Ah, the lure of the fixer, the lure of easy money?
Fixer uppers can be a booby-trap!
Or, is it simply find a run-down place and repair it for that easy win! Just like in all the TV shows!
But there are hidden issues, as with anything that seems too good to be true. Without proper knowledge and even then, without decent amount of experience, one can find themselves facing construction, land or timing issues that could wreck a deal. And by wreck we don’t just mean take away some of the potential profits, but really all the profits, or even run a loss.
In California people will make decent money fixing and flipping homes, and they will assume that they are pretty good at it. But a lot of times, they are just playing the market. They (rightfully) are IN the market, and benefiting from its upward trajectory. Sometimes though, they stay in too long or over-extend themselves, and wham! they’re wiped out. Just like Trump.
So, what are some things we can do to mitigate risk and better insure our fixers are profitable?
When we talk about land, we’re talking about deal acquisition issues. Things like zoning, zoning changes, future local development or plans (is there a freeway planned to go through nearby?), or even past evironmental issues tied to the land (toxic spill?).
Things that affect resale value and which are not disclosed to you as the buyer need to be researched independently. Sellers may not know that the fact that old uncle phill dying in the property lst year is something that they should mention. But neighbors might tell your prospective buyers about it and freak them out!
On that note, there are crazy neighbors or their pets that might be a hinderance. Check the street at various times of the day, and working and non-working days. Talk to neighbors. Go to the city or county to ask for records of that property. Ask the seller many many questions, especially leading questions. Leave long pauses to see if they offer more info. If a husband and wife (or any multiparty), find the most talkative one and try to get them going!
Timing is two considerations. One, we need to finish the project quickly to save interest costs, and two, we need to make sure we don’t miss the market.
In most areas, real estate sales follow a seasonal cycle, and there are better times to sell than others. For instance, you won’t be selling many newly remodeled homes at the end of the year in the winter and near the holidays. Also, when kids are going back to school is another time that families don’t want to bother with a move or transition.
Best times are Spring & early Summer. So, you’ll want to make sure your rennovation work is done in time to meet those times if appropriate.
Of course, we don’t want to miss the upwardly moving market by buying a fixer at the top of the market, or near it, then taking so long to fix it that the market is crashing when we’re done!
Construction problems can cause both cost and timing problems, either of which can kill a deal. So it’s imperative to keep things moving, as well as keeping costs under control.
Part of keeping it moving is to have a plan on what repairs are to be done, and sticking with the plan. And with all the decisions like tile color or cabinet style, those need to be finalized very early, before the workers need to know. Have materials on site whenever possible. Select materials that are in stock or have a very quick delivery time. Stuff that is easy to get more of when you run short. And in stock items are usually easier to return when the job is done and there is leftover. (Otherwise sell it on Craigslist or give it to the workers as a bonus).
The biggest change you can make (if not doing it already) is to make the contractor a partner in the deal. This is on larger deals. On smaller deals, where you just hire sub-contractors, there is no need.
Making the contractor a partner makes them responsible for profits, as well as timing. Of course some profit is given up, but with deals near the top of the market, and for larger buildout deals, it’s worth it to buy more risk adversion.
Of course if you are a contractor yourself, and have access to all the labor and materials you need at wholesale, then you are set. That’s the best deal, to leverage extra crew time to earn extra money in the real estate market.
Even remodeling contractors that focus on one area such as windows, kitchen cabinets or roofing are at a better advantage than the guy who is hiring a contractor or workers and paying for profit.
In Conclusion, do your due diligence, and do it fast!
To avoid more risk, start small, partner with an experienced filipper or contractor, or even money person. Leverage their network and tips to help stay out of trouble.