The Real Deal: To flip, or not to flip?
June 10, 2020
Rob Lotufo,
Ozark Properties Group
There's a growing market in our area for people who want to buy fixer uppers. Some people just want to gain equity and find a nice place to live with a minimal investment. Others are set on flipping homes, or doing renovations to increase the marketability and value dramatically.
I quite often have clients call and say they are only interested in repo's (repossessions). Sometimes these are also called REOs or Bank-owned properties. This is a serious business, and in some cases, not really suited to beginners. Here are some tidbits of wisdom you might want to consider if you think you are ready to get in the flipping game.
Buy it at the right price
You can't make money remodelling a run down home, or a flipper, if you don't buy it at a low enough price. Some investors try to quote out the whole refurb job and make sure that they are going to be profitable before even making an offer. Others just try to buy as cheap as possible and hope for the best.
There are a lot of factors that give you bargaining power at this stage of the game. The best strategy, of course, is to have cash in hand. A cash offer "as is, where is” will whet a seller's appetite anytime. If you need to build in contingencies such as loan approval, appraisal or inspection, you make your offer less appealing to a seller, who often just wants to get rid of the property with as little hassle as possible.
Very often, repossessions are available only to cash buyers, or at least buyers with a letter of credit in hand. If you have liquid assets, you might want to consider talking to your bank about what they could do for you on a quick turnaround investment loan. Another reason you might not want to go with a conventional mortgage, even if the seller allows it, would be to avoid any prepayment fees or early payment fees associated with mortgages. In most cases, if you buy with a simpler loan, you may save a lot on processing fees: appraisals, origination fee, etc.
What's wrong with this picture?
I just finished talking to a man who has been looking at houses in the $20 to $40,000 range. I found myself asking, “Why are the houses so cheap?” There's nothing wrong with buying inexpensive houses, but you have to be honest with yourself and ask what the reason for the low asking price is. Some issues like roof repairs, septic systems, wells, flooring and sheetrock damage are easily noticeable, but others are not.
A few things to always be on the lookout for are hidden problems like moisture, mold, termites and wood rot. Although technically the seller should disclose any of these items they know about, there's always a chance they either don't know or chose not to disclose them. If, after you have done the research and feel like you've got a good handle on the things that are wrong with the house, you think you still are making a good deal, go for it!
Do it yourself?
Here's where a lot of investors lose their shirts. You have to know your limits. Many people can do carpentry, but not plumbing; can paint or do sheetrock, but stay away from electricity. It's very important to round up some competent contractors, and get a feel for how much of a project you are taking on. It's a really good idea to build in a significant buffer for over-runs on renovation projects. After all, it's no fun to do all the work and end up not making a profit.
Time is money
If you're borrowing money, or if like most of us, your time is limited, it's important to have a schedule of completion for a project like this. Over-runs cost money, whether you are paying for labor or not. It's very important to set a schedule and try to adhere to it .
Rent or sell?
The quality of your renovation very often is going to depend on whether you are building long-term value in a house to sell, or whether you are just trying to make it adequate for people to live in. Installing granite countertops, hickory cabinets and ceramic tile floors is very often a standard for nicer homes these days, but they won't bring you a dollar more in rent at the end of the month from a tenant. It's important to know your end game and plan your renovation around what your desired result is.
How is the neighborhood?
Every location has its market value. There is an old adage about “buying the cheapest house in a nice neighborhood”. That's a solid plan if you can find one. In general, it's a good idea to make sure you are not overbuilding in an underpriced neighborhood. If you don't know the area, a really productive effort might be to try and research it, talking to people who either live there or are familiar with it. Often the internet can help, but it may not reveal the whole picture. Factors such as school districts, proximity to shopping and crime rates all weigh in on determining the quality of a neighborhood.
A great place to live and work
Southwest Missouri has so many things going for it. We are a short drive from Northwest Arkansas, Springfield and Joplin. We have low taxes, relatively low cost of living, low crime rate, great local schools and mild weather. You can get a lot of home for your dollar down here, and often there is a good opportunity to get a nice piece of land to go with it, with plenty of room to grow. I'm always excited to see people buying “need TLC” homes here in the Ozarks, fixing them up and making it an even better place to live.
Ozark Properties Group
There's a growing market in our area for people who want to buy fixer uppers. Some people just want to gain equity and find a nice place to live with a minimal investment. Others are set on flipping homes, or doing renovations to increase the marketability and value dramatically.
I quite often have clients call and say they are only interested in repo's (repossessions). Sometimes these are also called REOs or Bank-owned properties. This is a serious business, and in some cases, not really suited to beginners. Here are some tidbits of wisdom you might want to consider if you think you are ready to get in the flipping game.
Buy it at the right price
You can't make money remodelling a run down home, or a flipper, if you don't buy it at a low enough price. Some investors try to quote out the whole refurb job and make sure that they are going to be profitable before even making an offer. Others just try to buy as cheap as possible and hope for the best.
There are a lot of factors that give you bargaining power at this stage of the game. The best strategy, of course, is to have cash in hand. A cash offer "as is, where is” will whet a seller's appetite anytime. If you need to build in contingencies such as loan approval, appraisal or inspection, you make your offer less appealing to a seller, who often just wants to get rid of the property with as little hassle as possible.
Very often, repossessions are available only to cash buyers, or at least buyers with a letter of credit in hand. If you have liquid assets, you might want to consider talking to your bank about what they could do for you on a quick turnaround investment loan. Another reason you might not want to go with a conventional mortgage, even if the seller allows it, would be to avoid any prepayment fees or early payment fees associated with mortgages. In most cases, if you buy with a simpler loan, you may save a lot on processing fees: appraisals, origination fee, etc.
What's wrong with this picture?
I just finished talking to a man who has been looking at houses in the $20 to $40,000 range. I found myself asking, “Why are the houses so cheap?” There's nothing wrong with buying inexpensive houses, but you have to be honest with yourself and ask what the reason for the low asking price is. Some issues like roof repairs, septic systems, wells, flooring and sheetrock damage are easily noticeable, but others are not.
A few things to always be on the lookout for are hidden problems like moisture, mold, termites and wood rot. Although technically the seller should disclose any of these items they know about, there's always a chance they either don't know or chose not to disclose them. If, after you have done the research and feel like you've got a good handle on the things that are wrong with the house, you think you still are making a good deal, go for it!
Do it yourself?
Here's where a lot of investors lose their shirts. You have to know your limits. Many people can do carpentry, but not plumbing; can paint or do sheetrock, but stay away from electricity. It's very important to round up some competent contractors, and get a feel for how much of a project you are taking on. It's a really good idea to build in a significant buffer for over-runs on renovation projects. After all, it's no fun to do all the work and end up not making a profit.
Time is money
If you're borrowing money, or if like most of us, your time is limited, it's important to have a schedule of completion for a project like this. Over-runs cost money, whether you are paying for labor or not. It's very important to set a schedule and try to adhere to it .
Rent or sell?
The quality of your renovation very often is going to depend on whether you are building long-term value in a house to sell, or whether you are just trying to make it adequate for people to live in. Installing granite countertops, hickory cabinets and ceramic tile floors is very often a standard for nicer homes these days, but they won't bring you a dollar more in rent at the end of the month from a tenant. It's important to know your end game and plan your renovation around what your desired result is.
How is the neighborhood?
Every location has its market value. There is an old adage about “buying the cheapest house in a nice neighborhood”. That's a solid plan if you can find one. In general, it's a good idea to make sure you are not overbuilding in an underpriced neighborhood. If you don't know the area, a really productive effort might be to try and research it, talking to people who either live there or are familiar with it. Often the internet can help, but it may not reveal the whole picture. Factors such as school districts, proximity to shopping and crime rates all weigh in on determining the quality of a neighborhood.
A great place to live and work
Southwest Missouri has so many things going for it. We are a short drive from Northwest Arkansas, Springfield and Joplin. We have low taxes, relatively low cost of living, low crime rate, great local schools and mild weather. You can get a lot of home for your dollar down here, and often there is a good opportunity to get a nice piece of land to go with it, with plenty of room to grow. I'm always excited to see people buying “need TLC” homes here in the Ozarks, fixing them up and making it an even better place to live.
