Fix & flips are no easy task, and while each project will present its own set of challenges, there are a certain set of things that all developers should try to keep in mind. As with any other investment, developers should attempt to minimize risks and costs while maximizing returns. Here’s five things that can help you achieve that.
1: Know your market.
In the real estate investing world, it’s usually best to stay in your comfort zone. Knowing your market means being familiar with the neighborhood you’re investing in, the people who will be working with you throughout the flipping process (attorneys, insurers, brokers/agents, lenders, and your crew), the activity within the market, and prices within the area (and what’s driving them).
Who is buying properties in the neighborhood? How long are properties staying on the market? What makes this area desirable? Can you estimate the price of a property just by looking at it?
The more you know about your market, the more risks you’ll be able to mitigate. In the long run, maintaining a sharp focus on a single market could make you more efficient than spreading investments across multiple unfamiliar markets.
2: Know what you’re buying.
Just because a property seems cheap, doesn’t mean the upside will be larger. Be thorough with your diligence process. Inspect your properties before you buy them. Know why they’re being sold. Look out for structural damage, environmental concerns, and title issues. Know who your end user will be (the target buyer of your flipped property). And always get an outside opinion. Brokers and agents familiar with the market can usually give you an educated guess of the actual value of a property; and appraisers and inspectors can give you a more in-depth value analysis and a review of your scope of work.
3: Don’t underestimate your costs.
Knowing how to budget comes with experience. The more projects you’ve completed in a certain market, the more you learn about the cost of local labor and supplies. Nonetheless, in addition to all construction and renovation costs, a proper budget should be able to cover contingencies (and the less experienced you are, the more you should allocate for this).
These can include:
- Unexpected issues with the property (things you will uncover once you begin the renovation);
- Labor shortages throughout the life of the project;
- Price hikes in renovation supplies, such as the recent surge in lumber prices or last year’s shortage of appliances; and
- The costs of closing (you can read our guide on closing costs here).
4: Don’t overestimate your profit.
Even before starting a flip, it’s easy to overestimate your exit price. Just because selling prices seem high, it doesn’t mean they will remain that way throughout the life of the project. Plan ahead for a worst case scenario, and see if the project still seems like a promising investment.
Once the project is complete, it can also be tempting to overprice a completed flip. After all the time and work you’ve put into it, it might only seem fair to command the highest possible price. But overpricing a property might end up leaving your listing on the market for a longer time, which could hurt your time-adjusted return on the project. Remember, a fix & flip is all about speed and efficiency.
And speaking of this…
5: Stay on schedule – or be early.
If you’re dealing with a short-term loan to fund your fix and flip, any setbacks may result in late fees or even defaults. Additionally, given the time value of money, delays can hurt your time-adjusted pre-tax returns on any short-term investment1.
You should consider each investment’s timeline on a case-by-case basis, but the general rule is to avoid being late at all costs. Take unexpected delays into consideration. Always plan to finish early — at worst, you might just finish on time.