Maricopa County, Arizona is one of the country’s hottest markets for house flipping. Investors flock to cities like Phoenix to find great deals at trustee auctions (also known as foreclosure sales), make upgrades, and re-sell them to home buyers.
Flipping houses may seem like a great way for investors to make a fast profit on home sales, but knowing how to determine which upgrades make the best financial sense, while ensuring the home will be safe for the new owners, can be tricky.
There is no cookie-cutter formula that will work for all flips, but there are some useful rules to consider on a house-by-house basis to achieve the best payoff on your investment:
1. Assess your fix and flip market
When determining your budget for a fix and flip, the first consideration should be the neighborhood. If the flip house is located in a neighborhood with a considerable number of other home listings all of which are updated and in great condition, you may have to spend more money on the flip that you would if, for instance, the house is located in a neighborhood with few to no houses listed for sale.
If you choose a flip in a neighborhood with competition, you may opt to invest a large amount of money on upgrades to make the house more appealing to home buyers, and undercut the competitors’ prices. However, this can create a new dilemma, in that you may run into appraisal problems.
Ninety-five percent of home buyers need an appraisal performed by a licensed appraiser to secure a home loan. The appraisal values the property to confirm to the lender (bank) that the home’s value is equal to the amount the home buyer is borrowing.
When you sell an upgraded house, the highest and best use is to sell it to an owner- occupied buyer, most of whom will need a home loan. As an investor, you may need to get an appraisal as well if you are planning to secure a loan. Buyers who are paying cash for a property typically expect a discount on the sale price, so it makes sense for investors to utilize appraisals
2. Determine your selling strategy
The current selling market in which you are working also affects your flip-selling strategies. For instance, some higher-priced markets require sellers to stage their houses, whereas others don’t require staging because they’re in a market in which houses sell whether they’re staged or not.
If you make the decision to stage a house to sell, you can’t skimp on the process. Hiring a professional home stager or staging a flip house yourself with high-end furnishings is the best option.
3. Resist the temptation to over-improve
Transforming a dated and run-down flip into a lovely, inviting residence can be very rewarding, but some flippers get themselves into trouble when the flip they envision doesn’t add up financially. The temptation to add on to a house is one upgrade that investors need to think through while crunching numbers. Unless your flip house is in an extremely high-value area, the cost of an add-on may quickly send you over budget, especially considering structural and other “hidden surprises” (wiring, plumbing, zoning ordinances, etc.) that often surface during major renovations and add-ons. You have to be certain that the costs of an addition will not only be repaid in the home’s sale but that the carrying costs don’t drag down your profit margin.
The more work involved in a flip, the higher the risk of running into expensive problems and the longer the timeframe to get in and get out. Unless the potential pay-off is undeniable, it’s best to resist huge remodeling projects on a flip.
4. Make wise improvement decisions
When planning to flip a house, your key points of interest should be the kitchen, bathrooms, paint, flooring, roof, and windows where necessary. If the bones are good, for instance in the kitchen and baths, see if you can simply upgrade them without a complete gut and rebuild. Even if, upon inspection, the need for electrical or plumbing upgrades surface, your budget should be able to handle these items without blowing the budget.
Flipping houses for profit doesn’t require making the properties perfect but rather making them appealing to buyers. Of course, you want to address any major systems that need repair or replacement, such as HVAC, roofs, and other items that may prevent buyers from getting approval for financing.
You don’t always need to replace bathroom surrounds with custom tile, you don’t always need to gut and replace every kitchen with high-end appliances, and you don’t always need to replace the siding on the home’s exterior. Sometimes these kinds of upgrades may make financial sense, but sometimes they don’t. The trick to a successful flip is knowing which upgrades will make your flip desirable to buyers without over-improving to the point of eating up all your profits.
Gentry Real Estate Group BuyLowAZ team helps investors bid on Trustee Auction properties that best meet their investment needs. Visit our website or contact Spencer Caldwell at 480-283-4425 or sign up and one of our representatives will qualify you.