Yesterday I toured a property that might be a good potential to flip. It is a big house (maybe even duplex potential) in a good neighborhood. It sits on several acres, and has waterfront shore line. I call it a “Snake Farm” because it is narrow and very long. The house sits at the front of the property a long way from the water. The pictures in the listing don’t look too bad. They definitely justify the lower price. Even the text of the listing says it is in need of major repairs.
All of that information triggers my Potential Buy alarms. When I first called about the property there was an offer pending. I said I would call back in a few days to see if the offer was accepted. When I called, the offer had been removed. In that case it was worth going and looking at the property, which we did. The pictures, to the credit of the Real Estate agent, made the property not look too bad. The reality was something different.
The pictures did not show that the most recent tenants had been mice and racoons. It did not show the obvious leaks in the roof, the wavy floors, sunken walls, and doors that are out of square. It is definitely not a quick or cheap Flip. This would take major work. Yet the house “spoke” to me. It was whispering that it wanted be beautiful again. That might be true, but how much will that cost, and can I get my money back?
If you are thinking of flipping houses, all the rage on television these days, it might be wise to look at how Flipping works in the real world. If you are the handy type, and have some experience doing renovations, that is a huge plus. If you don’t even know which end of the screw driver to hold, Flipping may not be the best idea. Yes, you can hire contractors to do the work. But contractors are not cheap, and they seldom work to your schedule. I learned how to do many of the things contractors do, because I needed to get the job done now!
Where do you start with a flip? My recommendation is to start with a good mortgage broker. Unless you have the money to buy the whole property outright, you will need financing. Knowing how much you qualify for will keep your search limited to real possibilities. In Canada right now, as a non-owner occupied home, you will need a minimum of 20% of the purchase price as a down payment. On a $200,000.00 property that means you need to have $40,000.00 free cash to just buy the property. Then there are the closing costs, and then it might be nice to still have some cash to pay for the materials and labor.
You need to be aware that in Canada a bank is only allowed to finance (Non-owner occupied) up to 80% of the purchase price, or 80% of the appraisal price, WHICH EVER IS LESS! This does not apply in the US. What this means is, if you get a smoking hot deal, where you pay $100,000.00 for a house appraised at $200,000.00, you can still only borrow $80,000.00. Canada does not reward you for negotiating a good deal. Now, the way around this is to use “Private money”. But where the bank rate is 3%, (100K @ 3% equals $475 per month) today, private money is 8-14%. (100K @ 12% equals $1032.00 per month). There is a big penalty on the interest side. But if you are only going to have to hold the property for 3 to 6 months, this might not be a deal breaker. Just remember, to include the interest cost in your calculations. Knowing what you can afford, and how much free cash you have to do the renovations, will allow you to start your search.
You find a couple of possibilities, and go look at them. You find one that looks feasible. If you are knowledgeable about construction, look around as much as you can on the first visit. If the floor or roof sags, go into the basement and take a look as to why that might be happening. Take your time!! Make notes and take pictures, if the agent will allow it. If you’re not into construction, arrange a second visit, where you bring your contractor friend with you. You need to know what work is involved in getting this property into resalable condition. Once you have the job list complete you need to estimate the cost of doing those jobs.
That leads us to the next step. The “What does the MY BUYING price have to be?” calculation. To do the calculation, the first thing you need to know is, what is the selling price of this property if it is in top shape? The Real Estate agent should be able to give you a reasonably accurate number. Example: You are looking at a house listed at $150,000.00. The Agent tells you that houses like this one, in good shape, are selling for $225,000.00 to $250,000.00. I like having a safety factor, so the number I would use is the $225,000.00.
Now the calculation. Take the estimated renovated resale price, ($225,000.00) subtract the selling commission (5% of $225,000.00), subtract the cost of doing the renovations, then subtract the profit you want to make. This will give you the price you need to pay for this property.
|Renovated Sell Price
|Less Commission (5%)
If you pay more than that, you either have to spend less on the repairs, or reduce your profit expectations. If you look at the commission expense you can see why so many of the house flipper on TV are also real estate agents. That is why I am half way through my Real Estate license course.
The renovation cost is the best place to try and cut costs by doing as much of the work as you can. Material is not as expensive as labor. I learned a lot by just watching You Tube videos. Just a suggestion, if the person on the video makes it look easy, they are probably the one to copy. Pros always make it look easy.
The property I looked at has a few other flaws that really detract from the price. About 2/3 of the acreage is under environmental protection. That means it is basically unusable. It is also so marshy, that you can’t get to the shoreline. If you can’t get to, or even see the shore line, is it really “Lake Front” property??