Flipping in Boise -- A primer on flipping homes in Idaho (or most anywhere)
So you think you want to flip a house...
You've been watching Flip or Flop and you say to yourself "that looks easy; what a fun way to make money!" Maybe you have some construction knowledge or an eye for design and want to try your hand at renovation. We get it, we were bitten by the flipping bug about six years ago. We often get questions about flipping houses, so we are sharing some of the things you will want to consider before buying that fixer-upper.
Flipping can be an exciting, stressful, rewarding, and fun career or hobby depending you your level of involvement. Before you get your Chip & Joanna Gaines on, there are a number of questions you should answer:
Where do I find properties? A wise man once said "you make money on real estate when you buy it, not when you sell it." That seems counterintuitive, but the truth is if you a buy a piece of real estate right (ie. cheap to the market) you are already ahead of the game.
v Enlist the help of a good real estate agent - find an agent that knows what you are looking for. Agents see properties as soon as they hit the MLS, and sometimes before. Good properties don't last long, particularly in hot markets such as the one we are currently experiencing, and a good agent can often find just what you are seeking in a property.
v Go to Auctions - Bank owned properties (REOs), estate liquidations, and even some conventional sellers use auction companies to sell properties. There are different types of auction companies, depending on the type of property.
§ Online Auctions - Banks tend to use online auctions for bank owned properties. Sites such as Auction.com, Hubzu.com, and Xome.com are some of the national companies. There are also local online auctions depending on your area. Most of the properties sold on these sites have a reserve.
§ On-site Auctions - Local Auction companies hold auctions, often on the front lawn of the property, for estate sales or even some traditional sellers. Sales may be held as "absolute" which means no reserve, or "owner confirmation" which means that the seller must approve the high bid.
v Attend Foreclosure Sales - When properties go through the foreclosure process they are often sold at foreclosure sales. These may take place on the courthouse steps of the county courthouse where the property is located. Alternatively, the bank may utilize an auction company to hold the foreclosure sale at a hotel or other venue. NOTE: Foreclosure sales require 100% payment at the time of sale. Payment is usually made via cashier's checks at the time the bid is awarded.
v Detective Work often Pays - Knock on doors, talk to neighbors, and let people know you are looking. Drive through neighborhoods and look for houses that look neglected or vacant. Many flippers send out postcards or mailers offering to buy houses.
Where is the money coming from? There are a couple of adages that hold true in buying distressed properties-- 'Cash is king" and "He who hesitates is lost". In this market if you find a good target property, time is of the essence. You need to make a decision quickly, and present the best offer possible. Sellers always prefer cash offers, void of inspection contingencies or other conditions. If you are planning to finance the purchase of a flip make sure you have a pre-approval letter but understand that you may be less desirable than a cash / quick close buyer.
How do I decide on a house? So you have a target property or properties in mind and you are trying to decide whether or not it makes sense to put together an offer.
v Determine your budget- make certain that you have enough money or credit available to complete the job. Novice flippers often get in over their heads and run out of money before the job is completed and are forced to unload a property with no gain, or even a loss.
v Estimate your costs before you buy - it is better to walk away from a prospective project than to lose money on it.
Ø Write an estimate - We go room by room and write an estimate sheet for each area. If you aren't sure what something might cost, or if there are unknowns, enlist trades. Get to know a good plumber, electrician, roofer, carpenter, drywall hanger, tiler, flooring specialist, etc. , and have them give you estimates.
Ø Determine how much you are willing to do yourself - Are you planning to do all of the painting? Do you have carpentry skills? Maybe you have always wanted to try your hand at setting tile. Obviously, the more work you can do the less you need to pay someone else to do it. Less labor cost = more profit. However, understand that an expert can do things better and more quickly than a beginner, and often it is well worth the expense to hire things done.
Ø Create a materials list - For items that don't involve trades, go room by room and determine the cost of each item. Be as thorough as possible. Don't forget small things such as hardware, lighting, etc.
Ø Add 25% - Whatever number you come up with for the estimated total cost of the project, add another 25%. Notice that on your favorite flipping show they almost always exceed their budget; and they are experienced at this! You will very likely run into unforeseen expenditures, higher than expected bills from trades, and items you left off your estimate.
Ø Figure out your projected sales expenses - It costs money to sell a house. If you are using an agent plan on 6% commission (3% for each side), plus about 1% for typical closing costs.
Ø Determine your desired profit - You are in this to make money, not just for the "fun and excitement", so determine your break-even and then add in what you expect to make for your trouble and hard work. I know flippers that won't touch a project for less than 30% profit. I prefer to determine a dollar amount.
Ø Determine the projected market value - Look at comps (comparable properties) in the area of the prospective project to determine an approximate sale price once you have turned that dump into a castle.
v Pull the trigger - If your projected sales price exceeds all of your planned expenses and profit margin, put together your best offer and get it under contract.
What type of renovation should I do? Now that you have a house, decide what you want your project look like when you are done. Some of these decisions need to happen during the budgeting process if you are doing major renovation. Am I doing major renovation or cosmetic updates? What work will require permits? Are there items that require lead-time (custom cabinets, etc.)?
v Know your market - How long are homes in your area sitting on the market? What types of homes are in demand? Is the market in the area cyclical? What is the current inventory? These are all factors to consider when determining how extensive (or time consuming) a project should be.
v Determine the time table - Will your project take three weeks or six months? Generally, the longer a project takes the more it costs. Carrying costs such as interest (if you are using credit), taxes, insurance, and utilities all add up and eat into potential profits. On the other hand, if you know that home demand and prices spike in the Spring and you buy the project in the Fall, you may decide to take your time and take advantage of the better market.
v Know the trends - Styles change. What was popular in homes 20 years ago or even 2 years ago is different than what is popular today. Closed-off rooms have given way to "open concept" floor plans. Glass tile has been replaced with subway tile. Hardwood floors have supplanted carpet. Visit model homes. Tour your local "parade of homes" to see what home builders are doing. See what colors and styles are popular now, and use them in your renovation.
v Identify your buyer pool - If you are renovating a large custom home in an upscale neighborhood your potential buyers are far different than a first time buyer of a small 3/2 in a tract subdivision. In a budget-friendly, small, entry level home shower inserts, vinyl floors, and off-the-shelf cabinets might be fine. However, people will often pay-up for better finishes, and they will expect them as the price-point increases. However, be mindful of the neighborhood. It is good practice not to over-improve nor under-improve, and it may hurt you when it comes time to sell.
v Renovate for the masses - So you've always wanted to do a feature wall with gold-inlay wallpaper, or you have always liked the idea of purple back splash tile with ducks and geese on them. It is true that there is no accounting for taste. However, don't let your personal tastes cloud your judgment! Example: We passed on a house a couple of years ago that could have been a good flip, but opted for another property. It was scooped up by a first-time flipper at a good price, so we kept an eye on the renovation. The flipper put a substantial amount of money into the house including some VERY taste-specific design ideas. Bottom line -- it was ugly! The house sat on the market for over a year and required multiple price reductions (in a hot market) to get it sold. The lesson: appeal to the largest possible pool of buyers. Just because you like some quirky design idea doesn't make it appealing to others.
How do I get it sold? Your frog now looks like a prince and you are ready to cash in.
v How to price your home - There are a couple schools of thought as it applies to pricing a freshly renovated home. First, recognize that it is now one of the best -looking homes in the neighborhood and price high. It may take a while to sell, but your profit might be better. The downside is that it may linger on the market, become a stale listing and require price reductions. Second, know that you have a great house, but price it more moderately. The idea is to spark tremendous interest and potentially drive the price up with multiple offers. The downside here is that you may risk selling it too cheap if you underestimate the value.
v Staging is almost always worth it - Face it, a home always looks more inviting if it has furnishings. It may be a hassle and an additional expense, but we believe that staged homes sell faster and at a higher price.
v Hold an open house - Your neighbors have been watching your progress and they will want to see it...and it is fun to show it off. Also, people talk. We have pre-sold houses before the flip was completed to people doing a drive-by in the neighborhood.
If you have done a quality renovation and your project is fairly priced it will sell, and in this market it will likely sell fast.
We love flipping houses and we love talking about flipping houses. If you have any questions or would just like to share your experiences feel free to comment on our blog.
You can check out some of our recent flip/renovation projects, including before and after pictures at https://www.allredblack.com/flips/