The Realities of Fix-and-Flips – Part 2

The following article is a summary from the book, “REALTOR  for Life”, written by Duane Duggan.

Fix and flips are incredibly popular on TV home shows and make these ventures look easy and highly profitable – but are they? In my previous article, “The Realties of Fix-and-Flips – Part 1,” I discussed building a team of experts, which you will need as you move forward with any renovation of a property.  I also provided a Cost Analysis Worksheet to help you assess the costs of the fix up.

Here are additional areas you will need to consider as you think carefully about undertaking a fix and flip.

Picking the right neighborhood

-Is another fix-up being done there?

-Check the quality of schools and amenities such as shopping and other services.

-What is the crime rate and type of crimes?

Purchase price of the property

Once you find a property, you can analyze the cost of the fix-up and the value after the property has been renovated to determine the maximum you can pay and still make a profit.

In addition to fix-up expenses, you need to keep in mind that you will have acquisition costs, selling expenses, and taxes, if you make a profit.

You can use the form below to estimate your selling expenses.

Acquisition expenses for a permanent loan include:

-Loan fees

-Appraisal

-Tax service fee

-Title Insurance for lender

-Tax certificate

-Recording fees

-State doc fee

-Insurance

-Misc. Lender fees

-Interest proration

-Tax and insurance reserves

-Short-term commercial loans

Short-term financing
Sometimes it is more economical to make an arrangement with a commercial banker to provide short- term financing while the property is being renovated. With a short-term commercial loan, you would hopefully be able to have the home resold before the loan comes due. This way you would never have to apply for a permanent loan on the property.

Selling the property quickly
Make the potential buyer say “WOW” as they walk in the door. Almost every buyer that says “WOW” when they walk in the door will end up buying the house. Therefore, your goal should be to make them say “WOW” from the curb and then again as they walk through the front door.

Ask yourself what it will take to design the maximum amount of curb appeal? What will it take to make the kitchen and bath “sizzle”? What will it take to make the house light and bright?

Options for financing the fix-up property

1.        Pay cash for property and cash for fix up

2.        Pay cash for property, short-term loan for improvements

3.        Short-term loan to purchase, possibly borrow for construction expenses

4.        Permanent loan to keep and hold

5.        Permanent mortgage to purchase, cash for improvements

6.        Buy with a short-term loan, fix up, hold a year, then exchange for other property

7.        Owner-occupied renovation financing is definitely easier to obtain, with programs such as the FHA 203k
          program. 

If you missed my previous article, “The Realities of Fix-and-Flips – Part 1,” you can find it at: http://www.boulderco.com/blog/realities-of-fix-and-flips-part-1.html