What They Don’t Tell You on TV
Today’s most popular home and garden programs feature ambitious families buying, rehabbing and reselling houses for hefty profits. For the most part, the couples on TV make it look like an easy way to make money. Nearly every story ends with a beautifully staged home, a busy open house and a successful sale. But the truth is, the process takes the right combination of money, partnerships, skill and hard work. And it is not for everyone.
What’s known as “flipping” on television is actually real estate investing. And like other investments, the idea is to buy low and sell high. But unlike most other investments, the process of rehabbing and reselling a property needs to happen relatively quickly to ensure the investor gets the highest return.
When it comes to buying, rehabbing and reselling homes, there’s quite a bit that they don’t tell you on TV. Here are some important considerations:
Big properties and big budgets are risky, especially for first-time rehabbers. For your first project, consider starting with a single-family home that needs minimal work. This helps keep your renovation costs low. Focus on painting, replacing light fixtures and swapping out hardware—these changes tend to have big impact and require less time and money.
Research comparable homes in the area and pay attention to the finish work. Every neighborhood is different and not every buyer expects high-end finishes like granite and hardwood. Don’t over-improve the property.
If you’re hoping to increase the profit margin of your project by considering a lower-priced property in a transitional neighborhood, do your homework. Be sure the neighborhood is an emerging community. Check for other real estate developments in the area and upgrades to infrastructure like transportation, communication, sewage, etc.
Create a realistic budget.
Start by understanding all costs associated with the project, including purchase price, renovation expenses and financing costs. Calculate your turnaround time for the rehab, as well as costs for holding the property, which are often overlooked by first-timers. Holding or carrying costs include mortgage payments, utilities, homeowner association fees and any necessary landscaping maintenance.
To determine the maximum purchase price for your property, start by establishing the price you’d list the house for after it’s rehabbed—this is referred to as the ARV (after repair value). Once you know the ARV, multiply that number by 70 percent and subtract your projected rehabbing costs. For example, if the property’s ARV is $200,000 and the projected renovation costs are $50,000, your max purchase price would be $90,000. This formula factors in profit margin, Realtor fees and closing costs.
Once you’ve created a budget, add a contingency of at least 10 percent. No matter how carefully you plan, there’s a good chance unexpected issues and expenses will arise.
“Rehabbing is bottom-line driven,” said Henry Edelstein, Realtor and Certified Residential Specialist with Coldwell Banker Burnet. Edelstein is also a successful property rehabber. “Buyers need to run the numbers to make sure they can purchase the property for a price that works for them and provides a suitable return on their investment.”
Do your due diligence on the property.
Be thorough in assessing the condition of a property before you put in an offer, particularly with homes that are in disrepair, at risk of foreclosure, or that have already been seized by the lender. While your potential profit could be greater, doing due diligence is essential. Make sure there are no liens on the title or code violations.
When you walk through a property, pay attention to things like large cracks or gaps in the foundation or walls, sloping floors, and crooked doors and windows. These are red flags and often a sign of much bigger issues. Avoid properties with structural or foundation damage—these repairs are expensive and time-consuming. Always get a home inspection to help mitigate your risks.
“Unforeseen issues with projects are one of the biggest reasons rehabs fail and investors lose money,” said Edelstein.
Enlist the expertise of a real estate agent.
Time is money in rehabbing. Working with a real estate agent can help. Agents provide expertise on housing market conditions, comparable sales and pricing. Be sure to find a licensed agent who has rehabbing experience and knows the local market and neighborhoods you’re interested in.
A real estate agent plays an essential role in marketing your rehabbed home. An agent can help you stage the property and capture photos and video that will appeal to the market. Agents also have access to important marketing tools like Multiple Listing Service (MLS), agency websites and social media. Don’t be surprised if your agent begins marketing the property while it’s still a work in progress.
A real estate agent communicates on your behalf, ensuring potential buyers are qualified and negotiating terms. Agents are also experts at handling the volumes of legal paperwork required for buying and selling a property.
“If you use a Realtor, choose a good one,” recommends Steve Johnson, Senior Vice President of Commercial and SBA Lending for BankCherokee. “Carrying costs have a large impact on your profit, and an agent can mitigate some of the risk.”
Consider working with a general contractor.
Attempting to handle every aspect of managing a renovation can lead to stress and overwhelm. A licensed general contractor serves as your project manager and takes out much of the guesswork. Hiring a contractor that you trust helps keep your rehab project on track.
Contractors bring connections to the table that save you time and money. They have established relationships with subcontractors who are skilled in various trades, as well as home inspectors and building suppliers, to name a few.
Contractors have knowledge about the cost and availability of building supplies in your area. They think of items you may not know you need and can help you develop a list of the materials for your project, which is essential for creating a realistic rehabbing budget.
Keep in mind that hiring professionals to do all the work will substantially reduce your profit potential. Sweat equity helps. “Most successful rehabbers are not afraid to get their hands dirty and do much of the work themselves,” said Johnson. “People who are skilled at home repairs and the trades tend to have the best results.”
Work with a seasoned lender.
Most rehabbers don’t have the ability to make a full cash offer on a property. The good news is there are several options when it comes to financing a property you intend to renovate and sell.
Permanent bank loans and mortgages come with 15- to 30-year terms that are not ideal for rehab projects. They’re intended to finance long-term primary residences that are owner-occupied or non-owner-occupied rental properties that are not in distress. However, FHA 203(k) and Fannie Mae HomeStyle loans are examples of bank loans available to longer-term rehabbers.
Rehabbers may consider taking out an investment property or home equity line of credit (LOC) to fund their rehab project. An investment property LOC is short-term financing that can be used to purchase and renovate a non-owner-occupied home. A home equity LOC may be used to rehab a property the owner occupies as a primary residence and intends to sell.
Hard money or rehab loans are short-term asset-based loans typically issued by private investors or companies. These loans can often be obtained quickly because they are focused on the potential value of the property rather than the credit worthiness of the borrower. However, they come with high interest rates and high closing and origination fees, which can take a big chunk out of your profits.
Bridge loans offer temporary funding that rehabbers can use to cover time between selling one property and buying another. However, you can’t finance the costs of your rehab with a bridge loan.
Funding your rehab project can be complicated. Work with an experienced lender to find the best financing solution based on your specific needs.
The bottom line.
If you’re thinking of buying, rehabbing and reselling homes, be realistic. It’s not as glamorous as it looks on TV. “While rehabbing can be profitable, I haven’t seen anyone getting rich doing it,” said Johnson. He added, “It requires a lot of hard work and you’ll take on significant risk.”