It’s 1:30am and you can’t believe you’re still awake, but you just watched a 12 hour HGTV marathon of house flipping shows. This is your jam. You can rehab with the best of ’em and you’re ready to take your share of the real estate fortune pie.
Now, there are a million ebooks and videos on how to make a fortune flipping that will tell you it’s not all as peachy as an HGTV show – yet still profitable if done right. What I’m here to talk to you about, however is what might be the single most important decision you are going to make if you’re looking at a potential rehab project:
Is this the right property to flip?
Sounds obvious, yet so many people get caught up envisioning a beautiful final product and how inexpensively they can do it with their own sweat equity. Losing sight of the first step – a zero-emotional analysis of the profitability potential – is an easy trap to fall into. It’s not voodoo magic figuring it all out of course, but it does take some effort and attention to detail.
- Step one: Once you’ve found a potential place, drive around the neighborhood and get a feel for the quality and size of the other houses on the block (and perhaps the two nearest blocks), especially the newest ones. Write down all the addresses.
- Step two: When you get home, plug each address into a site like Zillow and get the info on it’s last sale date and price. It’ll look like that and is in the upper right area of the text info on the property. DO NOT go by the Zestimate⌐ to guess values. They are more often than not too high and you will get burned!* Looking at all houses in your area that have sold within the last year or maybe two, you can get a feel for exactly what that neighborhood will bear and what quality of home you will need to be in a desirable range there. Houses that are currently for sale give you useful info as well, in so far as you can look at ones that have been on the market more than 60 or 90 days and know that a house of X quality at Y price doesn’t sell easily in that neighborhood. Getting all this data can be arduous and it’s certainly more available to a real estate agent, so if you know one (*ahem, CALL ME 201-800-2166), you might one to lean on them for help.
- Step three: Make sure you’re not going to end up with the most expensive home on the block. It’s okay if you’re going to fix it up so nice that you think it’s got the best detail work, but you don’t want to try to recoup your investment when you’ve got something that’s bigger and going to go for $100,000 more than anything else in the immediate area. Invariably, the biggest house on the block will give you much less return on your investment than if that same house was in a more fitting neighborhood and was of median price to the area.
When my partners and I look at a property, I do all this, plus a full workup on the local economy – looking for any pending changes that might effect value. A Walmart coming in, a major employer closing, etc. My reports are 6 or 7 pages, and look like the image below:
As you can see on this one, it wasn’t an investment we’d pull the trigger on. Hopefully this gives you an idea of the amount of attention you need to pay to your ROI potential before making a purchase, though. From there, it’s onto the other steps that are all on your HGTV mind. =]
* In the Zillow graphic above you see a Zestimate⌐ of $593,312. I can tell you with a high degree of certainty that that house wouldn’t go for more than $575,000 today, especially given that I live in it and know the neighborhood inside and out. Another person down the street from me has their home listed at the Zestimate⌐ price, which is a solid $100k too high, given that the interior of the home hasn’t been updated in a couple decades. As you can imagine, there’s been exactly zero interest in the property and it’s been on the market for a month already. Get REAL comps if you are going to do serious business.