In today’s real estate market, buyers may have a tough time finding the perfect home. Smart buyers know how to be flexible!
If you’re shopping on a tight budget or if inventory is limited in your area, you may want to consider buying a fixer-upper.
For investors: Do you want to fix a home to sell or rent? This practice, also known as “flipping” can be a great way to break into real estate investment. Whether your project is large, small, or somewhere in-between, you will want to start with a budget. If your budget is tight, you may still be able to turn a profit. Careful planning, cost control, and sweat equity will be essential to a lower-budget home flip.
Whether you’re buying a fixer-upper to live in, sell, or rent, consider the following factors:
Start by writing your business plan. Even if you plan to flip just one house this year, a properly crafted business plan is essential to your success. Revenue is one thing, profit is another. Have your plan intact before you start looking at homes and certainly before you make an offer. Do you plan to live in the home you’re fixing? A business plan, or at least the budget portion, will help you stay on track to keeping your project financially sound.
If you’ve never written a business plan before, here are the basics. Start with a description of your business or project. What do you intend to do with the house you buy? What is your motivation? Next, describe your plan of action. When and where do you plan to start looking for a home? How do you plan to market your home for sale or rent once it’s ready? The middle part of your business plan should include the action steps. This might also be called an “operating plan.” List the things you will need to do to see your project to fruition. Also, try to assess how much time each item will require.
An additional section to add to your plan is a SWOT analysis. SWOT stands for “Strengths, Weaknesses, Opportunities, and Threats.” Create an honest list of the items that could fill each of these categories. Some of these items may need to be addressed before you start shopping for a home. Finally, create a budget and stick to it!
A good resource for help in writing your business plan is the United States Small Business Administration. Their website offers a tutorial and other resources for new business owners. Your state or municipality might also have a small business center dedicated to helping people start their first business venture.
Your business plan will culminate with a budget and timeline. It is important to revisit these items frequently, even daily. The act of controlling costs, including the opportunity cost of time spent, is essential to the success and profitability of your project.
Do what you can yourself. Highly specialized jobs like plumbing and rewiring may not be within reach to the first-time home flipper. However, much of the renovation will involve simple projects. If you can avoid the cost of outsourcing things like demolition, cleaning, and painting, you will save on hourly labor costs. If you’re handy and have good measuring skills, learn to tile and install other types of flooring. Many home-flippers also purchase, paint, and install their own ceiling trim, baseboards, and quarter-round molding.
Even when taking a DIY approach, you should budget time for delays. Demand for building materials is high and it may take weeks or even months to get the supplies you order. In this case, start on another project while you wait or consider changing the color or type of material you plan to use. For example, bamboo is a functional alternative to vinyl plank flooring. It’s less expensive than hardwood and is harvested from a renewable plant. Bamboo is available at several price points depending on the quality and durability rating of the finished floor planks.
The United States labor market is experiencing a shortage of workers. This, combined with the increased demand for new construction, has put a squeeze on the availability of skilled tradespeople. For fixes that require professional help, schedule your jobs as early as possible. If you need a referral to a qualified professional, your Realtor is a great resource.
If your budget is tight, the DIY approach is probably what you plan to do for most (or all!) of your fix-up. This is a great way to learn about all the things involved in construction, design, and home maintenance. If your area of expertise involves electrical, carpentry, etc., then by all means put in the work yourself…but know that you may need permits for various jobs and these should be obtained before you begin work. No one wants to be subject to the dreaded “stop work order” and the fines and delay costs that will ensue. Even if you are not a licensed contractor, you still need a permit for remodels, add-ons, and larger jobs. Smaller steps in your project, like painting and interior repairs, probably do not require permits and inspections. Call the governing office in your city, county, or municipality to find out which aspects of your project will require permitting and inspections. It may be named the “Building & Permits Office,” “Office of Building and Planning,” or something similar.
If you do plan to do all or most of the demolition, remodel, and design yourself – Great! Inform yourself ahead of time by consulting with professionals, reading about each DIY project, and watching videos. Then, go! Fixing a fixer-upper is something you learn by doing. There will be hiccups along the way – delays, mistakes, surprises – but if you can approach a project safely then it usually makes financial sense to give it a try. However, do have a contingency plan in the form of a list. Know the reputable contractors in your area and who to call if you need to bring in an expert. Your Realtor can advise on the best pros when you need a helping hand.