The potential for significant returns has long made flipping houses a popular avenue for investing in real estate. And the current market conditions and low interest rates of late have made it all the more attractive to investors. In 2016, average gross flipping profits reached heights not seen since 2005, reported RealtyTrac.
With stats like that, it is easy to get caught up in the market fervor and only see the rewards, but fix and flips have some inherent risks. If properties are not properly vetted early in the process, it can lead to disappointment and unrealized profits. To make sure your next flip is not a flop, avoid these pitfalls in investing.
Blindly investing in a market. Researching a neighborhood is essential when selecting a property to rehab. As the old adage goes, location is everything and certain characteristics around where a property is located can pay big dividends.
For one, a neighborhood within a strong school district is often a good indicator of high resale potential. In fact, homes in the best school districts have 77 percent more value than homes located in low performing school districts, according to a recent study by Realtor.com. Additionally, homes in top school districts sold on average eight days faster than homes in below average districts.
Homes located in areas with low crime also tend to have a higher property value. One survey found that people in the market for a home prioritized safety even over price when considering a neighborhood.
There is also evidence that homes close to public transportation command higher prices. A joint study by the Public Transportation Association and the National Association of Realtors found that homes within half of a mile of a high-frequency public transportation were worth 41 percent more.
There are a lot of factors to consider when evaluating the location of a potential investment, and a good real estate agent can help you identify opportunities that are most likely to payoff.
Failing to calculate post-renovation value. When house hunting for a property to fix and flip, you will be evaluating those in disrepair that are being sold as-is, which is to say at a value that is representative of its current condition. But before you even think about putting in an offer, you must first determine the expected value of the home once it has been fully renovated.
Known as the after repair value (ARV), it is the most critical number to your fix and flip venture. The viability of the project is dependent on your ability to manage costs. The ARV will help you determine the maximum amount you should pay for the house and renovations, so that you don't invest more into the property than it is worth.
The Internet offers a lot of real estate tools that can be useful for cursory research around potential ARV, but most sites are working from estimates. So, once you are serious about a piece of property, you should consult a real estate agent well-versed in the area to develop a comparative home analysis. A licensed agent will have access to a multiple listing service (MLS), which can provide data on how much similar properties in the area have sold for in recent time and how long they were on the market. When evaluating properties, it is important to stick within a mile of where you are looking so that you get an accurate view of the market.
Forgoing an inspection. Rehab projects can offer significant gains, but they can also present unforeseen costs if you do not take the right precautions. It might not be possible to avoid all surprises during the process, but you can minimize them by having a home inspection before finalizing the purchase.
A house inspection should be included in the offer process to protect yourself from any unknown issues. Specifically, there should be a contingency clause within the house purchase agreement that states the buyer has 5-7 days to have the home inspected by a professional and that the purchase is dependent on the outcome of the inspection.
A skilled inspector will look for wood rot, pest infestations, roofing problems and cracks in the foundation. Major structural issues like these might be more than you bargained for and can make your project a money losing venture if not identified beforehand. But even minor issues that were previously missed can be an important bargaining chip in negotiating a lower purchasing price.
Flipping houses can be financially lucrative. And by avoiding these potential downfalls, you will protect your investment and set yourself up for success.
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