If flipping houses was as easy as you see on TV everyone would do it. As much as you may like to think of yourself as a real estate investor, your main job title should be “problem solver”. All the education and resources in the world won’t get you ready to handle the unexpected challenges you will face during a normal house flip. Even the seemingly easy flips always have an unexpected obstacle, or two, thrown your way. How effectively you handle them will often define your success, not only with the property, but in your business. Before getting involved in a fix and flip deal you should have an idea of exactly what you are walking into. Knowing what you can anticipate will help you react, saving you time, money and sanity. Here are the five biggest challenges you will face with almost every rehab property.
- Adding value. The goal of any house flip is not to simply make the property look pretty, but to add value and sell for a profit. Buyers do not care about the condition you bought the property in and all the great work you did. They want to see how the finished product stacks up to the competition on the market. Your first hurdle is finding ways to add value to the property. All improvements, updates and upgrades are not created equally. Blindly throwing money at a property will not do the trick. You need to make the right improvements that buyers will find appealing. This takes a little research of comparable listings, recent sales and a sense of what the market wants. If you follow a cookie cutter list of updates you will spend money that you may not be able to recoup. If you can’t add value to the property, it may not be a deal worth pursuing.
- Coordinating tasks. Having a vision for the property only works if you have a team to help carry it out. Even before making an offer you and your contractor should have an idea of what you want to do and who you want to work on the project. Once the offer is accepted you need to get everybody in line and confirm availability. You can have the best plumber in the business, but if they are booked solid for the next three months it doesn’t do you much good on this property. At a minimum you need to get verbal confirmation that your team is available to work in the next 30-45 days. Once you get closer you can narrow down specific dates, but you need to at least get commitment from everybody you plan on working with. Price is always important, but availability is almost as important. If all other things are equal, you need to work with the person that can guarantee work will be done in your timeframe.
- Cost overruns. Even with a conservative budget, cost overruns are common. There are dozens of seemingly minor expenses with every rehab that can quickly add up. The carrying costs alone can make an impact if you are not mindful of the timeframe. The most obvious thing you can do to ensure you stay under budget is to add a cushion to your expense sheet. Giving a 10-15% buffer is helpful, but even that doesn’t ensure you are safe. There are always unexpected items in the middle of every project that need money to cure. You really don’t know what you will find when you start knocking down walls and opening up rooms. If you decide to go the cheap route and not spend the money when you know you should, you will reduce the appeal and ultimately the sales price. You can certainly watch every dime, but you can’t be cheap when it is necessary to spend money, even if it means going over budget.
- Finishing in time. If you have ever watched a house flipping show on TV, you see how much they stress finishing within the estimated timeframe. This is not because they want to see how quickly they can turn the property over. It is because time really is money when it comes to flipping houses. Every day you own the property you are on the hook for the carrying costs of insurance, taxes, utilities and interest payments. Additionally, real estate markets are fluid and can change dramatically in 60-90 days. The after-repair value you estimated in June may not be the same in September. Quality is most paramount in any rehab, but speed is just a notch below. If you project drags out, it has a definite impact on your bottom line.
- Town, permits, etc. In your excitement to get things going with the property it is easy to overlook things. The very first thing you should do if you plan on doing any expansions, additions or renovations is to have a talk to with planning and zoning. There is a good chance at a minimum you will need permits. There is also a chance that you may not be allowed to do something you want to do. Obviously, this is a huge problem if you start work prior to finding out the codes and restrictions. This is an area typically that your contractor will take care of, but it is up to you to do your due diligence as well.
Rehabbing a property is filled with numerous small battles. Knowing what to anticipate prior to getting started certainly helps.