We’ve all seen it by now; shiny new stainless steel appliances, spectacular granite countertops, fabulous hardwood flooring, colors working in harmony with backsplash, tile, baths and entire house. Your typical flip. The vast majority of homes that have been bought by an investor, renovated, and sold for profit (a “flip”) fall into this typical flip category. They all look beautiful and inviting to the eye, but how do you know which investors cut some corners and which investors took pride in their workmanship? How do you identify a potential flop from a beautiful flip?
As a realtor, investor and hard money lender, fix-n-flips are part of my everyday life. Real estate investing will remain popular for a long time, but unfortunately some buyers are missing some key points that would suggest less than par workmanship in their newly purchased homes. Don’t be distracted by all the shine and glimmer, use this checklist as a tool to determine the true value of the home.
- See the house in person: we know it’s a hot market and homes are selling in cash before you have time to even think about it. The competitive sellers’ market has put a lot of pressure on buyers to settle, or rush into decisions. Let’s be honest, this is a HUGE investment, likely the biggest of your life, do not rush the decision. Never waive home inspections, even if the Seller or Listing Agent is requesting no inspection contingencies. But before anything else, go to the house in person and give it your own inspection. Check every corner of the house, many mistakes will become magnified where materials meet, in all the corners of the house (between wall and floor, between countertop and wall, window frames, door frames, etc). Take your time, take pictures, bring anyone you know that has construction or real estate experience. This part is vital.
- Dig deeper into the property history: most public website such as Zillow and Redfin offer “Property History” reports, which they pull straight from public records. Title companies can offer this as well. First thing, check for the most recent change of ownership. Was it in the past 12 months? If so, most definitely an investor flip. Or possibly, a recent buyer that discovered something wrong with the house. Either reason permits more research. The prices for these change of ownership transactions should tell whether it’s a flip or someone selling quickly after purchasing. Next, check for any unusual activity. This could be multiple price changes, many different “Delisted” and “Listed” actions. If it was a flip and has been on the market for a while with many unusual activities on the history, you’ll need to figure out why. Are there problems with the home or was it just overpriced? Property history of a home is one of the fastest ways to uncover potential property issues.
- Educate yourself on the flipping process: just because the investor made $50k doesn’t mean they are ripping you off. This is likely the number one misconception. Buyers see the home purchase 6 months ago for $400k and they are under contract for $550k on the resale. Buyers tend to say “they are making $150k off me!?!?” (insert every mad emoji here). We need to understand the full process of a flip, because the investor’s profit is considerably less than just the difference of the numbers. Without boring you all with a lesson on finances, remember to note all expenses this investor has (all approximates): closing commissions (6%), holding cost (2%), closing costs (1%), renovations ($35-$65/sqft = $50k+), loan costs (9%), possible closing costs on purchase (1%). Example:
Closing/Commissions/Holding (9%): $49,500
Loan Costs/Origination + Interest (9% of loan amount): $32,000
After deducting all expenses, the investor would be left with approximately $18,500. Still lot of money? Well spread out over 6 months, that’s only $3k/month, not exactly millionaire status.
So now that the “rip-off” concern is understood, we can spot if someone truly is pricing the home way too high, or if it is a fair price based on market comparisons and investment history. Next, one should educate themselves on all the choices that investors have when flipping the home. Sure they redid the flooring, but are all the structural components below the nice new flooring also in good shape? Sloping floors is a common mistake made by investors moving too quickly. Are all the electrical and plumbing connections set up correctly and to code? They replaced the roof and redid the exterior stucco, but are all the vents installed correctly? There’s always more than meets the eye. One way to help satisfy your concerns, is to request a copy of all permits on the house. This is especially important when there are any additions or structural changes to the property.
- Always use a certified home inspector: as noted earlier, this is a vital part of the home buying process and should never be waived on a flipped house just because it looks so nice. We are not experts, the home inspectors are. Use them and listen to them and demand any fixes to be made prior to close of escrow. Inspectors will call out any trouble spots that may be broken or not to code. Typically, they order them in list of required fixes and suggested fixes. Required fixes should always be negotiated into the deal as credits or completed by seller.
- The more experts, the better: bring in a couple of trusted sources of construction knowledge. In many cases, the inspector notifies the buyer of problem areas and then says consult with an expert. Maybe that’s a trusted handyman that does it all, maybe it is a licensed electrician just for one electrical concern. Regardless, use them as not only another source of eyes to uncover potential issues, but also get the prices quoted to you for these repairs. This will deem beneficial for any negotiations and decisions on proceeding with the home. (http://realtormag.realtor.org/home-and-design/feature/article/2016/08/beware-flip)
- Get familiar with the material: read up on the differences between hardwood and laminate hardwood, or quartz vs granite. There are difference price points associated with each, which may help explain why the home is priced higher or lower than others you’ve seen in the area. It will also help determine if this is the right home for you, many people prefer true hardwood but can’t tell the difference between engineered and laminate. Here are some quick examples:
Solid (Real) Hardwood: more expensive, expands/contracts in weather, no true pattern as it is cut straight from solid wood from nature – the pattern will never repeat itself
Engineered Hardwood: usually cheaper than solid hardwood, both can be refinished, not affected by humidity/temperature as much, more versatile
Laminate Hardwood: much cheaper, still durable but not nearly as strong against water, will bubble, versatile.
This checklist will provide buyers with a good foundation on which they can make an educated decision on the purchase of a newly renovated, flipped home. There are plenty of beautifully renovated homes out there that are of the highest quality around, but there are a few flips to avoid buying. The more information the better, find everything you can on the flip and the contractor’s experience. Use your professional sources and take their opinions seriously. Trust your gut and remember to keep the process fun!