What to watch out for in Flipping and rehabbing

Question

Hey everyone! I'm looking to hear what some seasoned investors look out for when touring a possible rehab or flip? What are some red flags that maybe a new investor might not think of? What are some things for you personally stay far away from when looking at a property? Thank you all again for any and all feed back! I'm asking these questions not just for myself but also for any other new investor who might be looking for some more nuggets of great info.

Chris Varsek · Answer

For me, I look at the roof and foundation.  While roofs are easy to replace, they are expensive.  If I have a good roof, and a solid foundation, I can usually make a deal work on the right property.  You have to know your parameters - what will make this a win/win for you when it's done?   Why would someone want to buy this off of you - so think location, condition, etc.  Start at the end when evaluating the property.

Marty Boardman · Answer

I don't hire general contractors for my fix and flips. They are expensive and don't always have my best interests in mind. Instead I hire a project manager that is paid to keep the rehab moving along on time and on budget. My PM schedules the sub-contractors and makes sure materials are at the job site so nothing gets held up. I pay the sub-contractors directly and I pay for all the materials. If the house gets done under budget and/or before their deadline I give my PM a bonus.

Rob Beeman · Answer

@Andrew Vincent  Items to watch for:

Take a flashlight with you when you view the property - spend plenty of time in the basement (crawl space) as if there are foundation issues, plumbing issues, etc. this is where they usually can be seen.

Properties on high traffic streets sell slower or for a lower ARV (or both)

Bigger is better (more square footage, more/larger bedrooms, larger kitchen, more baths, larger yard, larger closets). 3BR's typically sell better than 2BR's. If you buy a 2BR, if possible, make it a 3BR - increased value/easier sell.

In urban markets, wider streets are better than narrow ones. Streets with plenty of parking are best. Walk the alley ways - are they clean & safe, or not. Is there a block captain - they know the area and residents and can be an awesome resource.

Buy in areas that attract homeowners vs renters (conduct demographic research for percentage of each). According to the National Association of Realtors (NAR) the product that is selling the fastest (fewer days on market) nationwide are homes that are priced between $100K and $250K. If your market offers this price range, having the finished sell price fall into these figures might help it sell faster.

Be respectful of the neighbors near your project. It is their neighborhood and you are just a part-time visitor there during the length of the rehab and sale.

Marty Boardman · Answer

Besides foundation issues, which Matt and Steven mentioned...

A BIG red flag for me is a dysfunctional floor plan. If the layout of the house doesn't flow, and there's no way to cost effectively reconfigure it, then run away.

Another one would be a house that sits on a busy street or backs up to anything like a shopping center, apartment complex or freeway. It's very difficult to determine how much to value a property if it's not located in a normal residential neighborhood. I once flipped a house that sat directly across the street from a BMO Harris Bank drive thru. I took an additional 20% off what I thought the ARV would be to account for the crappy location and still lost money.

Aaron Pfeffer · Answer

It's also always important to look at your potential investor like a hard money lender does. What will they be looking for to say "no," and that's how red flags will present themselves. Number one on the list? Do the numbers really make sense and should this particular borrower be taking on this debt if they do. Number two on the list? Everything else.

Bruce Woodruff · Answer

The most important - in terms of not only cost, but hassle:

Foundation - Meaning slab or raised foundation

Structure - Referring to framing issues....beams, headers, joists, cut trusses, etc

Plumbing - in particular Cast Iron used for sewer. It is always in need of replacement and can be very costly.

Electrical - Undersized mains, knob & tube, old wiring, not enough outlets...

A good Home Inspector will find these issues.

Conner Olsen · Answer

Unlike a lot of other posts, foundation issues are not always a problem. Texas homes notorious for having a ton of foundation issues and we are the #1 state for foundation repair. About 1/3 of all houses I tour have some foundation settling. We have a clay soil here that expands and contracts frequently and can cause issues. In many other markets you should run from a house with these issues.

I'd be on the lookout for items that are expensive and don't add value to a house like plumbing, electrical, foundation, roof, AC, furnace.

Evan Polaski · Answer

@Andrew Vincent, this is impossible to answer, as it is so deal specific.  Generally, I would say when I was starting out, I wanted lipstick renovations.  Unfortunately, anything that is lipstick level does not produce a profit in this market (meaning it sells for too much money).

The big ticket items include foundation issues, water intrusion issues, main stack/sewer line issues, electrical issues (knob and tube or aluminum or fuses).  HVAC can get pricey if you need to reduct.  Masonry work/tuck pointing can become a huge cost too.  Termite or rotted wood.  Prior renovations without permits always can be a bit scary too.

Oh... and title issues.  ALWAYS, ALWAYS, ALWAYS buy title insurance for the full purchase amount.  If you have a mortgage, the lender requires it up to mortgage amount, but either way I always buy it for full purchase price. I know flippers, personally, that have done a lot more deals than me and never had an issue.  I have had to use my title insurance three times over the last 7 years.

What to watch out for in Flipping and rehabbing

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