September 13, 2017
8 Tips: How to Profit from a House Flip
Thinking of making a quick buck on the hot real estate market? The practice of “flipping” a home – purchasing a property, sprucing it up, and selling at a profit – has long been a popular tactic. After all, everyone loves a good makeover, as TV shows Flip or Flop, Love It or List It, and Flip this House can attest.
However, renovating a property for profit in real life is more complicated than cable programming lets on – it takes considerable market savvy, financing knowledge and stellar project management to make those profit dreams a reality. To shed light on best flipping practices, Limor Markman, a seasoned flipper and founder of financial literacy resources Limor.Money and HomePurchasingSecrets.com, shares her secrets for a successful fixer-upper.
1 – Know Your Market
The golden investment rule of buying low and selling high certainly applies to house flips. Markman says that while you should steer clear of scalding markets and overvalued properties, you still want to ensure the area is valuable enough that you’re likely to sell quickly. Reviewing comparable sales and listings in your desired area is a great way to gauge whether a property has potential for return.
“Personally, I like to do a flip in an area where ‘days on market’ is less than a month – like around 20 days. That can be a good indicator that the market is moving, because you can do the best renovation, but if nobody buys it, you’re screwed,” she says.
She adds that while no one “has a crystal ball”, picking a property in a location with strong market appreciation is the way to go. As well, because flips are generally done within a short time frame, investors can actually leverage a market’s upswing.
“If you’re in a market that’s not appreciating, is flat or depreciating, regardless of how you intend to make the money, you’re not in a situation that’s going to set you up for success,” she says.
2 – Go for Mass Appeal
When picking a potential flip home, it pays to be a people pleaser – you want it to appeal to as many buyers as possible. For this reason, Markman cautions against choosing overly unique or specialty homes that may only be a draw for a limited number of people.
“I want to buy a property in a location that’s very valuable, so in a major city, and you really want to pick a property that would be most desired by the most people,” she says. “I wouldn’t do anything where it’s a little obscure, like if there’s five bedrooms, or properties that have a guest house off the back. It could be really attractive, but you’re actually limiting yourself to the pool of people looking to buy it.”
3 – Score a Deal
It’s important to keep your revenue top of mind, and that means avoiding homes priced at a premium. For Markman, there’s one element that makes a property a particularly attractive prospect – a motivated seller.
“You want someone who is eager to get rid of their property; they’re downsizing, or they’re moving, or they have a sense of urgency, because they’re more likely to give you a better deal,” she says. “The most important part, I would say, is that with the property that you’re purchasing up front, you’re at least getting a little bit of a discount below market value. If you build in a bit of a buffer on the budget, it’s not a guarantee, but there’s a greater likelihood that you’ll end up more profitable.”
4 – Factor in Holding and Finance Costs
Markman says a common rookie mistake is overlooking the cost of actually owning the property while you’re fixing it up, such as mortgage, hydro and property taxes. Insurance can be another surprise cost, as coverage can be more expensive for vacant properties, and many insurers require additional alarms systems and monitoring.
“Every single month that I’m doing a renovation, I’m not generating any income – I’m not getting rent, and I’m not living there, so I’m not getting the benefit for the cost for my personal life,” she says, adding that it’s important to factor these costs into the final listing price.
5 – Be Picky with Your Improvements
Common renovation advice says to focus on improving kitchens and bathrooms, believed to offer the highest return. That’s not necessarily the case in a flip, warms Markman, who suggests spending instead on cosmetic improvements such as paint, flooring and curb appeal.
“(Kitchens and bathrooms) can be highly coveted by potential buyers, but they can also be really expensive… approach with caution. If you’re going to spend $30,000 on a new kitchen, you have to make sure that the end price is going to be equal or greater value to that,” she says.
“There’s nothing like a clean coat of paint, even on the ceiling, through the whole house, and also making it relatively neutral, so any potential buyer can be excited about moving in. The second one is flooring. We find a lot of houses with inconsistent flooring – it’ll be outdated, or different in every room. Having the same, consistent flooring can make things look a little bigger, and makes a much smoother transition between the rooms,” she adds.
6 – Insist on an Inspection
Above all, Markman says, don’t waste money beyond surface value.
“When I do a renovation, I never touch a property that has a lot of structural issues, or issues where I need to spend money that a potential buyer wouldn’t see,” says Markman. “If the plumbing needs to be done, or the wiring behind the walls, I will not go anywhere near that property, because I’m going to be pouring in money that’s not going to be visible to the potential buyer.”
That means it’s vital to bring in a home inspector to glean a clear picture of the extent of required work – otherwise, you’re taking a blind approach to your investment. “I never, ever, in any circumstances, skip an inspection,” she says. “It’s one thing if someone buys a house to live in because they love it so much that they’re willing to cover it, but for a renovation or flip, that doesn’t work – if I have no idea what I’m getting, I have no idea whether I’ll break even, and I could lose money as a result of that.”
7 – Work with a Dedicated Team
Forget strapping on your own tool belt – a profitable flip is best left to the pros. That means hiring a team of trustworthy contractors who are able to work full time on your project.
Markman says the type of professional she’ll hire depends on the project, but always includes a painter and general contractor. And, because time is literally money, she manages the flow of work with an iron fist.
“With renovations, I need to get it done as quickly as possible. I need to ensure they are available, that we have good rapport,” she says. “What I like to do when doing a renovation, is have a very detailed schedule where everybody knows exactly there they fit into the chronological order of things, and then I book them for that day.” She advises against working with buddies or personal connections in the industry if there’s any doubt they can follow said detailed timeline.
8 – Build that Buzz
The best time to start spreading the word about your new and improved property is actually while renos are still under way, says Markman – it’s important to create as much exposure as possible. While her considerable expertise allows her to market her properties as a private seller, she recommends greener investors connect with a realtor for more support.
“When you’re working with a realtor, some of them offer a higher level of support from a marketing perspective, so especially if you’ve done the renovation, working with a realtor who has some digital expertise is great,” she says. “I know realtors who do pretty fancy landing pages, websites, virtual tours, and you really want to showcase as much of the property as possible.”
For those going at it alone, she suggests going beyond MLS and leveraging social media – Facebook in particular is effective because it allows you to target your listing to specific locations and demographics. She also hits traditional outlets, such as Craigslist and Kijiji.