Find an old tired house with multiple layers of separating and peeling wallpaper, simulated wood paneling in the basement, some rusty orange coloured carpeting with a relief pattern in it and a burn mark in the shape of an iron just for character. Throw in a few cracked window panes a matching turquoise tub toilet and sink, peeling roofing shingles, a leaning wood fence and a driveway that has worn itself into two parallel trenches separated by a long stretch of crabgrass and you have what many emerging investor/house flippers would call “opportunity for profit”.
This home is the star of dozens of cable TV shows. The ones where in the first scene some slick entrepreneur in Ray Bans and a pair of unscathed designer work boots struts up from his scotch guarded SUV, Blackberry permanently attached to the side of his head and turn his crew loose to strip, replace and polish the dog on the street house. After some on screen personality conflicts between him and a couple members of the crew, the unmasking of a few unanticipated flaws and a couple Jack Bower like deadline countdowns for theatrical effect, the house is now transformed into a gem that has buyers lining up to submit their offers. As the credits roll, flipper king announces his lovely profit which is equal or better than the average working Joe`s annual salary. Who wouldn’t be tempted by this kind of opportunity?
Unfortunately, would be fix and flippers can be easily seduced by the promise of quick and easy cash. You need also to be prepared to put in some skin and sweat and even take a hit financially if things don’t happen in Hollywood script like fashion. Here are a few common mistakes, hurdles and tips for those who want to try house flipping for themselves.
Understand the reality of this method of earning
While adding value to property can create wealth, it is no ‘get rich quick’ scheme. It still requires time, dedication and effort. The results that you ultimately achieve will reflect on your commitment to these three areas.
Do your Homework before making a financial commitment to any property
90 % of your time is going to be spent on locating and purchasing the property itself. In this instance, your preparation will be research, viewing, negotiating and more research.
Do the work yourself or pay a professional?
Anything you do yourself saves money right? This train of thought is fraught with danger on two levels. Firstly, if the level of workmanship is substandard then this can and will affect your resale price. If you’re no good at it yourself, pay someone who is to do it. Figure out what you are worth per hour to the project (estimated time invested divided into estimated net return) If that figure comes in at $55 per hour and you spend two days painting (my painter works for $13 per hour), where is your true savings?
Have access to the funds to back you
No real value in a potential $50,000 profit if you can’t pay the bills to get there. Have the cash or a substantial line of credit to cover you in unforeseen scenarios that might increase project costs, length of time to sell and additional work needed. Don’t quit your day job after one successful flip. After you see a pattern of success and evidence that this is an ongoing venture that is both enjoyable and profitable - that is the time to consider if a permanent career shift holds merit.
Plan your Exit Strategy
Occasionally, despite your research and planning, the property just does not want to sell in the current market. External influences are beyond your control and will pop up from time to time. Have an exit strategy and you’ll be fine. Don’t take on a project if you cannot afford any unforeseen holding costs. Secondly, there is often financial advantage to holding a good property. If the market doesn’t agree with you at that particular time, then rent it out for twelve months or so.
Check your emotions at the curb
Don’t ever let yourself be ruled by your emotions when buying. You must always allow for buying, selling and closing costs. Where possible, your purchase price must be sufficiently below market value to at least allow for these costs. Even better, the price should be low enough to allow for closing costs plus rehabbing costs.
The following formula will allow you to assess the real purchase cost of a particular home that you may have in mind. Starting with the final selling price, work backwards and deduct selling costs, profit margin, renovation costs and costs associated with buying. This final figure should indicate what you can safely offer for the property. If it looks like a totally unreasonable offer amount either for you or the seller then keep on looking.
How often have you walked into a home and been totally horrified by the décor? Yet this is another common mistake made by renovators. They let their emotions get in the way and decide what is good for them is good for everyone else. Keep It Simple and focus on the “wow” factor. It is no coincidence that a home sells quicker and for a higher price when it possesses strong buyer appeal. You’re here to make money, not win a home decorating award. Give the market what it wants, not what you think it wants!
Don’t over do your renovation
The great temptation of renovating is to do too much. While the “wow” factor is critical, you must keep your emotions out of the equation and strictly adhere to your budget. Nothing goes exactly to plan when renovating, so don’t panic if you exceed your budget by small amounts. Allow for a buffer to cover any surprises (usually 10 to 15 per cent). Always have your costs estimated accurately prior to purchasing a property. Have a building inspection done and make your offer to purchase conditional upon its findings. This will enable you to discover any unforeseen surprises and possibly renegotiate the price should the inspection uncover any major defects - or even walk away.
Understand things can and often do go wrong in the course of buying revamping then selling a home. A little planning goes a long way and can soon put you in the category of the profitable real estate investors in your target market.
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