Flipping can be very lucrative, but do not become blinded by the shiny promise of big dollars at the end of the deal. Yes, it can be profitable, however planning, having good insight, building a great team with valuable resources – such as attorneys, home inspectors, contractors, realtors, appraisers and lenders/hard money lenders, can make all the difference between success and failure.
1. PROFIT: There is an old saying, “you don’t know what you don’t know”. We find many real estate investors, especially new ones, do not underwrite their deals properly. While it may be easy to treat a flip like a wrap-up summary on a fix and flip show from HGTV, make sure you consider all your costs, not just purchase and construction costs. Do not forget to factor in additional real costs, such as title insurance, taxes, finance cost, real estate commissions, extended hold time for the project, coordination amongst contractors and subcontractors, etc. At our company, when we look to fund a deal, we do a project and financial stress test to make sure the project has ample room for the investor to make a profit. Don’t become a victim of chasing a deal, make sure the numbers work.
2. CONTRACTORS: If you’ve previously completed a construction or a home improvement project, you know things do not always go according to plan. If you must rely on a general contractor and/or subcontractor, make sure you have vetted them through referrals/past client reviews and ensure that they are properly licensed. Equally important, have a detailed contract on specifics on their scope of work, timeframe to complete the job and payment schedules. Contractors are the biggest factor in determining if your fix and flip project will produce the desired profit, so spend the time needed to make sure you hire the right ones.
3. WHITE ELEPHANT: Sometimes, what appears to be the best deals are the worst. Over the years, we’ve seen investors excited for picking up a property for pennies on the dollar. However, they may have failed to consider all the external and internal features, making it difficult to market the home for resale after the renovation is completed. Examples would be; the property is near a train, airport, high retention wires, cemetery, busy thoroughfare, or lacks a good school system. Other examples include purchasing a 1-bedroom home in a 4-bedroom community or having six-foot ceilings when buyers are expecting eight foot or higher ceilings. While these may not be a deal breaker, these are factors that must be considered. If you are purchasing a property to flip that has some of the issues listed above, you may face a longer hold and carry time, and must therefore account for this in your profitability analysis.
3.5. MONEY: Plain and simple – you don’t have enough to get from purchase to resale. At times, investors forget to include expenses that can slow down or prevent them from getting to the finish line. Once again, make sure you include closing costs, which include attorney fees, inspection, title, insurance and taxes. In addition, there are real ongoing costs – finance fees, construction contingencies, town inspection fees, as well as exit fees – including attorneys, realtors punch list, staging, etc. With all that said, the good thing about money is… if you find a good deal the money will follow. As a hard money lender, we can bring all or most of the money needed for a project. A good lender will stress test a deal for profitability and model out the full capital needed to ensure the project is a success. Even if you have the funds for the dwelling, a relationship with a lender is a great resource and provides another set of eyes on the deal. You can share a deal summary with the lender and have the funding as a back-up.
Alpha Funding prides ourselves on being the best in Class Pricing, Leverage, Speed and Service in the business! We deliver both CAPITAL & STRATEGIC support to real estate investors, owners, builders and developers for value added projects to maximize leverage, or close on time sensitive and special circumstance transactions. Call us today and let us give you EXPERT advice on your next investment!