The Flipping Houses Jackpot

[MJ DeMarco]

Question for all you house flippers out there ...

In your experience, what specific problem areas constitute the house flippers jackpot? What I mean is, what areas of concentration make a house a great flipping candidate? Besides the discount, when you examine a house, what criterion makes it a great candidate?

For example, if I'm looking to flip a house, my logic would tell me to look for homes that need inexpensive "Visual" updates like:

1) Needs paint (cheap, visual impact)
2) Need landscape cleaning (good value return, visual impact)
3) Need flooring (relatively inexpensive, big visual return)

What are the "jackpot" items that immediately make a potential flip a buy ....things that make ya say "Oh yea!" Things that can be renovated inexpensively and have the most bang for the buck?

And conversely, what are the "money pits?"

1) Needs new A/C system (this change is not visually seen and is expensive)
2) Foundation (Again, not visual and expensive)
3) Cabinetry? Countertops?

What "this house needs this" will make a flip an unworthy candidate?

 

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[hakrjak]

I know that after watching "Flip This House", everybody and their grandma wants to try house flipping by simply changing fixtures, painting, and slapping in some new carpet.... But, my company really focuses on delivering a quality product above and beyond anything you will find in that price range within town.

Some things I look forward to changing when I walk through a potential rehab include:

- Doors (Change from those old wood grain doors to new 6 panel doors)
- Countertops (It's inexpensive to use a formica simulated granite counter now...)
- Appliances (We always always always use new stainless steel appliances...)
- Ripping off wood paneling, and drywalling then retexturing

Things I think make the biggest change in value:

#1). Landscaping -- Many flippers overlook this, but in my opinion -- Nothing can improve the look and value of a house like quality landscaping. A little sod can go a long way! A few landscaping timbers will not break your budget and will really add to the yard... And you can buy mulch in bulk really cheap.

#2). Getting rid of popcorn ceilings and replacing with knockdown texture

#3). Putting on a new roof, if needed. It's not that expensive if you have the right contractor and priced it into your purchase price.

#4). Installing Ceramic tile in the kitchen and all the bathrooms. Don't be cheap with flooring!

#5). Using an upgraded carpet. Again, don't be cheap with the flooring and buy the crap landlord grade carpets. Pay a little extra for a cut berber or thicker carpet! Also, always pay for the extra thick pad to put under it.

Potential Money Pits?:

Well, you could say that anything is a potential money pit, but here are a few common ones that come to mind:

- Replacing or retexturing concrete driveways -- It just doesn't seem to be worth your while most of the time, and the customers don't really seem to care much about it.

- Finishing garages -- Sometimes it can look nice, but most buyers don't care much about the garage.

- Granite countertops -- Most neighborhoods are simply not granite countertop neighborhoods, so I'd stick with Formica.

- Cabinets -- If you replace cabinets, I'd try to find a full set for around $2k... Many people blow their budget by spending $5-6k on cabinets, and it's totally unnecesary.

- Staging -- Don't spend $5k to stage a house that you are only going to make $15-20k on when you sell it. Go to Kmart or Target and pick up a few simple pieces of furniture for under $500 bucks, and then plan on reusing them in your other flips in the future. Do not pay for furniture rental or staging services from an external vendor -- As you will get ripped off, big time.

Cheers,

- Hakrjak

 

[lightning]

Hey Mike,
I had similar questions and posted a thread about this topic last year. Some really good responses here.

http://www.thefastlanetomillions.com/real-estate-residential/11172-bang-buck-factor-renovating.html

 

[Russ H]

Lighting/MJ-- does it make sense to merge these 2 threads?

-Russ H.

 

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[NoMoneyDown]

I am not a flipper (I like to buy and hold), but thought I'd chime in with a "buying cheap homes to rent" perspective.

I strictly buy homes that only need cosmetic work (i.e., replacing carpet, replacing/installing appliances, replacing doors, replacing locksets, and so on are what I would consider a "heavy" rehab). I may pay more for the house, but I am saving in several other ways: immediate cash layout, time, and stress. I buy a home, spend a week getting it ready, and I'm done with the "rehab". If it needs a new A/C system, or new roof, or the foundation needs leveling, or anything that is traditionally seen as a "heavy" rehab, I'll pass (it on to another investor). My job is to spend as little money, time, and stress up front in order to get it filled.

However, like hardcore flippers, I STILL concentrate on specific areas more than others, like landscaping, the kitchen, and bathrooms. I'll mulch around front yard trees and beddings. I'll plant colorful flowers (if it isn't too cold). I'll install new bath fixtures, if the old ones are worn. I'll replace a garbage disposal if the old one is rusty, or not working. And so on. Mainly just small things here and there that take a few minutes. IOW, I still need the place to look good, but I'm not trying to sell it retail.

 

[MJ DeMarco]

Lighting/MJ-- does it make sense to merge these 2 threads?

-Russ H.

Ehh just leave it as is ... I'm looking for FLAGS/INDICATORS in the evaluation process that indicate a good flip over a bad flip.

 

[SteveO]

I agree with Hak. Lipstick flips are what everyone is trying to find. They are around but harder to locate at the best price.

I like JScott's model of finding affordable homes that are selling right now. Calculate the cost of repairs and put that into your budget.

The key elements to understand are:
- After repair value
- Length of hold time and costs associated
- Cost of repairs
- Purchase price
- Your time allocation
- Cost of sale

The part that jabs at most people is the cost of repairs. You will learn this over time. Attention to detail on the estimates will save you a lot of money.

You also want to be conservative on the market value after you complete your work.

The actual business model should not be too difficult. The real challenge is with the estmations. Experience will help to refine.

 

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[SteveO]

One other thing is that a team is really important. You need to have reliable people that can do good, fast, and cost effective work for you.

What is the big deal about changing an a/c system if you can do it for 2K and have it done in a day? Same with a roof or carport/garage conversion. The majority of the work on these items are with trying to find bids and being able to trust them. A knowledgeable team takes a lot of guesswork out of the equation.

 

[Russ H]

What is the big deal about changing an a/c system if you can do it for 2K and have it done in a day?

Wow. We can do it in a day (just did, yesterday). But it cost us $6K (5 ton, 13 SEER, min CA stuff).

Damn. Last time I paid $2K on an AC was more than 10 years ago!

I once again pay homage to you, Steve. I am humbled by your resourcefulness.

-Russ H.

 

[hakrjak]

Wow. We can do it in a day (just did, yesterday). But it cost us $6K (5 ton, 13 SEER, min CA stuff).

Damn. Last time I paid $2K on an AC was more than 10 years ago!

I once again pay homage to you, Steve. I am humbled by your resourcefulness.

-Russ H.

I pay my guy about $500 per install, and I buy the units off craigslist new or used for between $150 and $700.... You don't have to go broke doing central AC!

- Hakrjak

 

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[kwerner]

These tips on how to / where to find good materials / contractors for your flips could be the start of another great thread.

 

[Russ H]

I pay my guy about $500 per install, and I buy the units off craigslist new or used for between $150 and $700.... You don't have to go broke doing central AC!

Old AC units have terrible efficiencies-- around 5-6 SEER or even less (3-4 SEER) if they have a slow leak. It's against the law in CA to put them in.

Also, many of the older units use banned CFCs (chloroflourocarbons), which are more than against building codes around here-- using them means jail time.

Our local codes require a min of 13 SEER for AC (higher is better).

Ah . . . a cursory glance at your energy codes looks like at least 10 SEER is required for remodels-- which costs way less (about half) of what the 13 SEER units run right now.

A 5 ton unit runs about $3.5K. A 3 ton, about $2K.

ColoradoENERGY.org - Air Conditioner SEER Value Table

http://www.pprbd.org/codes/EnergyCertSingleRes05.pdf

http://www.pprbd.org/codes/2008RBC_Revised.pdf

http://www.pprbd.org/PPRBC/99PPRBC.pdf

-Russ H.

 

[Russ H]

SteveO-

I had thought AZ had mandated a min of 13 SEER as well-- I was wrong.

10 SEER.

OK. I feel a little bit better . . .

-Russ H.

 

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[hakrjak]

Sorry to hear that once again California has gone out of their way to make sure it's as difficult and expensive as possible to do business.

I've been able to find some real steals on used units, and even a couple of new units with the caps still on here over the past 2 yrs, and I have never once asked what the Sear level is or what type of coolant it uses, etc... I take a look at the unit, see if it looks like it could pass for new, and then I buy it. The only question I ask is what is the tonage, so that I can estimate if it can cool the amount of square footage in the house. When a new flip is on the horizon, I start running ads on Craigslist that read, "I buy used & new Central AC UNITS!" -- Something along those lines.... I get all kinds of calls from desperate souls trying to unload these things, because I guess not many people buy them? I've never had a bad one, or a DOA unit (So far, knock on wood)

When I go to sell the flip house after completion, I've never had a client ask me the age of the AC Unit, or anything about it's specs... Their home inspector checks to make sure that it works, I suppose -- and that is about it.

I did purchase a brand new 2.5 ton unit for $350 last year, and I've had it in storage until this month. My AC guy did mention something about the SEAR level, and told me that he couldn't buy those anymore, but this one was obviously brand new so he'd be happy to install it for me, for our usual price arrangement.

Cheers,

- Hakrjak

 

[Russ H]

Hak-

Sorry if I sound dense, but it's against Title 24 here to install units that don't meet energy guidelines (which is why they sell on Craigslist so cheap here-- you can't legally install them!).

Are you saying the local code enforcement folks (aka your local building inspectors/building dept) are OK w/you installing these things?

Or do you just not ever pull permits, and never have any of the work inspected?

Sorry if I sound so dense-- just not getting it. If we covered this before, my apologies. My memory ain't what it used to be!

-Russ H.

 

[hatterasguy]

I was going to respond but Steve said exactly what I started to type, so I'll just say re read his post.:iagree:

 

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[StreetsofSilver]

In addition to some of the things mentioned above, here is what I look for in a jackpot house:

-Location (I'm surprised no one already mentioned this)

-At least 3 bedrooms (or 2 with an extra room that can be converted to a br)

-Hardwood floors (They are easy to sand and re-finish. I usually just carpet the stairs and bedrooms)

-Replace floors with Travertine tile (wholesale prices) in kitchens and bathrooms

-I opt to buy the unfinished cabinets and have the contractors stain them (saves $)

-Build a deck and/or white picket fence (cheap and it gives the perception of the American Dream of owning a home). Sometimes I put shutters on windows



Potential Money Pits that are an unworthy candidate IMO:

1. Black Mold - If it's white it doesn't bother me, but if it's black it is not worth it

2. A functionally obsolete layout (ex. You have to walk through a bedroom to get to another bedroom)

3. Outdated electric (knob & tube wiring throughout the house, no circuit breakers). The less that I have to deal with city inspectors the better

 

[Dhappy]

I like the real dogs everybody else stays away from.I get them real cheap.The ones that need ac,roof,walls,floors,kitchen,bathrooms,etc. I look for a nice area with pride of ownership. I stay away from a rental area for a flip. I look for a 3 bed and 2 bath 2 car garage close to nice schools.I will flip anything in any area if the price is right. Now if I'm looking for a rental to keep then I don't want to do much fix up.

 

[Dhappy]

I also love black mold,termites,water damage,houses that had a small fire,condemn by the county.I bought a house once were there was no running water or electric for 6 months and the owners were using the bathtub as the bathroom. It stunk,but I got it cheap and paid a guy $75 to remove the filled up bathtub.

 

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[Michael W.]

I also love black mold,termites,water damage,houses that had a small fire,condemn by the county.I bought a house once were there was no running water or electric for 6 months and the owners were using the bathtub as the bathroom. It stunk,but I got it cheap and paid a guy $75 to remove the filled up bathtub.

I have nothing to say but... WOW!

 

[MJ DeMarco]

I also love black mold,termites,water damage,houses that had a small fire,condemn by the county.I bought a house once were there was no running water or electric for 6 months and the owners were using the bathtub as the bathroom. It stunk,but I got it cheap and paid a guy $75 to remove the filled up bathtub.

That's what they call "If you do what others don't, you will live like others can't!"

 

[Dhappy]

I paid 5k for that house and put 10k into it and rented it for 3 years. I then sold it for 70k. Other investors would not touch it and told me I was nuts to deal with the maggots and stink. I'll I could smell was money.

 

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[reipro]

There are several things that we look for in a flip.

1) Location, Location, Location or really cheap, really cheap or really cheap.
2) Cosmetic fixes not structural. This includes cabinets, counter tops, vanity in bathroom ect. and NEW APPLIANCES FOR THE KITCHEN. Not moving walls or fixing foundations.
3) Kitchen returns 150% for every dollar spent WISELY!
4) Bathrooms returns 125% for every dollar spent WISELY!
5) Carpet
6) Paint
7) Landscaping- this is a must and it not expensive your potnetial buyer will either pass by the house or love it before they even walk in.

 

[CashFlowDepot]

MJ

There are really TWO kinds of flipping:

A wholesale flip and a retail flip

Wholesale FLIPS are when you just get an option to purchase then wholesale the an investor who will fix them up. I've done more than 1,000 of these types of deals and they are the fastest and easiest way to make money.

With a wholesale FLIP, i like to build a buyer's list before I ever start looking ( a good place to do that is at the foreclosure auctions because they are all buyers). The buyers will tell you where they want to buy - then you just go find the deals.

Most of my wholesale buyers are section 8 landlords so they are looking for the cheapest houses they can get in to.

Some of my wholesale buyers are rehabbers. I only wholesale them properties that require more work than I want to deal with. ( ie. fire damage ore excessive repairs)

Retail Flips are when you buy the house and rehab it to sell to a retail buyer. I'm looking for location, location, location. Especially now that sub-prime loans are gone, I need a buyer who can qualify for an FHa or conventional loan. You can only attract those kinds of buyers in nice neighborhoods.

I don't want any houses with severe foundation problems and I don't want to move walls. See wholsale flips above. If the house needs too much work, I just wholesale it for a quick profit and move on.

Here's an example:

I recently got a $165,000 house for $60,000. It needed about $30,000 - $35,000 in repairs and had a code violation so the city was going to be involved. When you add in 4 - 5 months of holding costs plus taxes and insurance and the OOPS fund, I would be in the house for about $105,000 - $110,000. ( those flip that house shows don't talk about the real costs of "flipping)

If a realtor found my buyer and if I had to help with closing costs, it could be another $10,000.

That leave a net net profit ( after 4 - 5 months of rehab) of $45,000

or... I can sell in 24 hours to a rehabber for $90,000 and they pay all the closing costs.

I make a quick $30,000 and avoid all headaches!

While the rehabber is rehabbing the house, i can go do 5 - 6 more wholesale deals.

Who comes out ahead?

Who makes more money?

Retail Flips are not all that they appear to be. Wholesale flips are a lot more fun!

next time I'll tell you about my Magic Bus - where I sell 20 - 30 wholesale deals in 2 days.

Jackie

 

[^eagle^]

Potential Money Pits that are an unworthy candidate IMO:

1. Black Mold - If it's white it doesn't bother me, but if it's black it is not worth it

Mold? I had a minor mold problem on my home that I killed for about 20 bucks. You can fumigate a whole house yourself for about 300-500 max.

Fumigator, respirator, mold killer and if you like one of those white painter's disposable jumpsuits.

 

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[phlgirl]

We have recently (about 3 months ago) switched to the 'flipping' business model, as we are no longer able to secure long term financing, in order to keep the properties ourselves.

Top indicators of a good flip:

• Location - I want to see that multiple houses have sold recently in the immediate area. I want to know the condition of these homes and the number of days on market (DOM). Our realtor & appraiser look at every deal and give us their opinion on quick resale price and market value.
• Curb appeal - particularly when we are looking to market to an owner occupant (as opposed to an investor looking for a rental prop). We want the house to be appealing from the outside.
• Margin - we need to be able to purchase the home, complete the necessary rehab and then turn it around to the end buyer at 75-85% of the market value and still make a profit. With so many homes on the market these days, we need to be able to set ourselves apart and sell quickly.
• Multiple exit strategies - all of our deals need to be able to fit not only the 'retail strategy' but the 'investor strategy' as well. All houses must have the ability to be a cash-flow positive asset, with equity built-in.

There isn't much we wont take on in a rehab. We are fortunate to have a team who can turn almost anything around in 2-3 weeks time. Aside from serious structural problems, as long as the numbers work, we are game.

From our standpoint, the deals are endless right now..... its the buyers that are the biggest challenge. Surprisingly (to me), they are out there too, if the price is right. Our most recent retail property was on the market for about 7 days and received 3 offers. I was shocked.