At 26 I made my first property flip. Another agent had listed an old vacant three-story Victorian house in a neighborhood that was transitioning from single-family to multi-family. The house was in OK but dated condition. The expensive components, like the roof, siding, HVAC system, electrical and plumbing were all in serviceable condition.
An investor owned the house and was having difficulty attracting long-term tenants in the transient neighborhood. It was a text-book example of a building that was under-valued because of its current use. Although the neighborhood had transitioned, the house had remained the same. This was the opportunity I had been looking for since graduating from real estate school six months earlier. I would convert the home into a four-plex, sell it quickly and with my new fortune buy other under-utilized properties and flip them for a tidy profit.
There was just one problem. I didn’t have any money.
My new partners solved the money issue. We purchased the property and within a year had resold it at a slim profit. My huge fortune that I was going to make on this one deal was reduced by unexpected delays, under estimating the conversion costs and income taxes. In addition, the time I spent dedicated to the success of the project distracted from my normal listing and sales income. From the experience, I learned that flipping properties isn’t as easy as that two-hour seminar on “How to make a fortune flipping properties.” There are financial opportunities available investing in distressed properties, quickly making some improvements and then selling the property for a higher price, but there are a myriad of pitfalls along the way. Here is some advice to make sure your flip doesn’t flop.
Where is the money? A mistake many new want-to-be flippers make is not having a sufficient amount of money to complete the project. They have the idea. They have perhaps identified the property, maybe they even have the skills and time necessary to perform the required work but they don’t have the money. It takes money for the initial purchase, money for materials and labor, money for the holding costs and money in reserve to pay for unexpected costs and delays that always happen. When it comes to money, more is better. Many a flipper has lost their investments along with their shirt by not having enough money to hold on to their property for a longer duration than what they anticipated.
Don’t expect your friendly banker to automatically loan money to buy a distressed property. Lenders today are very concerned with the integrity of the property. Appraisers are instructed to report any health, safety or obvious building code violation. All conforming conventional and government loan programs require properties they insure to meet certain standards. There are a few home improvement loan programs like the FHA 203k. However, the borrower must be an owner-occupant, the maximum loan amount is $35,000, the repairs are limited to interior components and repairs must be made by a qualified person, usually a contractor.
Start small. All of us likely look back at some of the risky decisions we made in our youth and think “What were we thinking?” Maturity and experience have a way of tempering our exuberance. The following are high risk flipping ventures and should not be attempted by the novice or anyone younger than 30: zoning changes, parcel splits, converting an existing building or its use, anything requiring extraction of ground material and anything that requires compliance with the California Environmental Quality Act. First time flippers should limit their improvement projects to: paint, carpet, kitchen cabinets, counter tops, appliances, doors, windows and landscaping.
Do it yourself. The most successful flippers limit their risk by selecting properties that they can remodel themselves or that do not require highly skilled professionals. When architects, engineers and finished craftsmen get involved, profits decline.
Think resale. Keep in mind that the objective of flippers is to flip the property. Guard against developing any long-term attachments. Instead, be like a skilled surgeon who gets in and out quickly. All the work required should be scheduled before closing and begins immediately after. If permits are required, get them approved prior to closing. If a political decision is necessary for the success of the project, either walk-away or double your expected time for completion.
Don’t over-improve. Flipping properties is a business and, like any business, revenues and profits must exceed expenses. Focus on appearances. After paint and carpet, $1,000 worth of landscaping and some grass seed, will do more to sell a property than a new $10,000 HVAC system.
Seek professional assistance. Successful property flippers are visionaries. They see things as they should be rather than what they are. They are decision makers and risk takers. Many are skilled tradesmen and contractors. They are not real estate professionals. The average agent has the ability to handle the routine details of locating a property, negotiating the offer and closing the deal. An exceptional agent will go further, providing insight into market trends, advice on design and remodeling and often acts as a silent partner to ensure their client’s success.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his website at kencalhoon.com.