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Make sure you understand all the costs before embarking on home flipping

Posted by adamparkernelson@gmail.com on September 24, 2018
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Q: My wife and I currently live in the Northern Virginia area and will be retiring soon. We plan to move to the Raleigh. We both enjoy watching shows about buying fixer-uppers.

We’re wondering how we might go about locating a company to help us fix up homes in the Raleigh area. How would we be able to check out the creativity and quality of their work? Anything else we should think about? Thank you.

A: We, too, have watched and enjoyed shows on TV that generally depict the process of buying homes, renovating those homes and then selling them for a profit as a positive experience. Life always seems to work out — and typically in 60 minutes or less.

But “reality” TV is one thing, and the real world of real estate is quite another. We’re not saying that what you see on TV is not real, but you have to be a little skeptical. Real estate purchases, remodels and resales rarely go according to plan; just like in a real court of law, cases aren’t argued and decided in less than an hour.

That said, lots of people have made a great living buying, fixing up and reselling (or renting) properties. And Raleigh (like other hot markets) has a strong economic climate, low unemployment and lots of fairly moderately priced homes. So it’s a pretty good place to start.

The first thing you need to have is a lot deeper knowledge of the local real estate market. If you don’t understand real estate or the market in which you plan to invest, you’ll set yourself up for a boatload of expensive trouble.

If you understand real estate, you’re one step ahead of most other investors. By this we mean that you understand what drives real estate markets, you know the different types of housing options that are available, you know the differences between neighborhoods and school districts, and you are up to date on current crime statistics, home sale statistics and any business issues affecting real estate, among various other important factors.

Once you have an understanding of the basics of real estate, you also need some knowledge of local construction methods, a design sense, and the ability to understand numbers and costs. You can’t just pick up any old piece of real estate at a bargain price, put in $100,000 and make money. You must understand whether the market will support improving that home and how much you can put into the home before you price yourself out of the market.

So build a great team of people to help you out. Start with a smart real estate agent who will help you understand the local neighborhoods. Perhaps the agent will know some great contractors and subcontractors (painters, tilers, carpenters, etc.) who can help. Finally, if you’re doing major work, you’ll probably need the services of an architect who can help with some of the structural or design issues, and an attorney who can help close on the property or who can help with pulling permits or crafting lien waivers for the work you plan to have done.

Once you’ve built a good team, you might be ready to tackle your first project. However, if you’re looking to find someone to do it all for you, like a turnkey developer, we’re not sure how you would find that person.

Remember, everyone up and down the chain in real estate makes money from every aspect of the real estate transaction. You need to know your costs and understand expenses. If you have a contractor or construction supervisor do everything for you, you might not have much (or any) money left over as profit.

Have you ever noticed how in the TV shows they sometimes have problems that come up, but those problems generally get solved in what seems like an instant? In our years of investing in real estate, we’ve found that never to be the case.

Many years ago when we were working on a home renovation, the general contractor went belly up. Sam knew he was going broke three weeks before the contractor did. Finding another general contractor and new tradespeople would have taken weeks, if not months, and cost us thousands of dollars more than we bargained for. Instead, Sam took over as the general contractor, and we wound up only paying a couple thousand extra, and we were able to ultimately move back into our home on time.

Keep in mind that real estate investing isn’t for the fainthearted and you have to go in with your eyes wide open, knowing that few deals will play out the way they do on TV. With that attitude, a great team behind you and a ton of research and smarts, you’ll probably break even on your first deal, or maybe even make a few bucks.

If that’s how it plays out, know that in the world of real estate investments that’s a huge win, and you’ll likely do better on the next one. Good luck!

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