How to Find Potential "Flip" Properties

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findflip.jpgFlipping properties isn’t the same business as it used to be. Even as short as two years ago, “lipstick” alterations (meaning cosmetic changes such as paint and etc.) would yield massive returns. There’s no question that the market has changed, however. Discussions about the changing real estate market are on every news channel, every real estate website, and even within these pages of boozwatt.com. Flipping properties has become more of an art form now. It requires not only the transformation of a formerly ugly property to something of uniformly appealing taste (appealing to uniform taste is harder than it sounds), but also an efficient maximization of renovation dollars. The reality of today’s real estate market means that the margins on flipping properties is smaller. A prudent investor must buy for a good price, spend efficiently on the renovation, and then list below the market price in order to sell quickly and avoid carrying costs, which can become devastating the longer a home goes unsold. 

This all may sound disheartening, but it’s not as tough of a task as it may appear. All it requires is some additional planning before the project commences, ideally before the property is even acquired. Suggestions regarding how to find appropriate properties, and what to do with them is the purpose of this article, so read on. 

“Ugly” houses

There are three components to making money on a flip: 1) buy low, 2) renovate efficiently and add physical value, and 3) sell below market. Although representing the three stages of a project (purchase, renovation, and sale), all three of these considerations come into play well before you ever close on the property. They all exist in the planning stage.

First and foremost, it’s an absolute must that you purchase a house that’s “ugly.”  If the house is even remotely appealing, you won’t be able to buy it for a good deal. Therefore, the only way to achieve the first component is to buy an ugly house. There are many reasons a house is “ugly.” It doesn’t take much. It could have terrible, overgrown landscaping that almost hides the house from the street. It could have worn down or damaged siding and roofing. It could be dirty and disheveled on the inside. It could be horrifically outdated. And most typically, it could be in need of medium to serious repair. If you visualize these ailments, it’s almost like a checklist, which each check sounding a cha-ching in your mind. Although there are plenty of “ugly”houses on the market, the best resource, in any market, for such a property is the foreclosure market (see another boowatt.com article, How to make money buying foreclosures for more). 

Adding “physical equity”

When I’m scouting properties for my company’s next flip, there are several things I look specifically for. One of which is the biggest tip I can give you. I absolutely require, in any potential flip property, that it has room for the addition of “physical equity” to the home. “Physical equity” is actual square footage. What this means is that any house I consider must have some room for adding square footage. There are many different avenues for adding square footage. The easiest is an unfinished basement, a large, unfinished attic, extra large rooms that can be split in two, and even large or double lots, with room for additions and/or even subdivisions and the building of an entirely new property.

Unfinished basements are usually the best for efficiently adding physical equity. The only requirement is that the basement meets your local code for vertical access. In most areas, that typically requires a finished clearance of 7.5’ or more, which means once sheetrocked and carpeted, there is still over 7’ of space between the floor and the ceiling. Most basements do fit fine into this mould, with the exception of those building around WWII. Homes built during that time got a few less concrete blocks worth of basement walls, in order to save on materials. That typically resulted in around one to two feet of less clearance in the basement areas. Back then, basements weren’t looked at as livable space. They were exclusively for storage and utilities. Homeowners and builders didn’t look at basements the same way then as we do today. I doubt any average homeowner 60 years ago even considered the idea of a “media room” or even a family room.

Unfinished attics are also great and easy places to add physical equity. These exist in a lot less homes than adequate unfinished basements, however. Typically the only home in which an attic can be successfully finished is on older 1 1/2 story homes (also called a “bungalow”). These houses typically have a large roof line that runs the length of the house, with a roof pitched in such a way that it created more than enough clearance below for livable space. You’ll again have to check your local code, but typically for attic type spaces, the code requires that the requisite clearance (say, again, 7.5’) exist over some percentage of the room. Usually it’s around 70%. That means that over 70% of the room must have a minimum clearance of whatever your code requires. This formula exists because rooms in attics will naturally have slanting ceilings that follow the contour of the roof. Once a proper egress window is provided, attic space is the perfect location for a master bedroom and bath (if the house is long enough to accommodate the square footage).

There are definitely other things to look for in houses that can be changed quickly, and economically, but also have an immense impact on the value of the house. So many houses, even those built today, are very poorly designed. Many homes, especially smaller ones, suffer from, simply put, too many walls. The kitchen is walled off completely from the dining room, which is walled off from the living room, and etc. All this does is make each room seem small and separated, which leads to the house feeling choppy. Choppy homes feels very small. So much of a home’s intrinsic value comes from the psychological feeling it gives a buyer. By design alone, it’s possible to make a 1,000 square foot house feel like a 1,500 square foot house just by effecting the “flow” of the floor plan. As an example, in a recent flip our company did, the floor plan laid out in such a way that the front door opened into the living room, which had a small walkway into the dining room. The dining room was connected to the kitchen only by a doorway, and beyond the kitchen was a sunroom accessible through a set of double doors. All of these rooms were lined up in a perfect row. We removed 2/3 of the wall between the living room and the dining room, then we knocked out half the wall between the dining room and the kitchen, and then rebuilt a half way over the expanse upon which we built an extension of the existing kitchen countertops, essentially creating a countertop peninsula. Finally, we removed the double doors going from the kitchen into the sunroom. The effect of these renovations was huge. When entering from the front door, instead of concentrating on the living room (which was rather small and uninviting in the beginning), the visitors eyes carried through the dining room, into the kitchen, and beyond into the sunroom. It made the house look and feel huge.

Finding a property with such potential is easy if you begin to have an idea of what to look for. When researching these properties, look at pictures of the various rooms and see what kind of feel it gives. Then, once you’ve narrowed them down enough to actually visit the properties, pay special attention to the feeling the house gives you when you enter. It is common knowledge around the real estate world that curb appeal (the look of the house from the curb, theoretically the very first impression the buyer has of the property, as they get out of the car) is one of the most important characteristics of the salability of a home. What is less widely known, yet nearly as important, is the first impression upon entering the home. If the first thing you notice when you enter the home is how small it looks or feels, think about which interior walls, in the immediate vicinity, might be able to be moved, removed, or simply reduced.

Needed Repairs

A home that needs repairs can be a gold mine for a potential flipper as long as you know what it will take to fix whatever problems the home has. Almost all people that buy properties as their personal residences don’t want to buy things that will need immediate and substantial work. People are fine with buying things that will need cosmetic work, such as painting and new flooring and etc., however very few people would like to tackle something like a new roof, new siding, bad plumbing, etc. This reluctance is a benefit to the real estate investor looking to flip the property. More times than not, the cost to repair the problem is cheaper than the sale price discount the problem caused. In our last flip, a perfect example of such a problem existed:

In accordance with my personal parameters as mentioned above, the property had an unfinished basement. What was even better, however, was that the basement was “wet”, meaning when it rained the basement would flood. Now, it wasn’t like what most people would imagine a flood. There was barely any standing water, however it would leak from where the walls met the floor, and would cause a solid stream of water to flow towards the floor drain halfway across the basement floor. This completely precluded anyone from finishing the basement because you could never put a finished flooring down. It would be ruined the very next time it rained. People are so afraid of wet basements that they end up completely writing off the basement area altogether, because they have no idea how to even fix such a problem. We, however, investigated what might be the cause of it, and had some basement waterproofing contractors come out to inspect it and suggest a solution. It turns out that a large majority of water problems can be solved via the installation of drain tile. Drain tile is a tubing (usually PVC) that runs all along the perimeter of the basement, and into a sump pump. It works because the water flows down the wall and instead of going onto the floor, it goes into the tubing, then drains to the sump pump, which then pumps it outside. It’s a rather complicated process to install in an existing home, because it involves the removal (via a jackhammer) of 2-4 inches of the cement floor away from the wall in order to place the tubing. It is then re-cemented over. The only way you can tell drain tile is even there is from the difference in look from the old concrete to the new.

The best part about it was how relatively inexpensive it was for this all to be done. A large basement could be completely done for less than $10,000. That may seem like a lot of money, but consider that by doing that you just added the possibility of finishing an additional 1,000 plus square feet. As mentioned earlier, this is potential square footage that the previous homeowner likely completely wrote off due to the water problem. That’s an excellent find, and well worth the effort.
Conclusion

While flipping properties in today’s real estate market requires a lot more forethought and planning, it’s still an excellent way to build real estate riches. Hopefully this article gave you a glimpse into some of things that you should be considering when you are scouting for potential flip properties. These tactics fit into the renovation aspect of the Investment Decision Equation, and finding homes that are in need of the above renovations (cosmetics, re-designing and repairs) will allow the purchase price to fall within the 80% or less of finished appraised value from the Rehab Loan. Future articles are to come on more detailed aspects of the various renovation opportunities discussed above. Until then, get started, and GOOD LUCK!!!       

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This page contains a single entry by the boozwatt team published on January 5, 2008 8:29 PM.

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