As someone who flips houses, one of your objectives is to appeal to buyers so you can close a deal. To make this happen, you make improvements on the property. But, more often than not, novice flippers overdo the renovations and subsequently end up with lower profits.
They invest a lot of time and money only to have it backfire on them when they realize that they can’t sell it at a price that offsets their investment. In other words, they quickly notice that they’ve spent way too much. on something that the market isn’t remotely interested in.
In these cases, more isn’t always better.
Nevertheless, there is a solution to this problem. Read on to find out how you can improve your properties without falling into the common trap of over-investing in a fix-and-flip project.
5 Steps for Planning a Satisfactory Flip Project
Have you ever heard of the Goldilocks principle? The principle is based on the children’s fairy tale, The Three Bears, where Goldilocks is always looking for something that’s “just right.”
The moral of the story is to hit that sweet spot that’s not too much or too little. You can apply the same principle in a flipping project. Make just the right amount of improvements on a property so it appeals to more buyers, without spending too many unnecessary hours on it—or far more money than you should.
Here are 5 steps you can take to do this and increase your chances of success:
1. Assess the Property
Once you have a property in mind, you have to assess if it’s worth an investment. Here is a quick list you can use to get started:
- Determine the After Repaired Value (ARV) based on the neighborhood
- Determine the features of properties that sell quickly in that neighborhood
- The property should have these main features that local buyers want
- The number of repairs should be manageable, within your skill set or knowledge
- Your quick evaluation budget should have at least a 10% margin of error
- The ARV less repairs, less purchase price, should meet your profit criteria
If your prospective property meets the above criteria, the property you want is probably a good option for a fix-and-flip project. And it goes without saying that a comprehensive assessment of a property will help you determine the necessary improvements you’ll have to make.
2.. Study Properties in the Area
Do you have your eyes on a property already? Perhaps you’ve already purchased a property and are wondering how to make the most out of it?
Well, the next step is to conduct in-depth research to evaluate similar properties in the local area. We are referring to the properties that have similar features and price points to your home, so you’ll have a baseline to decide on what to improve in your flip project.
Scouting local properties is an opportunity to learn what buyers value. For example, here are some questions to answer as you assess properties competing for buyers:
- Which rooms do they prioritize—kitchens, bathrooms, or living spaces?
- What characteristics will make your property stand out from the others?
- What features will make your property more valuable?
- Are there building codes you need to follow?
By evaluating what’s already selling fast in the market, you won’t waste time and money on unnecessary improvements and your property will get the interest of a large pool of buyers.
3. Consult with a Professional
If you’re investing in an area that’s new to you, we suggest that you seek the help of real estate agents that have sold the most properties in that area. As local experts, they’ll be far more knowledgeable about what sells, at what price, and what to avoid.
In other words, they are your right-hand-men for insights on planning your flip project better. They’ll know what buyers are looking for and the exact things to improve to sell quickly—enabling you to make the right improvements that will make your property a hot item on the market.
Understand though, that you shouldn’t expect them to work for free – unless you want to ruin your reputation. So, you should either pay them for their time or agree to let them list the property for sale once ready.
4. Plan Your Budget
Based upon your research and feedback from area experts, you should have a renovation scope of work and now you’ll need to get bids for the corresponding pricing.
Be prepared for some unpleasant surprises! It happens. When it does, you may need to figure out where you can cut back in other areas.
Once you’ve finalized your budget, you’ll also need to stick to it. This is probably the biggest challenge! You can easily get caught up in “budget creep”, where you spend a few extra dollars here and a few more there, and don’t track these extras until completion. Then you get a nasty surprise that those dollars add up to thousands and ruin your projected profit.
Have a budget in mind of how much you can invest in your flipping project, including the acquisition cost and estimated repair costs (ERC). Only when you have these, can you find properties that fit within your budget and will give you the expected returns.
For example, you can use the industry-standard 70% rule in your budget planning. The 70% rule states that you shouldn’t spend no more than 70% of the after repair value (ARV) minus the costs of repairs on a property.
Let’s say your total budget is $100,000. You should then be on the lookout for properties that come out at around $100,000 after applying the 70% rule, which means the purchase cost shouldn’t go above $75,000 and the renovations shouldn’t cost more than $25,000.
Using the 70% rule helps you estimate the price range and renovation costs you can afford. That way, you only work within your budget for guaranteed flipping returns.
5. Do Only What’s Necessary
When you’re renovating a property to get it “just right,” you need to focus on the essentials. Keep in mind that you don’t have to go out of your way and make drastic improvements. As long as you cover what’s necessary, the property will be good to go.
These are what you to focus on when flipping a house:
- Ensure that electrical wiring and plumbing systems are functional
- Confirm that foundational factors such as walls, floors, and ceilings are in good condition
- Make the house look presentable by conducting a deep cleaning and adding a fresh coat of paint
Also, take note to invest in good quality items that are reasonably priced. Splurging and overdoing these things is extra work you don’t need to do, but you do still have to show potential buyers that the house has durable, functional items inside of it.
Moreover, doing too many improvements can elevate the price of the property beyond the buyers’ budget. For example, having a glorious fountain with a group of goldfish in the backyard will only jack up the cost without adding any value for the buyer.
So, just like Goldilocks, you need to make sure the property is just right.
Going above and beyond won’t pay off in the flipping industry. Instead, focus on making the right level of improvements to increase your chances of a successful project that will give you the highest profits. As a real estate investor, financial viability will always be top priority.
We recommend developing the knowledge to have a rough idea of renovation costs before offering on a property. You should find some example properties and develop a budget to renovate 2-3 sizes/styles of kitchens and baths. You should know about how much it costs to replace a window, exterior and interior doors, the cost of painting per floor plan square foot, what roofing costs per “square”. If you don’t know what something will cost, you should either have a contractor you can quickly contact for pricing or pass on houses that need that type of work until you can develop estimated pricing for that issue.
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