How to Avoid a Bad Fix and Flip Deal

One of the best uses of hard money loan programs is for investing into fix and flip projects. A fix and flip real estate project focuses on rapidly expanding the value of a property through targeted remodeling. By introducing a small but powerful set of remodeling projects, it may be possible to add $20,000 or more to the valuation of a residential structure. Most fix and flip experts focus on single family homes in competitive real estate markets.

Although you can make a great deal of money with fix and flip on real estate, there are some precautions to take into account. It is important to do appropriate research, set an accurate budget and take action as quickly as possible. The longer a project takes, the lower the profit will be.

You’ve seen the TV programs that portray how fun and easy it is to fix and flip a home, but if you’ve actually gone through the process, you know there’s a lot more to it. As a real estate investor, you know there’s money in fixing and flipping, but do you know how to make the time, effort, and money worth it? There are some specific actions you can take to avoid bad flips and fixers so you end up with the best results.

Understand Your Budget Completely

Real estate flipping expenses can grow unexpectedly if you are not careful. To estimate repair costs, it is a good idea to get bids from multiple contractors. If you are planning to perform some renovations yourself, invest time “comparison shopping” for your materials. You should add 10 percent on top of your best budget estimates to account for the unexpected, too.

Many fixers and flippers come up with a budget, but it’s just a guess out of nowhere. This is the first mistake when it comes to the budget for your project. There are two things you need to understand when creating your budget:

  • After Repair Value – This value is calculated by taking the value of your renovations and adding them to the purchase price of the property. Property value includes consideration of the structure, lot, and location. ARV will give you an idea of how much you can spend on renovations to make it worth the money.
  • Rate of Investment – To determine your ROI, you take the purchase price of the property plus the cost of renovations and divide that total by the estimated ARV. This will show you how much of a return you’ll make so you can determine whether your budget is in the right place.

Now that you know your ARV and ROI, it will be easier to set a budget. What may have seemed important at one point might not be very important now that you know how much money you have to work with in order to secure a profit. Write down every last detail of your renovation and take the list with you when you speak with contractors and other workers. Get accurate prices from multiple professionals so you can stay on budget. You should also take a look at market prices for the area you’re renovating in so you don’t overdevelop for that particular area.

Maximize Profit with Real Estate Flipping – Calculate ARV

ARV, or after repair value, helps determine if a property is a worthwhile investment. ARV represents the total home value after all renovations are done. The difference between your as-is property and the ARV is your potential revenue. To measure ARV, look at homes similar in age, size, square footage and room count, ideally within a mile of the target property.

Get the Project Done in a Reasonable Amount of Time

Another mistake fixers and flippers need to avoid is holding off on different parts of the project once financing has been secured. Interest never rests, so you’ll want to get your renovation done in the shortest amount of time possible. Once you’re done, you can sell the house (hopefully quickly) and pay that loan off early.

Determine Closing and Holding Expenses

Closing costs can be quite challenging to estimate in advance. It is not unusual to spend 2 percent to 5 percent of a house’s value for closing. Costs can be reduced by negotiating concessions or managed through favorable financing. To budget accurately, get several estimates for total closing costs. Don’t forget optional but desirable extras such as a home inspection.

Considering Partnership

Partnering with another investor substantially reduces your risk. Although this will inevitably reduce profit, it can be worthwhile. In most markets where fix and flip is taking place, there is a thriving community of real estate investors. Working together can mean success for all instead of costly competition. However, it may reduce margins too greatly on some properties.

Look for Homes Without Major Issues

One of the goals of fixing and flipping is being able to make some inexpensive repairs that will make the home desirable to a buyer in a short period of time. If you tackle a home with major issues, you’re going to spend more money and the project is going to take more time. Homes that most people would consider “undesirable” are a perfect choice.

Like many forms of investment, real estate flip and fix is a game of averages. Once you have several successes under your belt, you will develop instincts that will help you find “diamond in the rough” properties. Until that time, however, it is best to stick to the more common and better known trends in the area. For example, avoid homes with “weird” floor plans that need substantial revisions.

Look for houses with broken windows, old paint, and overgrown yards. Spend some time in the yard, replace the windows, and give the home a fresh coat of paint. These are inexpensive repairs that can be done quickly. If you purchase a home with major issues, such as a leaky roof, it could take several weeks or months to find the leak and get the issue resolved. That’s going to cost you both time and money. 

Choose a Great Location

You have to be extremely careful when it comes to the location of the property you purchase. If you find a cheap home in a dangerous neighborhood, it won’t really matter that you fix it up because nobody will want to buy it. If that same home is in a desirable neighborhood, it could be your diamond in the rough. Great locations include neighborhoods with street lights and signs, posted speed limits, curb appeal, well-maintained yards, low crime rates, and easy accessibility. Homebuyers often also look for homes near grocery stores, restaurants, schools, gyms, childcare centers, etc.

You might also want to take a look at up-and-coming neighborhoods. Maybe there’s an older, run-down home surrounded by new developments. It’s likely with all those new homes above selling value, fixing and flipping the rundown home could yield you a higher ROI than you had even planned on.

Work With a Confident Lender

Many fix and flippers don’t have private funding or cash, so they’ll need to work with a lender. As you go about choosing a lender, keep your goals and profit margin in mind. Too often, house flippers go with a lender simply based on one or two benefits, but you deserve the whole package. Capital Fund 1 offers loan programs to get you the hard money you need for your renovation. Our lenders work directly with investors like you to help you begin the process of achieving your goals. For more information, or to get started with a loan for your first fix and flip house, contact Capital Fund 1 today at 480-889-6100.

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