before starting your business, you must ensure that these factors are considered rightly. Here are few of them:
Get Huge Return
These are some of the essential points that you must remember before investing in real estate business. These factors can ensure you high profit and return. Do remember to take special note of these points before starting your journey. If you choose the right strategy, then this business can bet the best business, which would eventually give you immense profit.Read More