6 Questions to Ask for Success at Fix and Flips
Choosing a property for your investment portfolio can be equal parts exciting and exhausting. When many properties are available within your budget, sifting through the options and choosing the perfect one for your fix and flip isn’t an easy undertaking.
As an experienced real estate investor, you may have invested in several properties in the past. Maybe most of the investment decisions worked out, but perhaps you ran into a few roadblocks in the early days of your operations. Maybe you spent a little too much on a property that required substantial repairs, or missed out on a low-cost improvement that would have yielded a sky-high ROI. While you likely learned from your mistakes and have since refined your process, there’s always more you can do to improve your odds when flipping homes.
It may sound overly simplistic, but going through some of the basic tenets of a successful fix and flip can help you sift through available properties and make the best possible investment. With these six questions, you can hone in on what separates a great opportunity from a mediocre home – and what it takes to see the best possible returns.
- What Shape Is the Property In?
The condition of a property plays a vital role in assessing the worthiness of a fix and flip project. A property in “good shape” with strong bones and minimal damage can be turned around in a few weeks, while a home in “bad shape” may be in a poor state of repair with major structural issues that could pose significant problems in the long run.
However, “good” and “bad” aren’t set in stone; rather, these kinds of qualitative indicators exist on a sliding scale. A “bad” home to you may be an “okay” home to someone else with more experience in fixing and flipping, so it’s important to evaluate a home’s condition generally as well as in relation to your specific abilities and interests.
A property in good shape will likely have:
- A strong foundation with no cracks or water damage
- Solid floors and walls without mold, water damage, holes, or other structural issues
- No toxins or molds that could cause health issues to future residents
- Out-of-date décor or fixtures that require upgrades, not gutting
- Easily identifiable problems that can be clearly explained and solved
- Projects that align with your capabilities and interests
While some properties in bad shape may be available at deep discounts that can yield big profits with the right repairs, a property in good shape gives you a solid foundation to work from. These properties are less likely to have hidden issues that result in costly repair bills in excess of your budget and are more likely to lead to a fast sale for a maximum ROI.
Always work with an inspector before purchasing a home, and if an inspection raises red flags, heed them. The last thing you want is to lose money on what should be a simple fix.
- How Much Time Will It Take Me to Complete This Project?
The investment in a fix and flip property can be divided into two distinct categories: money and time. While many inexperienced investors focus solely on the financial aspects, it’s equally important to consider the value of your time.
Take, for example, a property worth $400,000 that you can sell for $485,000 in a month after $25,000 in upgrades. This provides a gross profit of $60,000 for a month’s effort – a successful transaction for virtually any investor. On the other hand, consider a property worth $400,000 that requires $50,000 in repairs that you can sell for $525,000 in six months. Sounds like a better deal, right? Well, not exactly. In the first scenario, your efforts would yield you $60,000 in gross profit in one month’s time, while the latter option would provide $75,000 in six months. Despite a lower profit overall, the first property yields a much greater return for the time involved.
When considering properties, take into account the time it will actually take you to make repairs. It’s best not to underestimate the efforts that go into most home repairs; while, yes, a kitchen can be completely turned around in a day or two, this kind of project is likely to require around a week. Calculate the time requirements of the fixes you have in mind based on your own experiences and industry suggestions, and plan accordingly. Remember – a conservative estimate is always best in financial matters, and that includes investment property.
- Will My ROI Take into Account the Risks in This Investment?
There’s no such thing as a risk-free investment. Every home you purchase to fix and flip carries with it some level of risk, and it’s up to you to determine what level of risk you can bear, what is reasonable, and what is worth it for you.
Experienced investors have the skills necessary to review the terms of a purchase, reasonably evaluate the repairs and requirements needed to list again, and determine a forecasted ROI. However, as with all budgets, this process is part number-crunching and part guesswork. After all, there’s no real way to know what challenges may come to pass along the way.
Before making an investment in a property, perform a thorough analysis related to the potential risks at hand, the repairs you anticipate, and the levels of returns that similar properties are yielding. Use conservative estimates for the costs and time commitments required for repairs, identifying worst-case scenario problems and being realistic about the after-repair value (ARV) in your local area.
In general, your goal should be to maximize profits in the smallest amount of time possible. The higher the range between repair costs and resale value, the lower the risk will be. In this kind of situation, you can run into significantly enhanced costs without cutting into your potential for profit. Cut things too close and you risk investing thousands of dollars and weeks of your life for an overall loss.
- Do I Have Enough Experience to Handle This Fix and Flip?
As an experienced investor, it’s easy to believe that you have the capabilities to handle any fix and flip, no matter how daunting. This may be true – after all, many projects have more similarities than differences – but some properties may require more experience, time or money than you’re able to provide.
Many home renovations are relatively minor or cosmetic in nature, like a new coat of paint, updated flooring, or new appliances, but some are not. Structural adjustments and serious damage repair are easily underestimated, sending inexperienced investors in over their heads. Before you realize it, bringing in professionals to rebuild floors or walls can add tens of thousands of dollars to your expenses.
In order to succeed as an investor, it’s important to know your own limits. This means understanding what you can do single-handedly, what your go-to contractors and handymen can accomplish, and properly identifying whatever issues may be outside of your grasp. Most investors, for example, can map out a kitchen renovation, but assessing the work that goes into a foundation repair is significantly more complex. Instead of making assumptions, you need to know your own limitations; a few prideful mistakes can be all it takes to tank a project and leave you with a costly mess on your hands.
- Do I Have the Right Team to Complete This Project?
While the rare simple flip occurs now and then, a standard fix and flip requires a little more than one person’s involvement. As such, the team you have available can be a big asset in determining the ease of a particular project. These are people you have vetted, worked with closely, shared trade secrets with, and molded into the perfect resources for your investment style. When you break outside of your mold, however, your existing team may not be appropriate for the projects on the table.
It’s fully possible to hire on an as-needed basis, but this can easily get you into hot water. The wrong fit can increase costs and decrease quality, leaving you with a sub-par product you’re in no hurry to attempt to sell. This may mean settling for less or paying more to have work redone, wasting time and cutting into your profits.
Instead of assuming you can find the right person on demand, stick with the team you already have assembled. Your existing contractors know your style, your preferences, and your price point, and are far more likely to go to work for you than a new person you bring in.
It may be tempting to break outside the box – and doing so isn’t necessarily a bad decision – but be sure the risks are worth the rewards if your existing team isn’t up to the challenges that lie ahead.
- Am I Able to Visit the Project Near-Daily to Check Its Status?
As they say, location, location, location. Generally, this phrase refers to the value of real estate. For an investment property, however, this applies to both the location of the property you are considering as well as your location as an investor.
A property in a great location will obviously yield a much higher ARV than a home in a rough and tumble neighborhood, but when it comes to property flipping, the investment you choose should be in close proximity to you as well.
When you have a great team of contractors and service people at your back, you might be tempted to put the repair process in their hands and assume it’s all going well, but this can be a big mistake. A hands-off approach can work, but it can also lead to errors in repair work, misunderstood renovation instructions, and, all in all, a final product you’re not pleased with, hurting the market value of your property.
Instead, choose a location that affords you daily or near-daily visits so that you – not your general contractor – can run the project. Whether you plan to stay on site for days on end, doing the work yourself, or simply want to supervise your team and offer constructive guidance, a location near your home or work provides significant advantages in guaranteeing the results you have in mind. Yes, it’s possible to succeed with a fix and flip a few hours away from your home, but prudent investors know the value in guiding the process from start to finish.
There’s no way to guarantee the success of a fix and flip, but the more you know about the process, the better your odds will be. These six questions allow you to dive into the heart of the properties you’re considering, providing a foundation for everything from risk level to necessary upgrades. By taking a reasonable, rational approach to the quest at hand, you’ll be adequately prepared to proceed with clear, unobstructed vision and the greatest possible likelihood of a substantial ROI.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574 LOAN or by visiting westparkloans.com.