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Don't Pick Out That Granite Just Yet: 4 Things To Know Before Flipping House
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It's tempting to visualize the gorgeous new stone counters and backsplash in your trendy remodeled row house, or to fantasize about how to spend your share of the "flipping" profit. But without a specific action plan that includes extensive market research, a realistic renovation schedule and cost breakdown, and the talent to make it all come together, such dreams can fail to ever get off the ground or, worse yet, result in a financial loss. The business of real estate investing is just that, a businessthat requires mastery of a specific set of skills. It's not rocket science, but it's not as easy as flipping burgers either.
Here are some tips to assure that your dreams of fix and flip success become reality.
If you are tempted to jump into the real estate construction and development market in DC, MD, VA, or DE this is a good time. [Read our blog on Top Zips for Flips in DC]. Demand is high, sales are brisk, prices continue to rise, and hard money loans for projects are available. But, the knowledge and experience that makes it possible to buy properties at the right price and then renovate and resell them at a profit is an acquired skill. Before you jump into the fix and flip pool, here's what you need to know.
1. Know Your Market - The Pros and the Cons
There is no substitute for due diligence when it comes to buying and selling real estate. Take the time to examine the statistics. Drive various neighborhoods, visit homes for sale and open houses, study the comps, school districts and vacancy rates in your target neighborhoods. Find public online newsletters and list servs to get a real sense of neighborhood issues. For condos or homes with a HOA, look carefully at the official documents to see what type of restrictions exist for renovating and selling. Analyze the average days on market for homes in these areas as well as listing prices and sales statistics. Consult with a local Realtor about your buy price and potential sell price, and be aware of current architectural and design trends.
2. Know Your Costs - All of Them
Knowing your renovation costs is critical to the process, whether you plan to simply refresh and renew or undertake a major renovation project. A recent Realtor.com article ["How Much Does it Cost to Renovate a House? The Numbers You Should Know"] provides cost ranges for many common types of projects, from new bathrooms to windows and roofs. These figures can vary based on the costs of materials and labor in your city, but these ranges give you a great starting point when deciding whether your project is viable. In addition to needing detailed cost estimates for your own estimating purposes, most lenders will want to see them as well. Be sure to include the costs of borrowing as well as fees associated with permitting and code compliance in your cost estimates. Understand the need for adequate insurance and be sure to comply with any licensing requirements. Developing ongoing relationships with reputable subcontractors can help you in this process. And always plan for contingencies. If there is one truism in the construction world, it is that the work always takes longer and costs more than you expect it will. Plan on and budget for delays and cost overruns. If they don't occur, celebrate.
3. Know the Potential - Renovate Smart
Determine what type of renovations will give you the biggest bang for your buck. Hanley Wood's annual Cost vs. Value Remodeling Guide compares the most common remodeling projects with the value they retain at sale. Apply this knowledge about profitability for a specific renovation to your property. If you get an opportunity to buy a foreclosed row house in a mid-range neighborhood well below market value, you may just need to spruce up the kitchen and baths, replace the carpet, finish the hardwood floors, and paint in order to reap a profit. In fact, doing more than that may overvalue your home, making it harder to sell. However, a neglected home in a more established and desirable neighborhood may be able to support an addition and complete kitchen and bath remodel. Look at comparable properties in your target neighborhoods and understand what type of renovation will sell best and quickest. Keep home style in mind. You don't want to create the only contemporary in a row of Cape Cods. Appeal to any prevailing buyer preferences for green features, sustainable materials, technology and energy-efficiency. Develop a checklist to aid in evaluation of potential projects. Depending on the neighborhood and situation, know that a low price is not your only goal. You can justify higher costs if you can demonstrate a higher return.
4. Find a Funding Source - Fast and Flexible
Most flippers use hard money or private money loans to fund fix and flip projects. These short-term loans offer fast and flexible financing to get the project moving quickly, which is key to fix and flip success. Ideally, you want to partner with a lender who knows you and your projects and build a relationship that can help expand your flipping business. If another project arises that you want to take advantage of while you are in the middle of your first, you want to have a lender who will work with you to make it happen. Having a lender who knows the construction business is also a plus. They understand and can help you work through permitting, cost, and contractor issues. Most lenders do require that borrowers do have an equity stake in each project. If you don’t have funds available, friends and family are a good source to turn to, especially for your first few deals.
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