If you’re convinced that residential rehabs can be a great investment, you have some homework to do before diving in. Due diligence requires that you develop your knowledge of the local market, policies and tax codes, and costs related to renovation projects.
A critical element in a successful flip is selecting the right property. There are several key considerations in that process, and getting your ducks in a row in advance is time very well spent.
#1. Define your deal
The first step is to thoroughly analyze your own position in terms of budget, available time, and what you intend to do with the property. This will help you to more quickly eliminate the properties that won’t work.
Establish parameters for yourself: what is the top price you’re willing to pay? What’s the lowest priced property you’ll consider? What size is your ideal property? How broad an area do you want to look in?
Plan to look at 20 or so properties before you choose, and use the experience to sharpen your understanding of the local market. This will help you to have realistic expectations for the project, its cost, and potential profit.
#2. Analyze the market
Depending on your situation, chances are you’ll want to find properties that are nearby. Get a handle on the local economy and the neighborhood’s characteristics. Is this an established area? Are prices on the rise? Is the neighborhood in transition? This can open up the possibility of higher profits, but also may mean that you have to hold the property for a time. What is the not-to-exceed price for the neighborhood?
Here are some general questions about the market that you must answer:
- How much are average homes selling for?
- How much are bank REOs selling for?
- How fast are properties selling?
- What areas seem to be selling the fastest?
- What property types/size/layouts seem to be selling the fastest?
#3. Do the math
Take no shortcuts on this step! Get down to basics, and nail down exact numbers on costs and your budget. Figure what you can spend, down to the last penny, on both the property and on the renovation project. Decide how much risk you’re comfortable taking.
Include the cost of utilities, taxes and maintenance on the property for up to one year. If you’ll need a short-term loan, factor in that cost as well. Get detailed information on the cost of labor and materials, as well as the services of professionals you may need to consult.
Base your expected selling price for the property on hard numbers. Check comparable sales in the area, and set a conservative goal for a sales price. When the project’s complete you may be able to adjust your expectations upward, but you don’t want to be in the position where you have to sell for much less than you planned.
Once you have a solid financial plan, you’re ready to look for suitable properties. Stick with your budget, and don’t let emotions enter into your decision.
If you have found your property and are in need of financing, let Patch of Land be your partner for your next project! For more information, look through the steps on how to get started or download a FREE copy of our Borrower Handbook.