Finding “Hidden Gems” in the Fix-and-Flip Market

Home interior remodeling of an older house

Uncovering the “hidden gem” properties that will give you the best ROI on fix-and-flip projects requires being able to think like a realtor, choosing those properties that appeal to the widest cross-section of home buyers.

Ideal Location

In selecting properties, your first consideration should be location. You can invest thousands of dollars in a property and end up with a finished product rivaling something on “This Old House,” but if the location is bad, you may lose money on the deal. No one wants to buy a house that sits on a busy highway or is many miles away from schools and shopping. Good locations are usually short commutes from employment areas without being in the middle of them since most people want to be near work yet not be constantly reminded of it. The best neighborhoods are often middle-class communities with low crime, a family-friendly atmosphere, with shopping and other amenities nearby. To confirm whether a neighborhood is family-friendly, drive through it and look for parks nearby and signs of children playing. An online check of local crime statistics should help you determine if the neighborhood is relatively crime-free.

Best Property

Single-family homes are usually the easiest properties to flip. While some rehabbers generate sizable profits from flipping commercial buildings and/or multi-family units, these types of properties tend to be larger projects that involve extra time and money. In addition, selling these properties is often a more complicated process that takes longer to close due to a more limited pool of potential buyers.

When evaluating a specific home as a potential fix-and-flip, three and four bedroom properties usually appeal to the widest selection of buyers and are the easiest to sell. Two or more bathrooms are preferable and a floor plan that has the kitchen opening to the family room and the bedrooms at the far end of the house is desirable. Avoid layouts where one must walk through one bedroom to get to another. Other features to look for are large closets, a separate laundry area and an attached garage.

Regarding ideal square footage for a home, size preferences vary across regions. Home sizes tend to be biggest in the Northeast and smallest in the Midwest. Average home sizes climbed steadily from roughly 1,700 square feet in the 1980s to peak at more than 2,200 square feet during the early 2000s, but have been shrinking since then. In 2014, the average size of a single family home was 1,900 square feet, according to the National Association of Realtors. One reason that house sizes are getting smaller is the return of first time buyers to the market. These buyers value affordability over space and want homes that aren’t overly expensive to heat in the winter and cool in the summer. Another factor is that many younger Americans are choosing smaller, simpler lifestyles. A good average size for a mid-range fix-and-flip property is 1,600 to 2,000 square feet. This provides enough space to be functional without being so large that remodeling budgets are inflated.

More important than the overall square footage of the house is avoiding major flaws that make the home functionally obsolete or exorbitantly expensive to upgrade. Examples of these include low ceilings, tight doorways, tiny or oddly-shaped lots, yards that drain poorly and lead-based paint throughout the house.

The surrounding properties are also an important consideration. No one wants to live next door to an overgrown lot or a yard cluttered with debris so check that the adjacent properties are also well-maintained. The property that you choose to flip should be similar to surrounding homes or only slightly exceed the standards of the neighborhood. Potential buyers may appreciate that a house is significantly larger and more upscale than nearby properties without begin willing to pay extra for these benefits. Think carefully before buying a property that has an unusual design because buyers may have a difficult time imagining themselves living there. Unusual attracts attention, but it is generally the homes that conform to the standards of the neighborhood that sell the fastest.

Most homes will fetch a better price after upgrades, but properties that require major structural repairs (i.e. new roof, foundation work, a complete rewiring or re-plumbing, room additions, etc.) are best left to more experienced rehabbers. The reason for this is cost. It is very easy to under-estimate the time and money required for major projects and many rehabbers overrun their renovation budget, eroding any chance of profits. Another reason is time. Simple repairs such as painting, flooring and minor kitchen and bath upgrades can usually be done without a building permit, but structural repairs that change the footprint of the house always require permits as well as on-site inspection of the work by local building authorities. In some municipalities the process of obtaining a building permit can take weeks. Beginning work without the necessary permit can result in hefty fines. Room additions to a structure often need specifications to be approved prior to work commencing and inspections may be required at every stage of the job. The drawn-out process of changing a home’s footprint can add months to the typical flip.

Most rehabbers would define a “hidden gem” as a property that generates the highest fix-and-flip profits. Hidden gems are often found in mature family-friendly neighborhoods and close to schools, shopping and work. These properties are generally three or four bedroom homes that are as nice as or slightly nicer than surrounding properties and that require only minor repairs and cosmetic fixes to improve. The best thing about hidden gems is that they are not all that uncommon. With a little research and patience, rehabbers may find many hidden gem properties hiding in plain sight.

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