ATTOM Data Solutions reported that homes flipped in Q1 of 2019 sold for an average gross profit of $60,000. It’s no wonder why the home flipping industry has remained hot. While there are great profits to be made in this field, these renovation projects can go very bad, very quickly. Here are 6 tips that will help you achieve success on your next fix and flip deal.
1. Begin with a clear, detailed scope of work
Unless you’re a highly-experienced contractor yourself, you should work with a knowledgeable contractor who can help you develop a detailed scope of work. Nathan Trunfio, President of Lending at DLP Direct Lending Partners, comments, “When developing a scope of work the more specificity the better. I recommend a line up scope with prices per line item. If you do not know the exact pricing for any individual line item, seek feedback from experienced operators. If that is not a viable option, then obtain at least three detailed bids to help you develop reasonable pricing per line item. Not using a detailed scope of work is a mistake that any investor can make. This is why it’s important for you to work with a professional who will help you outline a very clear scope of work.
2. Avoid undergoing large construction projects to dramatically increase square footage
In most geographical markets, it is not going to be worth your while to build garages or add major additions to a renovation property. This is because of the amount of the additional time and effort it will take. It will likely slow down your renovation and could require plans, permits, and approvals, all of which can add months to the project. If you combine the expenses with lost time, it generally doesn’t end up being very advantageous in most cases. If you’re buying a 2-bedroom/1-bath property, you might think that turning it into a 4-bedroom/2-bath home is much more sellable, but that’s usually not accurate. If you have to add major additions to earn good profits, then it probably isn’t a good deal. Unless you are a contractor with the ability to do major additions at a significantly lower cost, the cost of construction is typically as high or in some cases higher than the value the addition will add.
3. Conduct a complete financial analysis before purchasing the property
Conducting a full financial analysis will be the foundation to the success of your fix and flip project. With any large investment, you need to take the time to analyze every aspect of the deal. Too often, real estate investors don’t perform a comprehensive analysis and go into a real estate investment deal with no chance of earning great profits, regardless if they execute well. Brion Yarnell, Vice President of Business Development at DLP Direct Lending Partners comments, “We offer a proprietary deal analysis tool to assist investors to analyze their deal, discover any risks, and prepare to execute the project successfully.”
4. Use strategic decision-making
Strategic investors know how to differentiate what renovations the home actually needs, versus which ones won’t even affect its resale value. Of course, demolition of and completely remodeling a kitchen and installing new cabinets may significantly increase its appeal, but if it’s a fully-functioning kitchen, you may be able to just paint the cabinets and make minor tweaks. Look at the condition of the comparable home. If you’re not sure how to do this yourself, your real estate agent can help you.
5. Obtain three bids
Once you’ve found an experienced, reliable contractor, it can be tempting to hire him for all of your projects. Once the contractor realizes you’re not obtaining other bids, he may even increase his original prices. Obtaining three bids by multiple skilled contractors will give you ideas to develop your plan of action. One of the contractors may have a suggestion that can increase the value of the project, so it’s important to keep your options open.
6. Select the right contractor
This one may sound obvious, but it’s not just about picking a “good candidate” for the job. Conduct thorough research of contractors on your list, including a reference check on previous jobs While you may want to work with the contractor who is offering you the most affordable pricing, it’s probably not the best option. Once you select the contractor, you may find it helpful to contract him with what’s called a “penalty clause” so that he commits to your deadline and the project gets done on time. Do not pay contracts for work until they complete the work. If the contractor cannot afford to start the job or order materials without payment upfront then that is most likely not the right contractor for your job. They will likely have cash flow issues throughout the job. The rule of thumb with contractors is that you cannot pay them too soon, too late, too much, or too little. You should want to work with contractors who can afford to run their business and need you to finance them.