The idea is simple. Find a home that’s offered at lower than market price and needs some fixing-up…buy it…put some work into it…and flip it for a quick profit. With all the stories about foreclosure and bank repos, one would think there would be a ton of them out there that would work. The trouble is, there really are only a few homes that fit the correct model. A home might be offered at lower than market price, but typically when the cost of fix-up, holding and marketing costs are added, the real cost isn’t below what market price would be for the same home if it were in good condition. I used the word typically because every once in a while there is a home that is worth a closer look. The purchase price and cost of repairs would seemingly leave enough room to make a decent profit.
What a lot of would-be investors don’t figure in though are the incidental costs that come up. Example: a furnace that looked and ran good when it was first looked at, but when the home is being sold, an inspection from a buyer’s home inspector reveals a crack in the heat exchanger that requires the purchase of a new furnace for $3,000 in order to make the sale. Or, after rehab work is started, you realize that the main service drain for the plumbing needs to be replaced. “Uh oh… that wasn’t in my budget” Usually there are at least a few minor “surprises” and some moderate ones that change the amount that the initial fix-up budget didn’t include. The key is to know what you are doing and to analyse the property carefully. Experience helps.
Another area to consider is Holding Costs. While the home is owned until it is sold, the meter is running on things like home owners insurance, property taxes, interest on any borrowed funds, utilities, Home Owners Association dues while it is being marketed. One never knows for sure how long it will be until the home is sold, and these items will eat into the profit margin quickly. Everything must be thought out and included when analysing a property as a rehab/flipper candidate.
Every once in a great while there is a home that still looks good after close analysis. The challenge then is to beat all the other investors who are looking for the same thing. An investor must be diligent at watching the market for potential rehab candidates. After one is identified, they must not hesitate to look at it. Then they must be very good at analysing the property to see if it meets the investment criteria. Then submit a written offer in that is accepted before someone else does it. Again, experience helps…plus a little luck. I’ve assisted a number of investors through this process.
I make this sound difficult because it is. It’s very hard to do and be succesful at it. Difficult?… Definately. Impossible?… No.
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