You may be wondering if jumping on the house flipping bandwagon makes sense? As HGTV has conveniently capitalized on several shows focused around this very topic, naturally there is a draw for people unfamiliar with the ins and outs of real estate and rebuilding homes. As a couple intimately familiar with the industry, I have to confess we have spent numerous hours watching shows such as, “Flip or Flop” and “Fixer Upper.” Not only are we engaged at the opportunity to take something of little value and make it something wonderful, but the ability to do that in Hampton Roads is very feasible. During the shows, our debates and discussions are not necessarily how wonderful a renovation is or how great the color schemes are, but more about discussing what properties and neighborhoods we can find to recreate a similar renovation.
How easy is it to flip homes in this area? Well, here are some things to keep in mind when working with investment properties. First, work closely with a realtor that can help identify properties quickly. When I tell you the market is hot and homes are flying off the shelves within 24-48 hours, I’m not exaggerating. In addition, a realtor has insight into REIN which is the Real Estate Information Network. It’s basically the stock market of every house that has ever been sold, for sale, pending, etc. in our area. Just because a home appears on Zillow, Trulia, Realtor.com or any other third party aggregate site, does not mean it is still available. You’ll want to work with a professional that has the insight you need behind the scenes to get you the answers and opportunities you need.
Next, please take the time to understand the difference between a short sale property and a foreclosure. Over my career, I have learned that for some strange reason foreclosure properties are highly attractive in price, but when I physically show foreclosed properties to potential clients, they typically have the same reaction. What in the world happened to this place?! I never understood the logic behind homeowners that just destroy their homes prior to departure, but considering the circumstances that they are in fact losing their home… I guess that’s probably their reason to let out some steam on the house. Another thing about foreclosures and short sales is the length of time they take to complete the sale. If you are in a hurry, and need to close on a home in the traditional 45 day period, short sales and foreclosures may not be the right option for you.
Last, please make sure you understand setting a budget and staying within those limits is truly key in profiting from flips. There’s a great book, “Flip,” written by Rick Villani and Clay Davis that I refer to often. In my opinion, of the best tips in the entire book is found on page 99, which is the Flip Maximum Offer Formula:
Eventual selling price of the home
Less – Improvement costs
Less – Quiet costs
Less – Minimum profit
= Your Maximum offer
Understanding every component of this formula is really important to determine what you need to make and what costs are associated with the project. The section on quiet costs was very interesting, because all too often people that are not familiar with the nuances of real estate, remodeling, and rehabbing homes, forget to incorporate these expenses. These are things like: Interests, buying costs, selling costs, and more. In addition, this formula will help you determine the maximum amount you can offer in order to stay on your profit target. Just because a home is listed at $25k, doesn’t mean that’s what you will offer. Your realtor will help you tremendously with this part.
At the end of the day, flips can go 1 of 2 ways: Flip or Flop. If it’s a flop, perhaps your formula wasn’t correct or you underestimated the investment it would take to repair the home? There could be tons of reasons why the project could flop. If you have a successful flip, then it’s a win-win-win. It’s a win for the seller because you took the property off their hands. It’s a win for the neighborhood because you’ve helped increase the market value with your renovations. Last, it’s a win for you because you have successfully profited from your hard work!