You have the heart of an architect, the soul of an interior designer, the flare of a landscape designer. You have visions of creating the perfect house with that fix-and-flip you have your eye on. And striking it rich when home buyers create a bidding war to purchase your perfect creation.
You’re going to open up that layout to establish a perfect flow through the house. You’ve already picked out the crown molding for all the rooms, the perfect granite for kitchen and bath countertops, the beautiful wood flooring that will span the entire house. You’ve done sketches for the outdoor fireplace that will be the centerpiece of your back yard spa.
Dreaming is all well and good, but maybe it’s time for a reality check and time to pay attention to the warning signs of an over-improvement on your fix-and-flip.
Set Your Budget; Stick to It
The best friend a fix-and-flipper can have, if he/she is going to be profitable, is a conservative budget. Before you even consider purchasing a house to flip, you should have your budget in place.
You will base your budget on the after repair value (ARV), which should be a reality based price on what you can sell a fully repaired house for in the neighborhood. This should be formed from quality comps, preferably those that have sold in the past 90 days.
The 70% rule is the general standard in the flipping business, meaning you want your cost of purchase and your rehab budget to equal about 70% of your final selling price. That gives you a little wiggle room for other soft costs to ensure a decent profit.
Once you determine all the numbers, then you want to make sure all the wow-factor improvements you want to make to your home can fit within that budget. You can, and will need to, include more wow factors in a $500,000 ARV house than you could in a $100,000 ARV house.
It’s also a good idea to include a contingency fund in your rehab budget, generally 10% is considered a reasonable amount to cover those unexpected costs that always come up with a flip.
The budgetary warning sign that you are starting to over-improve on your flip is when you start eating into your contingency budget for those wow-factor items that may or may not be adding value to your home.
Set Your Timeline; Stick to It
The timing of your flip also is crucial in your profit and how quickly you see the return on your investment. Setting a timeline for your general contractor and your subcontractors are factors you can control more so than how quickly your house sells and moves through escrow.
Another warning sign that you are over-improving your house, even if it’s not costing you much from a budget standpoint, is if your improvements are extending your timeline. Costs such as interest rates, property taxes, insurance, utilities, etc. will continue to mount when you extend your timeline, so you need to be aware of those costs as you consider improvements that are affecting your timeline.
Remain Comp Aware
You don’t want to look at the comps before you buy your fix-and-flip house then wait to see them again when you complete the project. Housing markets can be volatile, so you want to be monitoring comps during the course of your rehab to ensure your original budget remains effective.
If you see markets trending up, you might consider some extras to justify a higher asking price, but if you see comps creeping down, you might need to cut back on some amenities.
Heeding these warning signs will enhance your ability to create profit and be a successful fix-and-flipper. We would be happy to discuss these issues further and offer more advice as you get started or grow your business. Contact us to see how our finance options also can benefit your fix-and-flip endeavor.
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