Key Indicators to Flip or Flop
Buying a home, renovating it, and selling it for profit looks like fun on TV where the entire process takes place in less than an hour. Flipping houses may not be as easy in the real world of real estate investing, but it can be profitable if you take your time and plan the project. Investors flipped nearly 95,000 homes in the third quarter of 2021, earning an average profit of $69,000 on each deal, according to CNBC.
This doesn’t mean every sale is a winner. Some properties are a better fit for the short-term rental market or part of your long-term investment portfolio. However, you can avoid the flops if you understand the market and learn how to choose the right properties for this type of deal. Here are the key indicators to consider in order to distinguish between a flip and a flop.
It’s more than a cliché that location, location, location is a significant factor in a home’s value. The truth is that people want to live close to the places they go to the most. Homes located near shopping, public transportation, and schools tend to have higher values than homes far from these amenities. At the same time, being too close to major highways, airports, and noisy nightlife can be a detractor for some buyers — and a flop as an investment.
Think about your potential buyers for the property. Are they young families? Single professionals? Retirees? What a young family values in a neighborhood (good schools, local parks, and a large backyard) can be very different from what a retiree wants (smaller yard, quiet neighborhood). You may even check out up-and-coming areas where you can find a great deal now and potentially sell for a decent profit when the buyers flock to the neighborhood.
You’re flipping houses to turn a profit, so you have to pay attention to market value. This is simply what you can expect to get for the renovated property. Ideally, you should be able to sell it for more than your total costs, including what you paid for the home and how much it cost to repair it. If you can’t sell it for more than you put into it, the house may be a flop.
One way to gauge the home’s market value is to check out what other buyers paid for similar homes in the area. You can do this through a comparative market analysis done by a real estate agent or broker. The agent researches recently sold homes in the area that are similar to the one you want to flip. For some homes, this is a straightforward process because the agent is easily able to find comparable properties. If the home is in a rural area or has wildly different features than the neighboring homes, a comparative analysis may require additional skills.
Pay attention to the condition of the home you plan to flip. You have to fix everything that’s broken and may need to update what’s out of date. This includes plumbing and electrical systems, doors, windows, and flooring. Sometimes you don’t find problems like water damage or foundation issues until you start the demolition process. These unknown and unexpected repairs quickly chip away at your potential profit.
It’s also helpful to consider the home’s amenities and how they compare to other properties in the neighborhood. Ideally, the homes should be as similar as possible. A two-bedroom, one-bathroom home surrounded by four-bedroom, two-bathroom homes may not be a good choice for a flip. On the other hand, the house with the only pool in the neighborhood may be the one to pick. At the same time, be careful about over-renovating the home. Details like Italian marble and top-of-the-line appliances may not bring in any extra money.
Right now, there’s an estimated housing shortage of five million homes across the country. Watching construction trends can help you choose a home to flip. An uptick in single-family home construction can indicate an area where housing is in short supply. It takes months — and sometimes more than a year — to build a home from start to finish. Some buyers don’t want to wait that long and are willing to purchase a move-in-ready home, especially if it’s been renovated.
Construction trends also offer clues into where people are moving and what types of housing interests buyers the most. You should see a greater number of construction permit applications in areas where the population is growing. If you can access public records or listing descriptions of the sizes and amenities of new constructions, you can use that information as a checklist when evaluating potential flips.
Reach Out to Our Team
Understanding the market is just one factor in a successful flipping project. You also have to see the potential in the property for your buyers. Our OpenAiRE team can help you unlock the potential in your properties so you can increase their value and get the maximum return on your investment.