To the fix-and-flip newbies

Wednesday, January 13, 2010 , Posted by Johnny Fuery at 12:55 AM

Originally Published 2005-07-23 15:07:52

This is part rant. Be warned.

The number of "investors" in the real estate market of late has been growing. If memory serves (from the WSJ sometime this month), it's at 23% nationwide, compared with ~16% as recently as 2000. This metric is a percentage of purchasers.

This means that there are a lot of newbies in the market. I know, I'm young, and I've only done it a few times, and then during one of the greatest bull markets in the history of American real estate, so my condescension of others with the term "newbie" might be a bit premature.

Blow me.

I have seen, firsthand, how seemingly experienced people shoot themselves in the foot. A colleague, recently, complained to me about the price his fixer fetched. Both I and his realtor told this fellow that he should get between $600K and $630K. He received on offer after two weeks on the market for $601K. The realtor said to take it.

The seller, my friend, was whining about it. The realtor now believes the market is cooling. Let the ranting commence.

The original floor plan, a 3 bedroom home with 1.25 baths (a quarter bath is a toilet in some random place. yes, it looks ghetto), was redrawn, creating a 3/2.

Problem #1: The quarter bath became a full bath... which you had to go through the laundry room and kitchen to get to.

Problem #2: The common bathroom became a master bathroom, so the other two bedrooms now have to use the bathroom connected to the laundry room on the other side of the house.

Problem #3: The master bath is connected to the smallest bedroom. Not exactly your ideal master suite.

Problem #4: Keep your realtor in check. I happen to know this particular one, and he is a forthcoming, genuine, trustworthy man. All you could ever want in a realtor, right? Yes, but as the seller, it's still your property. You MUST remember that your realtor works for you, not the reverse.

For my part, I think if they held out and the current feverish market doesn't suddenly catch a cold spell, they might fetch another $5-10K. I'd take my $601K and run, personally. The floor plan is, to put it bluntly, garbage. I personally ran one of the Sunday opens, and there was a lot of interest, but very little bite. The potential buyers all loved the house until they pictured themselves living in it. One of them even turned to me and mumbled, "a bathroom off the kitchen?" and rolled her eyes in disgust. They left hurriedly.

Remember, noobs, that's what you're dealing with: a place to live. Use some common sense, people! "Every house has to have a master bedroom" is not an axiom to invoke at the expense of usability.

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I've examined another home, recently, where a staircase that could have easily been placed outside (and looked very tasteful) was placed inside -- at greater expense. It's absolutely gorgeous, but the unit is so small it would be nearly impossible to rent to anyone but a family member. The placement of the staircase on the interior meant an additional $15-20K in foundation work and only bought some additional storage space that could easily have still been added and accessed using a second exterior door in a very tasteful manner. It also cost all of that extremely valuable square footage -- probably 60 square feet or so in a unit that is only about 250.

This one small change makes a difference of ~$300 in potential monthly rental income, which certainly has a direct effect on the property value (one of the textbook appraisal methods uses the rental income as a multiplier). Not to mention the extra money spent on the remodel.

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Oh and one other thing about the market cooling. If your computations on profitability (you did do that, right?!) include "appreciation" ANYWHERE in the mix, you need to get out of the market as quickly as you possible can. Flipping is a business. You're buying a product and ADDING VALUE. You are then selling an improved product with greater value at a higher price. If you are at the mercy of the market's whims, then you need to pack up and go to Las Vegas. At least there you'll have a good time while you lose your money.

It doesn't hurt to have a backup plan, either. If the market does fall 20% next month, can you handle the payments? Can you rent the place at zero or almost-zero cash flow? If you can't, can you swallow the pain, either via tax benefits or raw grit?

PS Buying-and-holding (i.e., the landlord business) has made me far more money than flipping ever has. B&H is investing -- it makes you rich. Flipping pays you a salary. It might be a really good salary (successful business owners usually get one), but it's still a salary.

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