Find, Fix & Flip…. Without the Flop
March 31, 2021
Laura Kelly Mance
By studying history, we can build on former discoveries rather than starting from scratch and we can avoid repeating mistakes. Looking back can have an enormous impact on our journey forward. (I’m trying to convince you that a 38-year real estate veteran can teach you something about fixing and flipping in the year 2021). I haven’t sold real estate in decades and what I know about flipping these days can fit in a thimble. I actually did flip houses in the late 80’s and closed over 100 of them in one year myself. And of course, as a manager and former designated broker, I have a plethora of “what could go wrong stories” and will share some from both the Seller and Buyer perspectives.
I closed over 100 “flips” in one year as a relocation coordinator for a real estate company. The third party relo entity purchased the homes from transferring employees and our team had to fix them up and sell them in short order without losing money. Keep in mind, these were purchased from employees based on 2 or 3 formal appraisals. The employer didn’t want to lowball their own employees, so they were acquired for fair market value. During a two-year period, we moved hundreds of homes quickly for maximum value and nearly always covered the per-diem for carry costs, repairs, and improvements (R&I), commissions and closing costs. That’s a flip, right? If you’re a successful flipper, I’m betting you’ll agree that the only thing that’s changed are the sales prices and the cost of R&I.
For us, it all started with the Employee Relocation Council (ERC) forms we used to determine what repairs and improvements (R&I) we’d make to our properties in preparation for sale and what we might sell them for. Every property was analyzed the same way using ERC guidelines. I checked and the forms exist today. First, it asks what the subject value is in its current state. We agents did not have the benefit of seeing the two appraisals that were done or know the buy-out price. Every property got a full report and those reports included a detailed analysis and forecasting of the market in the general and the specific area. Was it declining or improving? What impact did employment opportunities have on that area? Was there a shortage of comparable listings or did inventory exceed demand? How did the subject compare visually and condition wise to competing listings as well as sales? These reports were several pages long and included photos of the subject as well as comps. Then we were asked to recommend R & I, give a probable cost and predict what impact those repairs would have on the market time and the eventual sales price. Here’s an example:
Suggested R&I – Interior and exterior cleaning including landscaping. Carpet, paint, roof coating, Kool deck restoration, pool tile acid wash. App. $25,000. (this was broken down by category and we used the same trades every time and got good at estimating)
As Is Value $290,000.
R&I $ 25,000.
Improved Value $345,000.
Gain $ 30,000.
In this case, we could show based on our area analysis that the R&I would improve the value and reduce the marketing time by more than what those improvements cost us. That wasn’t always the case. The closing costs& per diem on this sale would be about $28,000. And we anticipated coming out $2,000 ahead. We usually ended up break even or slightly ahead and that made up for the few where the buy out price had been too high and couldn’t be recovered no matter what we did. I might add, commissions were 3.5% on the buyer’s side and $500 on the listing side. Escrow and Title costs were also less because of the quick turnaround.
Today, most flippers are doing more in the way of R&I and have higher expenses, but I venture to guess that the successful ones are doing the same analysis we did over 30 years ago. I assume they’re looking for more profit and that demands taking more risk financially.
There’s also another breed of contemporary flipper. She’s run out of improvements to make to her own house and convinces Harry to buy the townhouse down the street “as an investment because she can fix it up and make them a tidy profit.” Louise and Harry aren’t using forecasting or comps or experience to guide them. They already overimproved their own home but don’t know it because they aren’t trying to sell it. They hire the best trades, install a suite of Monogram appliances, Toto toilets, tile floors and new cabinet doors in the kitchen and baths. They take a “good buy” and turn it into something they can’t possibly sell without losing money, so it ends up as a rental and still doesn’t pay them back. Don’t let your friend “try flipping.”
So, we’ve covered the age-old principles of value and potential value analysis when flipping. Do your homework! Markets change but the basic principles stay the same. I also reminded you not to put Toto toilets into a house you plan to flip. Last up are a few things to remember when you’re representing a Buyer who’s interested in buying a flip. Here goes:
- Be wary of the flipper who won’t fill out a SPDS claiming “never lived there.” I’m sorry, but in the process of renovating, painting, and fixing he/she saw the place naked. He/she knows more than nothing.
- Get copies of the warranties for any new appliances. Make sure that the 1-year warranty didn’t expire 3 years ago because this appliance is an old model and was sold as a part of a train carload of old but unused appliances.
- Find out who worked on the property and get copies of invoices.
- The house looks pretty! Floors, kitchen, bathrooms and walls are bright and shiny. How’s the furnace? How’s the hot water heater, air-conditioner and roof? Is the garage door holding on by a thread and how about that irrigation system? Scope the sewer and find the roots protruding sooner rather than later.
- In addition to the home inspection, advise your Buyer to hire licensed trades to inspect the major components. Flippers know that a finely tuned HVAC unit doesn’t attract as much “love” as a slick new backsplash or subway tile in the shower. Open the unit and see if the duct work connects to the air handler. (I didn’t make that up)
- Remember that a “face lift” is just that. It doesn’t ensure that the heart and other vital organs are in good shape. Don’t let your Buyer just fall in love with a pretty face.
I guess the remaining challenge now is finding affordable properties with flip potential. There’s a lot of competition now and that drives prices up and profits down. These days I would search non-owner occupants for fully depreciated rentals they might be willing to sell or trade into something different. Try to figure out who should probably sell now and doesn’t know it yet.
Those are my thoughts on the topic of Find, Fix and Flip. From any angle, you must do your homework and be thorough if you want to avoid “the Flop.”
Laura Kelly Mance, CRB
President, Long Realty Company