Should You Invest In Fix and Flips?
There are many potential problems that you will need to consider before investing in a fix and flip. Properties are generally hard to find. Estimating the renovations can be challenging. The current market will impact the ability to sell the property once the renovation is complete.
In this post, I want to cover these challenges when looking to invest in fix and flips as part of a real estate investment strategy.
Fix and Flips are risky
So, fix and flips can be very risky. A lot of money can be made with fix and flips because there’s a potential to get a property at a good value, do the necessary renovations and sell it for a good profit. There’s also the opportunity or the risk that you would lose money on fix and flips.
What exactly is a fix and flip when it comes to real estate investing?
What people do is they purchase a property from a motivated seller who is trying to sell this property at a discount price. For whatever reason, they need to sell fast. I won’t go into that. I cover that in another section, but the challenge is you want to get a property at way below market value.
So, you look at the properties in the area and you determine that the market value for this property is, let’s say $400,000. You’re going to want to determine that the purchase price is about 70% of the market value. So that means buying it at $280,000, in this example. Then you’ll estimate the cost for the renovations and add that to the purchase price and then determine if there’s enough profit in there for you to invest in this property. And once the renovations are done, you would sell this property at a premium price relative to what the market is and there’s your profit.
But there are a lot of unknowns with fix and flip. And as I said, there are a lot of risks associated with them. So, when you first do a fix and flip, what I recommend is you do it with an experienced contractor, or you do it with a partner or with somebody else who’s done it and you shadow that person.
Hard to Find Deals
So first, it’s hard to find fix and flips. It’s hard to find good deals because there are a lot of people just like you out there looking for properties that want to do the fix and flip. And some of these people do fix and flip for a living. Sure, there are some people that are doing one or a year, but there are some people that are doing one a month or more, and they have teams in place. These people know the market, they know how to find these properties and they have a lot of people out there looking for properties for them.
So it’s hard to find good deals so you must be looking all the time.
Estimating the renovations
The other big risk with fix and flip is understanding what the renovations are going to cost.
You’re going to do your estimate for the renovations. And as I said, you want to make sure you’re working with an experienced contractor or an experienced partner. You’re going to do your estimate. Then take those estimates and add 25% to 50% on top of what your original estimates are. None of this 5% or 10% margin. You want to make sure your estimates are good. You want to put in a real good buffer.
Now the other challenge with the renovations is, even though you put in those good estimates, you never know what’s going to happen. You never know what’s underneath the floorboards behind the walls, in the plumbing or the electrical. Sure, you will get an inspection, but the inspection may miss something.
The other thing is a lot of these fix and flips are being sold without inspections because you’ve got a lot of people out there trying to buy these deals. So, if the owner says, as-is, you’ve got to take that risk. I wouldn’t recommend you do a fix and flip as-is to start with. And not buying as-is is going to make your buying and finding a fix property that much harder because you’re going to be competing against people who will buy properties as-is, sight unseen and even without an inspection.
So be careful of the risks associated with the renovations and your estimates of those renovations.
Inspection Delays
The other risk you need to be concerned about will be the delays. One delay you are going to experience is trying to get the inspectors in on time to get the necessary approvals for the work you’ve done.
You’re going to be doing your electrical work and your plumbing work. And then you’re going to try to schedule an inspector. Well, guess what? That inspector may not be available when you need them to be. So now you’ve got delays and now you’ve got your people sitting there, these contractors, these workers sitting there waiting for these inspections to be done, or work is done and you’re waiting to put this property on the market, and you can’t.
The Current Market
Okay, speaking of the market … that is going to be another challenge.
You may be working in a very competitive market, meaning there’s a lot of inventory out there so it’s a buyer’s market. So now you’ve got to put your property on that market, and you’ve got to compete with all these other people trying to sell these properties and not just people doing fix and flips, but all the property that’s out there those buyers are looking at.
So, be careful of where you are in the market.
The other thing is delays in selling.
If you have got a property, that you think is worth $400,000, don’t put your property up for $425,000 because you think you’ve done a better job and your property is worth more. Ideally, you want to put the property up for sale below market value because you don’t want to hold onto this property very long. If you’re holding onto these properties because of the delays, I just mentioned, you’re going to incur additional expenses. I’m assuming you’re going to have a mortgage on the property and you’re going to have to pay property taxes utilities. So, all those things contribute to costs associated with the overall expenses of your fix and flip and ultimately your profit or loss.
Okay. So that’s just a summary of the risk associated with fix and flip. And my recommendation is to get a partner or an experienced contractor if this is your first fix and flip.
