Some of the best property investments can be found in the ugliest homes.
From the outside, the home may appear ragged, rough and in complete disarray. But when you take into consideration a low purchase price, makeover and its fix-and-flip potential, you suddenly see the beauty in this home.
Evaluate Beyond Looks in Property Investing
Successful property investors know the importance of looking beyond the aesthetics of a property. It’s crucial to understand what to look for and how to accurately calculate your rehab costs. If you estimate a fix and flip renovation project too low, you will lose profit. If you estimate rehab costs too high, another investor will make a better offer and get the deal.
When you first walk an investment property, take a rehab checklist or app to assist you in calculating home rehab costs and ARV. This can help you avoid missing any essential or hidden costs in rehabbing the property.
3 Areas to Carefully Evaluate When Flipping an Unsightly Home
- Foundation. Bring a level to use on wood, laminate or vinyl floor surfaces to check if the home’s foundation is level.
Look for cracks in the exterior brick. If the mortar is cracked, that is usually not a huge concern. Cracks in the actual brick can indicate settling and foundational problems that could be costly.
Hire a structural engineer for a foundation inspection and document what must be done. An independent structural engineer can give you an unbiased evaluation, along with advising you where to put beams, how many, etc. He or she is getting paid for the evaluation and has no incentive on repairs, whereas a foundation company or contractor may have.
Expert Tip: Buyers often think home foundation problems mean walk away. This may not always be the case, as this could give you more opportunity to make a great deal on a property. Take your engineer’s report to a foundation repair company for a professional repair quote before you walk away.
- Major Mechanicals. Look for hidden problems in all major mechanicals as these costs can add up quickly.
For major mechanicals such as plumbing, electrical and air conditioning, estimate based on your confidence level. For example, if you feel only 25% certain the plumbing may need repairs, include 25% of that costs in your rehab expense. If you are 75% certain the roof needs replaced, factor in 75% of those costs into your expense.
This assures you planned money for those costs. If you don’t need it, then you’re ahead. If you do need to make those repairs, you may be a little short. Over time as you invest in more and more properties, these costs will even out.
- Contract Contingency. If possible, build a contingency in the contract. This a provision that says the deal is contingent upon a specific inspection. If the inspection turns up areas of concerns, renegotiate the deal if it still makes sense.
If there is no contingency, hedge your bet, advises Jeff Johnson, a real estate investor and director of lending at Catalyst Funding, Houston. Consider the worst case scenario and how likely that can happen. For example, if you think there is a 50/50 chance you’ll see a $10,000 plumbing bill, build a contingency in your offer for $5,000 toward plumbing upgrades.
Expert Tip: Plumbing is the No. 1 area where Johnson advises getting a contingency, if possible. Unknown plumbing problem can quickly add up $20,000+. With plumbing, problems can easily be hidden within foundations, underground and all the way out to where your lines connect to city lines.
Have Confidence When Making an Offer on a Property
If the numbers work and the potential is there, don’t be afraid to make an offer, even a low offer, on a property that first appears as an eyesore. Be ready to move fast on a great investment opportunity by having an exit strategy, execution plan and financing in place before you walk the property.
Get pre-approved with a hard money lender as these loans are designed to be fast, easy, with no speed bumps so investors can move fast on a deal. Also, have a cashier’s check ready when you walk a property. Leaving an investment opportunity sit for a day, or even hours, can be enough time for another property investor to swipe opportunity from under you.
Catalyst Funding is a hard money lender who can help build your real estate investment opportunities. With a background in fix and flip projects and other property investments, we can provide resources and guidance to help you through the entire process. We strive to be more than a lender! For more information, contact Catalyst Funding online or call us at (832) 648-3626.