Real estate has been on the upswing for seven years which, history tells us, means a market slowdown is coming in the next year or so. Economic indicators back up the “tea-leaf-reading” as interest rates are ticking up, there’s political uncertainty and, although the economy is strong, the sustainability of this growth is the great unknown.
So for the professional house flipper, that’s a good news/bad news scenario. If the market keeps steaming along, your costs keep going up, and your buyers have less buying power. Both of these eat into your profit margins. If it softens, sellers will have to get a little more realistic about pricing. And you can pick up some great deals, which will brighten the black on your bottom line. Either way now is the time to figure out your strategies to make 2019 a super year for your flips.
Making the most money on your flips is the goal regardless of the vagaries of the market. The best way to do that is to minimize your risks by keeping a tight hold on your property improvements and staying financially nimble. The real estate data company ATTOM estimated the profits on the average sale in the second quarter of 2018 were slightly over $65,000 for all home sales. In our experience, which is the next best thing to the ATTOM deep-dive aggregator, the average flip profit is around $30,000. So when we binge on HGTV and see crazy six figure numbers floating across the screen, that’s not real life. Those properties are typically in higher property value areas, where the numbers are just bigger.
Go Minimalist When Flipping Houses
It’s tempting to do a top-notch renovation for a flip but that might cost you in the end. Research recent sales in the neighborhood before you buy and upfit the property to meet local standards. Consider the investment to be a paint-by-number thing. You provide a clean canvas and some guidelines and let the buyer finish the painting (literally, since painting is one of the first things a new homeowner does). Put your money into the structure and basic neutral finishes. It costs less and you can sell it as a blank slate.
Try keeping the project small in scope as buyers like the idea of a deal and don’t let “perfect” be the enemy of “perfectly fine” as smaller jobs mean faster flips.
Don’t Over Improve
If you find a great deal in an up-and-coming neighborhood, by all means make the investment as it will certainly pay off. Repeat to yourself that this house is an investment and don’t get lured into over improving the property. As your mother used to say, don’t let your eyes get bigger than your tummy.
A hidden trap in over improving is in the buyer’s appraisal. Most buyers finance and that means an appraisal. There was a time when traditional mortgage lenders had some control over the appraisal process but now it’s a blind transaction and unique neighborhood qualities aren’t factored in by a local appraiser who’s familiar with the area. Spending way more on this super investment only to find you’re far above the market on price means somebody has to eat the difference and, unfortunately, it may be you.
The next layer of the appraisal trap is an FHA buyer. Since the goal of flipping houses is to get them off the books quickly, a lowball FHA appraisal is the so-called kiss of death for a residential real estate investor. The market can turn on a dime and having that millstone hanging around your neck for the next few months is the difference between being in the red and black.
Streamline Your Financing
Managing your funding source can be easier and less of a headache with a private loan from an experienced partner. In an ideal world, find a lender who specializes in fix-and-flip money that offer terms so generous that you only pay interest on the draw and not the entire line. This magical money mart would have your funds available within ten days so you don’t lose out on prime opportunities. And maybe lend on some multi-family units, with an LTARV (loan to after repair value) of 75 percent.
Center Street Lending is just that lender – a private money entity with the expertise to get your projects underwritten and funded with minimal documentation and time. We are not a broker; we have our own money and can make decisions based on our own experience in the industry. Call us today to get more information on our processes, guidelines and approach so you’re ready for the next great opportunity that comes along.