As we mentioned in our When the Price is Right! blog post, the housing market has proven itself quite resilient amidst the COVID & economic crisis we’re facing today. As such, we believe there is ample opportunity to turn a profit as a Residential Flipper, as long as you’re strategic and judicious with your investments. In this blog post, we’ll outline the key elements of a successful Fix & Flip. Of course, we cannot speak to every scenario, but from our 50+ years of lending experience in this niche industry, we’ve seen common themes that drive success for our borrowers, regardless of their geographies or deal sizes.
Location, location, location!
First and foremost—and especially if you are new to this industry—it’s critical that you are familiar with both the broader city and specific neighborhood that you’re planning to invest in. From a macroeconomic standpoint, the buyer/seller Supply & Demand relationship will play a significant role in the success of your sale. Be sure to read our What Defines a Seller’s Market? blog post from June, which highlights this importance, especially as you’ll be playing both roles in your next investment. Then narrowing down to the neighborhood-level, no matter how nice your home is compared to the neighbors, it’s truly the neighborhood that will drive the majority of the price you’re hoping to sell at. Check out our How to Value Residential Real Estate post for more information on pricing your home based on your comparable neighborhood properties. Remember, it’s essential not to price too high above neighborhood comparables, otherwise you’ll price yourself out of the market.
Our Recommendation: Especially if you’re new to the industry, it’s best to first identify a few neighborhoods that you’re comfortable working in, you understand the trajectory of home prices, and you’re comfortable with the overall deal size (what you’re expecting to purchase homes at, how much money needs to be invested, and what you’re realistically expecting the sales price to be at).
Narrow down on a prudent property and act swiftly!
Now that you’ve identified where you’d like to invest in, now you can determine what house you’d like to invest in. If you are a new investor, we recommend starting small and targeting homes with a solid structure/layout, but are well-worn and thus could benefit from an upgrade. There are often unforeseen nuances when rehabbing a home, so it’s best to tackle what you can comfortably manage & afford, especially when starting out. We’ve seen many of our Borrowers grow over the years from smaller deal sizes simply focused on cosmetic rehabs to now working on ground-up construction deals for $1M+ properties. There’s no shame in starting small, building your experience (which will provide you better loan rates going forwards), and progressing along the way.
Our Recommendation: We have seen many new investors begin their career with condominiums or starter homes. Just be prepared to act fast on putting an offer in as these go very quickly. It may take a few months to get a contract on these types of properties, as inventory is often tight and if the level of rehab needed is simply cosmetic, many buyers who intend to owner-occupy will feel comfortable taking these repairs on themselves. Usually, the sweet spot for new investors are condos or starter homes that do need structural changes such as gutting the kitchens, removing or adding interior walls, finishing the basements, plus the cosmetic rehab. Constantly keep an eye out for these types of properties, as they move fast but can be a great catch if you can get one under contract!
Understand the financials!
As you begin sourcing deals (either from Wholesalers, speaking with local Agents, attending auctions or short sales, or shopping the neighborhood yourself), it’s critical that you understand the underlying financials of the deal. Realistically, what property size can you afford and also be approved for financing at this stage in your career? What amount of work needs to be done, how much will those materials & labor realistically cost, build in a contingency for unforeseen obstacles (as they almost always arise!), and understand your expected As-Repaired-Value from the onset, as you’ll need to list the home at an appropriate price (and definitely make sure it’s listed appropriately for the neighborhood). Keep in mind that you’re paying interest on your loan, so you want to factor in your holding period for the property as part of your overall expenses.
Our Recommendation: Get preapproved with a lender. That way you can act quickly on a potential deal and compete against buyers with all-cash offers. We recommend working with a lender who can also react swiftly to get you approved and is also very responsive to any changes along the way.
Build your team!
Having a reliable and knowledgeable team is critical in this industry, as they’ll ultimately help you keep expenses down, as well as provide genuine support throughout each stage of the investment process. This team includes: wholesalers to help source properties, contractors for the work itself, an insurance agent, a lender, an accountant, and a real estate agent to help you quickly market & sell the home. One thing to keep in mind when building your team is that the ‘lowest price’ contractor or agent isn’t necessarily the best for your overall budget – it’s best to select contractors based on both a price AND quality of work (get reviews from prior clients). We’ve seen unreliable contractors walk off the job, ultimately leaving the property owner scrambling for someone new while sitting on a half-completed project.
Our Recommendation: Unless you are a GC yourself or have an established team, be proactive about vetting potential General Contractors and subcontractors, as their quality & swiftness is key to flipping your property to drive profit!
Even for our most experienced borrowers who have been in the industry for many years, the Fix & Flip industry is undoubtedly a constant learning opportunity given national and local markets developments, changing consumer preferences, and the ability for unforeseen obstacles to arise at any time. But if you go into the process with a prudent mindset and equip yourself with a reliable team, you’re off to a good start. It then comes down to your understanding of the market, the type of home you’re looking for, and the diligence to stay up-to-date with listings and move swiftly to close. There is no one definition for success in this industry, but our recommendations for achieving it are based on many years of experience in the industry dealing with borrowers and properties of all types.
The Merchants Mortgage Team