TV shows make flipping houses look easy, but the truth is that the difference between profit and loss may come down to a few key decisions made while the renovation is underway. Here are nine tips to help ensure your fix-and-flip remains profitable.
1. Plan for time on the market.
Comps from neighboring properties should help you estimate how many weeks your property will be on the market. You can also talk with other local rehabbers about their experience with flipping timeframes. On average, most rehabbers expect to complete repair work in eight to ten weeks. Knowing the repair timeline and how many weeks comparable homes are on the market is key information for calculating the project’s cash flow requirements. For example, if neighboring houses are selling within four months, and repair work requires eight weeks, you should plan on six months of cash flow to carry the project from purchase through sale. There are also factors specific to each project to consider. For example if most home buyers in your area seek FHA financing, deals are likely to take longer to close.
2. Location Counts.
In general, city and suburban properties sell faster than rural properties. This is because most home buyers prefer to live near schools and shopping. Another advantage of more urban properties is that better comps are available since home sales occur more frequently. If you plan to bid on a property in the city or suburbs, however, take the time to learn about the neighborhood. Most home buyers won’t even look at a property in a high crime area or where there is significant traffic noise and congestion.
3. Have an exit strategy.
You should never purchase a property without having a Plan B ready if the house doesn’t sell. Even a great home can be difficult to sell if market conditions erode, and rehabbers may find themselves trapped into paying many months of mortgage costs, maintenance, taxes, insurance, and home owner fees. Exit strategies may include selling the house to a wholesaler or renting. If renting is your backup plan, decide ahead of time whether you want to manage the property yourself or hire a property management firm.
4. Don’t assume every project is alike.
Most rehabbers rely on past experience when estimating repair costs, but there are hazards to that approach since no two properties are exactly alike. Your current project may have a larger kitchen or more rooms than your last project, adding significantly to renovation costs. A detailed inspection and fresh estimate of repairs is required for each new project. Buyer preferences can also impact repair budgets. For example, if French doors suddenly become popular in your area, installing French doors in the property will increase your budget but ultimately pay off by attracting more buyers. Rising material prices can also throw off budgets and require a fresh set of calculations for every new property.
5. Don’t overlook these expenses.
Home purchase and repair costs consume the lion’s share of a fix-and-flip budget, but there are also other expenses that rehabbers must consider. During the pre-purchase phase of the project, there are closing costs, realtor commissions, appraisal and inspection fees to consider. During construction, in addition to costs for contractors, materials and work permits, there are property taxes, loan payments, insurance, utilities and sometimes home owner association dues that must be paid. Selling the property entails listing fees, cost for staging, more closing costs and realtor commissions. In addition, every renovation budget should set aside funds for unexpected repairs. Most rehabbers recommend setting aside 15%-20% as a contingency fund.
6. Centralize a planning calendar…
If you are managing multiple fix-and-flip projects at the same time, keep organized by creating a central calendar that tracks timelines and progress for each property. Different colors are used for the different properties. This calendar is updated at least weekly, either by an on-site visit to the property or speaking with the site manager. Regular check-ins will help you keep track of the past week’s accomplishments and know what is planned for the following week.
7. …But track expenses for each property separately.
For tax planning and budgeting purposes, each property’s expenses should be tracked separately. The budget spreadsheet should track estimated renovation and material costs, actual costs and keep a running tally of accrued expenses. By tracking accrued expenses, rehabbers can compare that amount to the property’s estimated After Repair Value (ARV) and update estimates for Return on Investment (ROI).
One of the biggest hazards associated with managing multiple fix-and-flips is an exponential effect that can cause small mistakes to mushroom into costly headaches. For that reason, careful due diligence is particularly important. Studying the local market, compiling relevant comps, investing in a pre-purchase home inspection and understanding the loan covenants are necessary steps for avoiding bigger challenges down the road.
8. Keep detailed records.
In addition to tracking the progress of each property, your central calendar should also track scheduled versus actual completion dates and note the reasons for any discrepancies. Keeping detailed records will assist you in creating future timelines and help you build a team of professionals who can be trusted to meet deadlines.
If you are just beginning to assemble your team, you can vet potential contractors by checking their rating with the Better Business Bureau. You can also seek referrals from other rehabbers and/or inspect the contractor’s work at other job sites.
9. Rehab in fall or winter, then list in the spring.
In many parts of the US, the best times of year to sell a property are spring/summer so schedule your renovation work during fall/winter. Seasonal planning is especially important in areas where winters are severe since home buyers are reluctant to venture out on icy and/or snow covered roads.
In areas with severe winters, schedule exterior repairs for during the fall, leaving the winter months for interior work such as hanging drywall, installing cabinets, carpeting and painting. Landscaping should be done in the early spring so that the yard is in top-notch shape for the summer and maximizes the property’s curb appeal.