When a professional reveals a secret to their profession, there is often a moment of disappointment. Think of a magician explaining a card trick or a pitcher showing the grip he uses to throw an unhittable cut fastball. You might think, oh, is that all? But of course, even if you know the grip, you probably can’t throw a perfect pitch, just like you probably can’t throw a playing card into a wall.
It’s the same thing with real estate: the idea behind fix-and-flip strategies is simple. Find a house you can fix up and sell it at a higher price than you bought it for. It’s deceptively simple, though, and the smart real estate investor needs to know how to spot the right house for a fix-and-flip project or else it becomes a money pit… and that’s far from a fun trick.
Before you seek a hard money loan for a fix-and-flip, you have to make sure you’re working with the right property. Thanks to the foreclosure crisis, the market is still saturated with houses. There are lots of opportunities for fix-and-flip investments, but there are also a lot of houses that won’t be worth your money. Here’s how to spot which houses make a worthwhile investment.
Understand the Regional Market
The incredibly simple idea behind fix-and-flip is that you buy a house, fix it up, and sell it for a higher price, thus recouping your investment plus $20-30,000. But merely fixing a house isn’t necessarily going to get it on the market at a higher price, or at least, not a price that’s high enough to make it worth your time and effort. The real estate market is impacted by a lot of factors, usually local in nature. To understand if the prices in a certain neighborhood are expected to go up, it is important to do your research and perhaps consult with a local real estate agent. They know their areas, and while you might have to pay fees, it is worth it in the long run.
You’ll want to consult websites like Zillow, which can show you average prices in the neighborhood, as well as trends from which you can extrapolate. A few other factors can include:
- If stores are moving in or out
- If public transportation in the area is being expanded or reduced
- Average time of homes on the market. Don’t buy in an area where it is hard to sell- no matter how much work you do, the area isn’t attractive.
Understand How Much Work Has to Go Into the “Curb Appeal”
“Curb appeal” is how the house looks from the sidewalk or when you’re pulling up. These projects, by nature, tend to be on the exterior and while it is possible to get great ROI on them, you have to make sure you calculate them into expenses. It’s one thing to say you are going to spend X amount of dollars putting in a master bathroom, but when you start factoring in gutters, new siding, a repaired garage roof, and a newly landscaped lawn, you start adding a few thousand here and a few thousand there. It adds up and can cut a lot into your margin. Make sure you think of the little things that add value. If you need to add too many of these to the property you’re considering, you may actually be subtracting value.
On the flip side, don’t underestimate how much extra value a house that already has a nice lawn or fairly new siding can offer. You’re paying a bit more, perhaps, but that is work you don’t have to put into it yourself, and that means more money to make the interior even nicer. Spotting the work that you don’t have to do, in addition to what is needed, is a crucial tip.
Avoid “Personal Preference” Homes
When I was a kid and we were moving, we once looked at a house with a sauna. We kids thought it was awesome and the then-owners felt it was a big selling point, but my parents didn’t care for it, and they certainly didn’t care for the expense it added to the house. We ultimately moved somewhere else. The lesson here is that just because you think something will be a big draw doesn’t mean everyone else will agree.
You may see a home that has a natural aquascaped pool or a geodesic dome garage – projects that you might think are neat. The problem is that you not only have to find a buyer, but you have to find one from the subset of people who feel the same way. A lot of people like a pool, but they might not think the expense is worth it. In other words, it detracts from the value. In general, the more idiosyncratic the addition, the less likely you are to find someone who values it enough to pay for it.
Getting a hard-money loan from a trusted lender to complete your fix-and-flip is a great idea. It’s a good market out there. You just have to be able to know which are the houses ready to be resold, and which are for sale because they’re lemons.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.