Categories
Flipping

Flippers: The Best and Worst Renovations

Never over-renovate your flip!

You’ll shoot yourself in the foot if you end up spending too much on repairs or upgrades to the property. 

Your goal is to make money from buying a distressed house under market value, fixing it up to a marketable condition, and selling it at a price higher than the acquisition and renovation cost. So, it’s crucial that you hit the sweet spot of renovating the house just enough to achieve maximum ROI. 

But how will you know what to fix, and what to leave for the future buyer? Which renovations will add value, and which will only hurt your chances of making a higher flip profit? 

Here’s our guide to help you decide:

Know the Best Renovations

  • Competitive Scan

First and foremost, scan the other houses in the area where your flip is located. Research what else has sold and what factors they have in common. Figure out what the market gravitates towards and prioritize the same things in your renovations. 

  • First Impressions

First impressions are important for potential buyers. Anything that will add to your flip’s curb appeal will help attract attention, making buyers curious to see what’s inside. To achieve this: 

  • Have the front door stand out with a contrasting color
  • Maintain the landscaping (if there is any) with fresh flowers and plants
  • Power wash anything that looks dirty or faded
  • Repaint all trim work for a polished look 
  • Replace any old exterior hardware (e.g., doorknobs, mailbox, outdoor lighting, window frames)
  • Add shutters or blinds to avoid the house looking empty/unlived in
  • Kitchens and bathrooms

Kitchens and bathrooms are two of the most important features when it comes to buyers deciding on a house. They’re also much more expensive to overhaul, so many buyers don’t want to have to renovate kitchens or bathrooms themselves. 

But kitchen improvements can help recoup your investment by as much as 66%, so this is one area where you definitely want to spend. 

On the other hand, anything you spend on bathroom improvements can yield an ROI of up to 67.2%, so they’re also a good investment when planning the budget for your flip. 

  • Attics and basements

Attics have come a long way from being a horror movie location to, now, a great expansion and additional space in the house. It’s possible to get back as much as 73% of your investment when the property’s attic is converted into a bedroom or some kind of usable room for potential buyers. 

This is an expensive renovation though, so make sure you do the math properly to make sure it’s worth it for your flip.

Know the Worst Renovations

  • Competitive scan

When you check out other houses in the area, also pay attention to what won’t sell. Each area will have their own preference. Make sure you avoid having similar features as houses that have sat in the market the longest.

  • Extreme tastes

Focusing on renovating the property with elements that will appeal to the largest buying audience. Instead of decorating and renovating based on your own taste, fix it up with the general public in mind. Don’t put any design or functional feature that’s too specific and only caters to niche markets, like crazy, bold colors or wooden countertops. 

  • Home Offices

Even though work-from-home set ups are increasingly becoming popular since the pandemic, most people still don’t need a full-blown office at home. At the maximum, you can recoup around 43% of your investment by adding one to your flip.

If you see that home offices are actually popular in the property’s area, in particular, you can just have a home office that can easily be converted into a bedroom, should the future owner chooses to. An extra bedroom adds more value, too.

Profit is what you want out of your flip at the end of the day. 

To do this, you have to renovate objectively, with your ROI in mind, and not think about trying to turn your flip into a house you’d want to live in yourself. 

Begin with a solid renovation plan, and a carefully calculated budget, and make sure you don’t spend too much money in the pursuit of the “wow” factor.

Image courtesy of Pixabay

Categories
Landlords

Perks of Having a Property Manager That’s Not You

Property management is extremely labor-intensive. You need to collect rent, evict problematic tenants, coordinate with contractors, maintain the properties, and so much more. 

It’s not easy, either—if you’ve ever experienced difficult tenants or irresponsible contractors, then you know what we’re talking about. 

However, if you have a rental investment property, you can’t go without it. The solution to your stress? Hiring outside help in the form of a property management company.

If you have a lot of properties, you may not have the time or energy to manage them all. PMCs can take care of the dirty details for you, which frees you up to expand your portfolio or focus on other things. More than that, property management companies provide expertise—expertise that you don’t have. 

We understand that you may be hesitant to share your profits. Are property managers really worth the cut? 

Let’s take a look at some of the benefits of having a property manager that’s not you. 

You’ll fill vacancies faster

A good PMC uses their experience to find you the best tenants. You’ll still have the final say on who rents your property, but a property management company can pre-screen applicants for you.

Plus, good property managers will know how to keep tenants and encourage them to renew their lease. This means lower turnover rates for the PMC (so less work for them to do) and steadier revenue for you.

You’ll have more thorough rent collection.

Collecting rent payments is every landlord’s most dreaded task. But if you have a PMC, you won’t have to worry about consistent and persistent rent collection anymore.

Property managers will take over collecting the rent, enforcing lease policies, and implementing fees. With a good PMC, your income as a landlord should be much more stable.

You’ll have a more aggressive eviction process.

Whether it’s a problematic tenant that slipped through the screening process or someone who turned sour overnight, you don’t have to go through the grueling eviction process anymore.

PMCs will enforce the policies in your lease and ensure that difficult tenants are evicted. Plus, with a more thorough screening process, property management companies can help you avoid renting to problematic tenants in the first place!

You’ll have well-maintained properties.

No more attending to tenant repair requests and making sure the rental is well-maintained. PMCs will keep your properties in top shape and field tenant concerns 24/7. They’ll do everything from scheduling and monitoring to documentation and evaluation of the repairs. PMCs are also in charge of paying your suppliers and utilities at the end of the year.

Keep in mind that property managers may not help you with cutting costs. However, you can leverage their expertise and connections to get better deals on maintenance.

You’ll have better legal compliance.

Keeping up with legislative changes is part of a property manager’s job. This will help you avoid having a lease or process that’s out-of-date, in violation of a new law.  

You’ll have the time and ability to scale.

If you want to grow your company and portfolio, you can’t spend most of your day managing tenants and properties. You’ll need a team to take on some of the responsibility. The less time you spend fixing problems, filling vacancies, and evicting tenants, the more time you’ll have to expand your investments.

Paying a PMC to manage your properties will result in less stress and an improved ability to scale. The bigger a revenue source you are, the more they’ll want to protect their relationship with you—so don’t skimp! Both of you will benefit from this working relationship in the long run.

Conclusion

Are property management companies really worth the money?

Well, having one will ensure that you have quality tenants, complete rent payments, someone to process evictions, well-maintained properties, updated legal requirements, and the time and ability to scale your real estate portfolio.

Just note that not all property management companies will do a good job—cheaper rates usually mean cheaper service. So, instead of asking if they’re worth the cost, ask “how can I make sure I hire a PMC that IS worth the money?”

Interested in hiring a PMC? What aspect of property management do you struggle with the most?


Categories
Landlords

5 Problems You can Avoid with Great Screening

Rigorously screening your tenants is everything in landlording. Why? Because great tenants will make you wish you got into landlording earlier, however, problematic tenants make some landlords wish they never began investing in the first place.

If you don’t want to end up with regrets – screen your tenants! Here are just a few of the problems you can avoid by doing so:

  1. MISSING & LATE PAYMENTS

The occasional late payment is one thing, especially if the tenant is just going through hard times (like a pandemic). But no landlord wants to end up with tenants that never pay on time, or never pay at all. Non-paying tenants will give you a headache trying to reach them, turn a blind eye to the lease agreements, and eventually, when you finally threaten them with eviction, pay only partially, just enough to stay a bit longer in your rental.

However, by screening well, you’ll see their employment status, current income, credit history, and talk to their past landlords to find out if they pay rent fully and on-time. This is the only way to help guarantee yourself consistent income through their rent – which is the whole point in renting out your properties.

  1. EVICTIONS

Processing evictions is expensive, time-consuming, and extremely stressful. Common reasons for evictions are non-payment of rent, lease violations, property damages, or illegal activities – all of which are pains you can avoid by screening well. 

You can avoid getting yourself into situations that require evictions by looking out for any concerning things during the interview screening. How responsible are they with their finances? How did they behave in their past rentals? Are they rule followers (e.g. did they follow the lease agreements at their previous rental)?

For more on how evictions work in Michigan, head on over to this link.

  1. PROBLEMATIC TENANTS

Some tenants don’t take their landlords seriously. They may seem great prior to renting, but this doesn’t mean they will continue to behave once they’ve secured your property. 

Some will damage your property. Some will harass the neighbors. Some will want you on standby to attend to any of their requests, no matter how unreasonable or small. Just look up “tenant horror stories” on Google and you’ll see what we mean! They will make you wish you hired a PMC (which you can obviously consider doing, too) or at least have screened them properly before handing the keys over to them. 

It’s just not worth it when you can verify their historical data and call up their references to check their behaviors. 

4. DIFFICULT MAINTENANCE

Since tenants have no attachment to the property, many lower class (C and D) tenants won’t take care of it as much as you wish they will. But you’ve invested good money in your units, so why wouldn’t you also invest in good tenants to take care of them?

It only takes one sloppy tenant to reverse the improvements you’ve done into costly damages you’ll be forced to fix. One dog to scratch the hardwood floors, one lazy tenant to neglect the overheating boiler, and one hoarder to turn your rental into an insect hub.

To avoid this, ask previous landlords how they were during their tenancy. Were there any problems with property damage, housekeeping issues, or living habits? Also ask if deductions were made from their security deposit, and get an explanation as to why. If tenants can’t provide a suitable, well-documented explanation for any sketchy rental history, beware!

5. HIGH VACANCY RATE

The words “high vacancy rate” should scare any responsible landlord, because an empty rental investment is just losing you money by the month. The vacancy rate compares the amount of time your property could have been rented versus the time it’s actually rented, so you want it to be as low as possible. Common reasons for vacancies can be because the tenants you get are always leasing short-term, the tenants are often problematic and have to be evicted, or the tenants ruin your property and you need to do major repairs – either way, your business is not generating profit during this time.

To prevent this from happening, verify the following during screening: Do they tend to move residences often? Do they have stable employment? How long do they plan to stay in your rental, and do they have the financial stability to commit to a longer lease? Look at past rental history, previous addresses, credit and employment history to figure this out.

Tenant screening is the last area of your property management that you want to skimp on. By being cautious before accepting an applicant, you can avoid more than just these five problems – you can eliminate most, if not all, of the things landlords have to stress over. 

Any experience you’d like to share on how tenant screening saved your life as a landlord? Comment below!

Image Courtesy of Ketut Subiyanto

Categories
Shortterm Rentals

How to Attract Short-Term Rental Guests During COVID

If you want your rental portfolio to stay in business during the coronavirus pandemic, you need to align your offering with people’s priorities in the new normal. 

Safety and protection are of utmost importance right now, so what safety measures should you implement to assure your guests? 

Furthermore, why are they renting in the first place – are they going to have a staycation since traveling abroad isn’t a safe option anymore? What can you then provide to make your STR attractive, given the rapidly-changing consumer behaviors we’re now seeing?

Here are some ideas to help your short term rental business adapt to these new times:

  1. Contactless Check-In and Out

Plenty of us have experienced arriving in a new country and checking yourself in to the AirBnb rental you’ve reserved beforehand. You don’t even meet the owner, you just use the passcode they gave you to enter the cute little apartment unit. Days later, after you’ve eaten all the street food and bought all the souvenirs possible, you check yourself out simply by locking the door behind you, before heading to the airport. It’s easy, safe, and keeps human interactions to a bare minimum (owners or property managers only show up when something goes wrong with the unit!).

With all the tools and technologies available, you can implement contactless checking-in and out in your rentals too, and operate with increased health and safety protocols. Digitizing and revamping your check-in and out process will help to assure guests that you provide convenience plus safety. All you need is: 

  • Digital key or lockbox access
  • Welcome card with house directions & local info
  • List of contact numbers
  1. Refund Policy

COVID has cancelled a lot of plans – but not a lot of payments. One of the biggest head-scratchers during this pandemic is how most of us can’t cancel expensive flights, gym memberships, or reservations in resorts without a whopping, heartless cancellation fee. 

To assure renters that your refund policy considers the pandemic and related governmental restrictions, try including these two in your emergency policy (at least, for bookings made prior to March 2020):

  • Flexible credits – Offer the guest a full credit for the amount they’ve paid if they are beyond your cancellation window. You can allow them to use these credits to book your property again in the future (post-pandemic), so at least it’s just a “rescheduling” for both of you. 
  • Refunding – Offer the highest refund you can in your cancellation policy, while still protecting yourself. If the guests are unable to accept credits, and you can’t commit to a 100% refund, then at least give them back 50%. With the pandemic, uncertainty is our reality nowadays, so take this opportunity to show understanding to your travelers – it will result in higher chances of them returning post-COVID.

3. Sanitizing and Documentation

Take the extra mile to sanitize your STRs – not just clean them. What’s the difference? Cleaning is removing most germs, dirt, and dust using a soapy sponge or damp cloth. However, cleaning does not remove all the germs and bacteria that are hidden in the deeper layers. By using chemicals to deep-cleanse, sanitizing your rental will lower the risk of infection and further assure your guests of a COVID-free home. 

Document all the sanitizing measures you’ve done using the simple guideline below. Feel free to add more details as you go along. You can even post this as part of your listing to make any prospective guest feel at ease:

  • Wear protective gear or PPEs while you clean.
  • Ventilate the rooms before you clean (as recommended by the CDC).
  • Wash your hands properly and thoroughly before and after each cleaning. 
  • Clean first, then sanitize. Use detergent to remove dirt, dust, grease, and most germs. Afterwards, spray and wipe with disinfectants using clean cloths.
  • Use disinfectants that are registered by the Environmental Protection Agency (or has 70% alcohol) as these are believed to be effective against the virus. 
  • Pay attention to all surfaces–especially those that are frequently touched. For rugs, sofas, drapes, or anything else that’s similar, machine-wash if possible.
  • Avoid touching your face while cleaning to prevent the spread of germs.
  • Wash all linens at the highest heat setting recommended by the manufacturer.
  • Empty all appliances and disinfect their surfaces.
  • Dispose of your cleaning supplies properly. 
  • Safely remove your cleaning gear after you’re done. 
  • Include a card in the property, informing newly-arrived guests that the property has been disinfected (listing all these steps, if desired!), and publish this
  • information online – it will help set your property apart when people are searching for a place to stay.

4. Comfort Features

Lastly, figure out why they are renting your property during COVID. If they’re planning a staycation, then it’s best to fit your property with entertainment and other comforts. This could mean additional towels, a coffee maker, board games, or free Netflix. (It will also differ, depending on where your STR is situated and what kind of guests you attract. Features that rowdy 20-year-olds will appreciate are quite far from those that 80-year-old elderlies will kiss your cheek for!)

Here are some features to consider:

  • Provide quality basics – Strong water pressure, fast and reliable WiFi, AC units and heaters that work without fail are all examples of levelled-up basics. Having these basics at good quality gives the guests everything they need for living, working, and relaxing in the easiest way possible.
  • Offer ample amenities – Stock your bathrooms chock-full of toiletries any of your guests can appreciate (especially when one of them forgets their toothbrush or shaving cream). Prepare your kitchen to handle an entire family cooking together with all the pots, plates, wine opener, and sponges. People are cooking in more now than ever before, so having things like spices and oil might be a nice additional touch, too. 
  • Have unexpected features – If Netflix is now an expected offer, then try installing a Nintendo Switch for your guests to enjoy. Throw in a foot massager in the living room too, for mom to get pampered while the kids play Mario Kart on the big screen. Perhaps you can put a couple of cold ones in the fridge for dad to kick back and relax as well. These are all small items that you can offer specially for COVID-escaping staycationers that will stay in the rental for days at a time, and these small touches go a long way towards garnering awesome reviews.

COVID may have hindered a lot of businesses from operating, but that doesn’t mean yours should stop too. There are ways to keep your short-term rentals attractive even in the midst of this pandemic. Try out these tips and comment below on how they worked for you!

Image Courtesy of Evgenia Basyrova

Categories
Flipping

Do Flipper TV Shows Help or Hurt the Industry?

Ah, the world of reality TV shows. Most of us have a love-hate relationship with these, as they supposedly mimic real life, yet need to be entertaining enough to make us forget about actual reality. But is that irony helping or hurting the flipping industry?

Over the years, reality shows centered around house flipping have remained amongst the most popular on TV. Just a quick search and you’ll see The Vanilla Ice Project, Fixer Upper, Genevieve’s Renovation, Flip or Flop, and My First Place – all exciting demonstrations that expose newbies to the real estate business.

So, are these shows a force for good – helping to encourage flippers and grow the industry as a whole – or are they making flippers’ lives more difficult?

The Good
These shows might be helpful to the market, as they introduce the real estate business to a wide audience, showing them the appeal and benefits of flipping houses.
They often reflect real-life house-flipping experiences, informally preparing people for what to expect – like how properties often have hidden repair costs. Fortunately, this also makes for an exciting narrative.
They may, therefore, help scare off people who realize that the trials and tribulations of flipping houses aren’t their cup of tea (or maybe not).
They’ve made flipping so widely-known that it’s not hard to explain to buyers and sellers the value of what you do (compared to other REIs, like wholesalers).

The Bad
The flipside of flipping’s TV popularity is that buyers and sellers alike may assume you’re in it to make a load of money, making negotiations more difficult.
These shows might very well be responsible for encouraging people to get into flipping before they’re fully prepared, i.e. committing to a huge investment, equipped only with information that was intended more for entertainment than education.

These newbie flippers will make mistakes on their pricing, leading them to overpay for properties. This makes it more difficult for experienced flippers to make money and stay in business.

In a worst-case scenario, these flippers end up negatively affecting the properties they work on – turning homes into worse shape than how they started, and with too much debt to be restored by anybody else.

The Conclusion
Real estate investing – especially flipping – can be quite lucrative, but that’s because it’s also quite risky. That’s something which reality flipping shows actually capture pretty well.

What they don’t communicate as strongly is the fact that, when you’re flipping houses, you really have to know what you’re doing, because it requires a huge financial and mental commitment from your end.

That said, it’s vital to know where and when entertainment deviates from reality. Oftentimes, these shows play down the risks (the cost and process of renovating and selling a house) and play up the benefits (the “insane” profits you’ll get in a short amount of time). So make sure you do your research if you’ve been inspired by one of these shows, so you don’t end up stuck with a half-flipped house that nobody wants.

Remember that the ones being featured on these series are experienced professionals – so make yourself as knowledgeable as possible before trying to follow in their footsteps.

Any stories about flipping TV shows impacting your real-life flipping business? Share them below!

Image Courtesy of Monica Silvestre

Categories
Wholesaling

Wholesalers: Clauses you want in your contracts!

An attractive perk of wholesaling real estate is how you can flip houses with no money of your own, or even good credit. People hear about this and want to jump into the business right away! However, most of them don’t even know how to properly structure wholesaling contracts – so what clauses do you need to include in yours? 

Let’s take a look at one kind of wholesaling agreement – an Assignment of Contract – and the types of language these documents should contain to protect wholesalers during deals. 

How Assignment of Contract Works

There are three players in every wholesale transaction: The wholesaler, the seller, and the buyer. The steps are:

  1. The wholesaler finds a good property at a good price, and signs a Purchase Agreement with the Seller (the owner of the house).
  2. The Purchase Agreement gives the wholesaler entitlement to ‘assign’ or sell the property agreement to a buyer.
  3. To assign the agreement to the new buyer, the wholesaler finalizes an Assignment Agreement to legally transfer their purchase rights to the buyer. 
  4. Handing over the baton to the buyer may cancel out the wholesaler’s legal liability and/or obligation towards the seller. 
  5. Now, the buyer can purchase the property directly from the seller, as per the original terms of the Purchase Agreement.

In this process, your job as a wholesaler is to be the middleman. You find a good deal, secure the rights to it (using a Purchase Agreement contract with the seller), then assign the contract to a real estate investor or owner-occupier (using an Assignment Agreement with the buyer). Your goal is to at least make sure that each of these agreements includes the important clauses–which we’ll be going through below.

The Purchase Agreement

  1. CONVEYANCE – This term refers to the act of legally transferring property from one entity to another. So what you want is to ensure that the property’s fee simple will be delivered to the buyer (or a representative they assign) by a General Warranty Deed. It should be free from any liens, restrictions, encumbrances, easements, or encroachments (even those not specifically referenced in this contract).
  2. PRORATIONS This clause is to ensure that property taxes and rents will be prorated based on the current year’s tax (without any exemptions, like discounts). All taxes should be current.
  3. DEFECTSHave this clause to hold the seller accountable for any defects that might be found. Essentially, this clause should state that the seller assures the property to be without hazardous substances, any violation of zoning, environmental, building, health, or other governmental ordinances or codes; and that the seller affirms there are no known facts regarding this property that could adversely affect its value.
  4. NO JUDGEMENTS The seller should confirm that there is nothing threatening the equity of the property. There should be no bankruptcy pending, or contemplation by any other title-holder.
  5. POSSESSION The contract should state that possession of the property, its occupants, and all the keys, will be handed over to the buyer when the title is transferred. If the property is vacant, then possession and all the keys to the property will be given to the buyer once the contract is executed. All leases, advance rents, and security deposits should be transferred to the buyer as well.
  6. RIGHT TO ASSIGN – This clause, along with the next ones, are where you should dictate your intention to wholesale the property. Without this clause, you can’t legally wholesale the deal, so this is a pretty important one. It should say that you, the buyer intends to assign the contract to a new buyer and the seller’s approval is not needed. Then have the seller initial the provision. Assure them that they will still get the purchase amount as agreed.
  7. NO RECOURSE AGAINST BUYERUpon default, the seller’s only solution is to retain what the buyer had put down as earnest money – they have no legal recourse to take any action beyond that against you, should you back out of the deal. 
  8. CLOSING DATE You want to give yourself as much time as possible to find someone to buy your contract. So negotiate at least 45 days or more. 
  9. “AS IS” and INSPECTIONS Make sure that this contract is contingent upon your inspection and approval of the property, before they transfer the title. The seller should provide you access and opportunity to inspect the property thoroughly (including all the power and utilities). If you accept the property, the contract should indicate that it’s in “As Is” condition. If you decline, then the buyer should notify the seller within 10 days from the day of the contract signing. 
  10. PROHIBITIONS – You don’t want to limit yourself to just this property or to one buyer, so make sure there is a clause that allows you to still accept future assignments. You should not have any prohibitions to do so. 
  11. ABILITY TO RENEGOTIATE – State that you can renegotiate the price. For example, specify a certain amount to be deducted for repairs. But if the property exceeds $20,000 in repairs, you should have the ability to back out, or renegotiate the asking price. 

With that contract done, next, you need an Assignment Agreement to govern the second half of the wholesaling process. 

The Assignment Agreement WHERE DOES WHOLESALER MAKE THEIR MONEY?

  1. This contract should say that you are “transferring” or assigning your right as the buyer to another party. The new party will now become the new buyer, and this now effectively closes the Purchase Agreement contract. 
  2. In an assignment, the buyer can see the purchase price you have with the seller, so they could be put off when they see you’re making money off the deal. In this case, they may try to negotiate their own deal with the seller. 

There’s a way you can try to protect against buyers cutting you out as the middleman and going directly to the seller instead: 

a.) In the purchase agreement, there should be a clause that allows the wholesaler to immediately file a claim of interest against the property. 

b.) Then, go right away to the local county and file that claim of interest. 

c.) Now it’s recorded in the chain of title for the property, so if a buyer tries to go around you and go straight to the seller, they can’t get a clean title, because your claim of interest will be on record.

3. If the purchase contract gave you more leeway, this time, you want to be as strict as you can with the buyer, to prevent them from backing out at the last minute and compromising your deal with the seller. 

Here’s one clause you might find useful for keeping your buyer on schedule. This clause penalizes them for any delay in closing. If they feel uncomfortable with agreeing to a $300-500 penalty, then they might not be very serious in the first place, so it’s not really that big of an ask. Here’s an example of how you can word this: 

ASSIGNEE  must close title on the property subject to the AGREEMENT by ____________, 20____. If seller of property subject to said AGREEMENT is ready, willing and able to close title on the above date but ASSIGNEE  fails to close title on or before said date, ASSIGNEE  will pay ASSIGNOR a per diem of $____________ until and including date of closing.

3. Aside from this, you’ll also want clauses which will make it as difficult as possible for the buyer to back out of fulfilling their Purchase Agreement, so ensure things like the property condition and price are clearly articulated and non-negotiable. 

4. Finally, your assignment contract should also say “X is the amount I’m being paid as an assignment fee” – this is your profit, which the buyer pays to you when you sign the assignment contract. Only then do you sign over the purchase agreement to them. This way, it doesn’t matter if the buyer closes on the house or not, because you’re now out of the deal and have made your money already.

Once you’ve drafted your contracts up, have them reviewed by a local attorney who’s familiar with wholesaling contracts to see if it complies with your local laws. Not a lot of companies are used to dealing with wholesalers, so make sure you work with a lawyer who is. 

Any other clauses we’ve missed? Share with us below!

Image Courtesy of Anna Shvets

Categories
Flipping

Can You Make Money Flipping Blighted Houses?

Are blighted properties diamonds in the rough for property flippers?

Many investors were attracted to Metro Detroit when they heard about $500 houses for sale on eBay. Now, it’s more like $10k a home, but can you still realistically make money by flipping these?

What are blighted properties?

Blighted houses are abandoned properties in derelict or dangerous condition. They might have overgrown lawns, dilapidated roofs, broken doors and windows, or other signs of neglect. These houses have been deemed uninhabitable, and need either complete renovations or a tear-down to become livable once more.

Where are the blight areas in Metro Detroit?

There’s a big difference between a blighted property and a blighted area. You should be able to make money flipping a blighted house in a neighborhood with solid buyer demand, but flipping for profit in a blighted area is another story – so it’s important to know where you’re buying.

You can see plenty of blighted areas in the City of Detroit, due to the area’s history, which saw the population plummet by nearly two-thirds in the 70s and 80s. Residents left, causing a corresponding loss of tax revenues, resulting in significant cuts to city services. 

This led to neighborhoods full of neglected, vacant properties. You’ll see this in Brightmoor, Burbank, Ravendale, State Fair, Grixdale Farms, Petosky-Otsego, NW Goldberg, and Westwood Park, where roughly 30-40% of buildings are unoccupied.

However, this isn’t the case across the entire Metro Detroit area. You still have the “Ring Cities” surrounding Detroit, which don’t have these blighted areas. Overall, the Metro Detroit real estate market is generally healthy.

Are blighted property flips profitable?

So, many people are curious about the potential “flippability” of these houses in blighted areas. Can you make money from flipping them? We’ll have to go back to the basics of how a flip can be profitable in the first place.

What’s important when flipping a house? 

  1. You Need to Get It at a Good Price

Like any real estate investment, you need to acquire your blighted house at an excellent price to achieve a decent ROI. 

This applies to tear-downs as well–which is a common situation for blighted homes–where you actually just want the land that a house is currently sitting on. You’ll need to buy the property cheaper than a bare plot of land, because of the additional cost to demolish and remove rubble. 

  1. You Need to Renovate Fast and Efficiently

At the heart of every good flip is a fast and cost-efficient renovation, which requires accurate prediction of the overhaul costs. If you’re a beginner, correctly budgeting for a blighted property flip can be quite tricky. There can be a lot of hidden, expensive problems within their walls! 

This is exactly what buyers of $500 houses didn’t realize–a deal on a blighted house is often too good to be true. Did you consider that it’ll be a knockdown? Is the layout of the house costly to change) even good?

If you’re buying a blighted house in a blighted neighborhood, renovations will probably be a nightmare. It’s not uncommon to experience break-ins, theft of materials, and vandalism (all of which equal additional costs and headaches) – and after all that, you still likely won’t be able to find a buyer at a profitable price. Which brings us to our next point about flipping blighted properties…

  1. You Need to Sell It at a Profitable Price

You need to sell it at a price that makes financial sense. Look for a price that’s 70% of its market value, minus repairs. It actually takes a special skill to find distressed properties and negotiating it down to a profitable price! So keep this example in mind: If the house will sell for 100k fully fixed up, and it will cost you 30k for renovations, then you should pay no more than 40k.

70% x $100,000 (market value) = $70,000

$70,000 – $30,000 (repairs) = $40,000 

If the math doesn’t add up–steer clear. You can end up spending more money fixing than acquiring, but don’t overspend and end up with a house too expensive for the area. Which leads us to our next point…

  1. You Need People to Want to Buy

You don’t want to be stuck with a fully-renovated house that nobody wants. Your flip needs to be sellable at the price you need, within the time you have, to a willing market, in the right area. 

Maintaining and holding a vacant property while you wait two years for a buyer doesn’t make financial sense. So make sure you’re confident that there is a market for what you’re fixing up, – which, if it’s in a blighted area, there almost certainly isn’t. (In the City of Detroit, some abandoned areas have steadily improved, but it’s still a slow process.)

It may be hard to believe, but you can still lose money, even if you’ve only paid a couple of dollars for the house. You may buy it for next to nothing, but end up spending so much money and time renovating it, that it costs you more than what you’ll sell it for. And what happens if people don’t buy it at all? This is why it’s important to know the difference between flipping a blighted house in an up-and-coming area, versus flipping in blighted neighborhoods.

If you have great experience in restoring and selling neglected properties, and you’re in an area that does have buyers, and you have enough contingencies in case it doesn’t fall through, then you’ll probably make a lot of money flipping blighted houses. Experts will benefit from its high-risk-high-return factor. 

However, it’s never a safe bet. If you’re a newbie, you might want to avoid this type of real estate investing for now (and stick to Ring City properties instead, where the risk is significantly lower). Flipping blighted houses is definitely not for the faint of heart!

Have you thought of flipping blighted houses? Or maybe you’ve done it already? It’d be great to hear from you below.

Image Courtesy of: Webdexter Apeldoorn

Categories
Landlords

Pros and Cons of Assignment of Contract

The most attractive thing about wholesaling as a real estate investment strategy is that you can do it with no money of your own and none of the headaches that generally come with owning a property.

There are two ways to wholesale real estate: double-closing and assignment of contract. We covered the down and dirty of double-closing a few months ago, but now let’s take a look at the pros and cons of wholesaling using the assignment of contract method.

What is Assignment?

An assignment of contract is when a wholesaler enters into a purchase agreement with a seller, giving them the right to sell the contract to a buyer for a fee. The good thing about this is there’s no capital gains tax involved (but you still need to pay about 30% ordinary income tax, depending on your tax bracket, if you’re holding it for less than one year).

Pros

  • Assignment is cheaper than double-closing: Because there’s only one set of closing costs to pay, this is the most cost-effective wholesaling method.
  • It’s a good selling point: You can negotiate a better price from sellers by assuring them that it will be a smooth and easy transaction, you will cover all their closing costs, pay off their lenders, and then deliver their remaining profits to them.
  • It’s simple: You find a buyer, sign an agreement, put the ‘earnest money’ into escrow, then step back and let the deal go through. It’s also easier to explain to titles companies than a double-closing, if the company you’re using isn’t experienced in wholesale deals.
  • Assignment can be done quickly: The process doesn’t require much time from your end – often just the amount of time it takes you to market and find a buyer. Because there’s only a single closing, that part of the process is usually faster than with double-closing, also.
  • It can create opportunities for repeat business: If done right, this can allow you to establish a relationship with the buyer and do repeat business with them over time. The most important thing here is to remain transparent, so that all parties are aware that you’re making money and are bringing value to the deal, whereas this is less clear with a double-close.

Cons

  • Your assignment fee is visible to all: One of the cons about this arrangement is that your fee will appear on the settlement statement. As we said, this kind of transparency can help you form lasting business relationships with your buyers, but it also can make some buyers and sellers wary. If you’re making a hefty sum, the seller might be taken aback or begin to rethink whether they’re getting a good deal or being ripped off by you. By the same token, buyers might think they could get a better price elsewhere, so it’s possible either party could try to back out of the deal once they realize you’re making money off of the transaction.
  • State legalities could be an issue: Realtors lobby hard to keep laws tight against wholesalers so they can avoid losing business in their respective states, so you need to remain vigilant and politically active to safeguard your rights and your business.
  • It can limit your options: You need to verify with your buyer if they intend to pay in cash or use bank financing. Keep in mind that some properties, like short sales and bank-owned homes, can have no-assignment clauses in place, which means you can’t use this method to wholesale these properties.

Assignment of contract is a good way to approach wholesaling if you’re looking for quick, relatively easy transactions and the opportunity to develop long-term relationships in the industry. However, this method might not be the best for those who want to make large profits off of each deal they do, as it can put off buyers and sellers alike. A good rule of thumb is to use assignment only if you’re making less than $10k off a deal, and to always be upfront with all parties about your fee and the benefits you bring to the table in exchange for this fee.

Ultimately, the efficiency of assigning a contract means that you can complete more transactions in a shorter period of time, which can make up for the fact that your fee will be smaller than in a double-close scenario. If you’re uncomfortable with the idea of being transparent about how much you’re making, or if you want to get bigger returns from each deal, then opting for a double-close is probably the better choice.

Image Courtesy of Cytonn Photography

Categories
Shortterm Rentals

How Soon Until Short Term Rentals Bounce Back From Coronavirus

Lady wearing a face mask
What is the new normal?

Coronavirus has affected the travel and tourism industry at an unprecedented scale. With strict stay-at-home orders and lockdowns still in place globally, online travel traffic is down by 70%, potentially accounting for up to $20B in missed revenues. In the US, bookings for short-term rentals bookings saw a 94% year-on-year decrease due to the pandemic.

As borders slowly start to reopen in the near future, what will the new normal of the short-term rental industry look like in Metro Detroit and Oakland County, in particular?

Localized Effects Will Differ

Travel restrictions have crippled the industry severely, but data suggests that the short-term rental industry is doing better than the hotel industry, which reported continuous declines, with revenues per available hotel room dropping year-on-year by as much as 94%.

Urban markets will likely suffer more than holiday or leisure destinations. In New York (where the virus hit hardest), year-on-year data indicate that the demand for short-term rental properties have decreased by 50%, and consequently, revenues have gone down by 47%, too.

What we’re currently seeing is a shift in demand from urban to remote rental locations, where there is less exposure to the virus. As these patterns carry on into the foreseeable future, we recommend STR operators to keep a closer eye on market trends and industry news. More than ever, strategic and data-driven decisions will be crucial in bouncing back from this crisis.

Assessing the Impact of COVID-19

To predict demand and gain market insights, consider using a trend analysis tool, such as MarketMinder. They provide good breakdowns of market rates and offer valuable insights on trends that can help you work out the state of your particular market, and adjust your strategy accordingly. (Note: some of their features are only available for paid subscribers, but you can do 5 basic reports a month for free).

Here are some trends to look at to gauge the stage of your market’s recovery:

  • How far ahead reservations are being made?
  • How are other hosts pricing their properties now vs. their pre-pandemic rates?
  • What rate do guests actually book the property for?
  • How far are people travelling to reach your area?
  • How are they getting there – by air or car?
  • When will business-related travel resume? Are there any conferences planned for the future in your area?
  • Are people booking owner-occupied rentals, or only “have the whole place to yourself” ones?

Post-pandemic, it seems very likely that travelers may opt for vacations that could be reached via land travel to mitigate risks. This may lead to an increase in demand for nearby STRs, as travelers try to find budget-friendly holidays and accommodations within easy reach of the city. 

To see how these trends are developing in Metro Detroit, we used MarketMinder to conduct a comparison between Downtown Detroit and a suburban area closer to the lake, such as Saint Clair Shores.

Insights from the tool indicate a rental demand score for Saint Clair Shores of 72, in comparison to Detroit’s score of 69. Median occupancy rates (calculated over the last 12 months) in Downtown Detroit are also down, from 69% in June 2019 to 45% in April 2020. By comparison, Saint Clair Shores has a current occupancy rate of 50%, possibly showing early signs of the shift in demand from urban locations to less densely-populated areas.

Human beings have an inherent desire to travel and explore. So it’s almost certain that, once travel restrictions are lifted globally, the demand for STRs will slowly increase again. Although we don’t exactly know when this “new normal” will begin in earnest, for now, property owners and landlords can spend this time preparing for it, by implementing strict sanitation measures to reassure and attract future guests.

Image Courtesy of: Anan Shvets

Categories
Landlords

Overview of the Student Rental Market in Metro Detroit

Student tenants can rent anywhere. They don’t always choose to live in student housing, or even in the immediate vicinity of their school, but often rent or split a regular unit instead. That means, no matter where you are in Metro Detroit, you can end up with student applicants for your properties.

You can run into them in three situations: If you’re in or near college towns, near a university in a bigger city, or even randomly, as long as you have student-appealing amenities nearby. And though Metro Detroit isn’t a popular university area, here are some neighborhoods where you can expect student applicants:

  1. College Towns

Landlords in college towns deal with students all the time. If you own rentals near one of the college towns in Livonia or Dearborn, there’s a high chance you’ve already run into them. A lot of these areas have vibrant downtowns, with many gyms, restaurants, and other amenities catering to the younger crowd.

  1. University Areas

Besides college towns, there are also spots near universities like the University of Detroit Mercy and Wayne State University (both in Detroit City) and Oakland University in Rochester. These have fewer student tenants looking to rent in the immediate area, as a lot of them commute from home, but you’ll still run into student applicants here fairly regularly. 

  1. Randomly!

There’s a community college in Royal Oak, but that’s not the reason students rent there. They rent there for its trendiness and great nightlife. Students can show up in any area like this, as long as it’s young, vibrant, and appealing to them. Some students would much rather live in a great neighborhood and just commute to their university, so regardless of your proximity to a school, you can still run into them occasionally.  

One of the most significant differences between student vs. non-student tenants is that they usually lack established income or credit history. But that doesn’t mean you should skip considering them altogether–you just have to know what to look out for.

How to Screen for Student Tenants

They should have a reliable source of funds, whether that be student loans or a supportive parent. Just make sure to also screen any cosigner that will be paying the rent. 

Once their financials are set, use your better judgment (and their track record, if any) to see if they’ll make good tenants or not. Obviously, the number one concern with students is that they’ll throw crazy parties and treat your property like a messy dorm. However, you can’t just discriminate against students on this basis alone – you’ll need clear criteria for selecting tenants, and be able to show that a particular applicant didn’t meet those criteria. 

Be careful of how you phrase things, especially when you don’t accept students and cosigners flat out as a blanket statement. You can have a policy that dictates no acceptance of cosigners, but in this case, you can never accept cosigners for anyone else without risking being accused of discrimination.

Student renters come in all forms, and they can crop up anywhere. You may not market your property to students, but if you’re near a trendy area that’s desirable amongst young people, you’ll likely get at least a few student applicants anyway. Your property doesn’t even need to be located close to one of Metro Detroit’s colleges or universities. 

So be prepared to handle student applicants when they appear: conduct proper screening and don’t be discriminatory when considering them–as long as the financials make sense and they have a co-signer that can guarantee you their rent!

Have you had student tenants in Metro Detroit? What was your experience with them?

Image Courtesy of Andrew Neel