Every real estate person I know, and quite a few outside the interest, share in this one particular dream. Finding the diamond in the rough, the dilapidated home with great bones that is in the up and coming neighborhood. Out with the old, in with the hip, and with that a pretty profit on resale.
But perhaps the greatest value you get out of flipping a building is the knowledge you accrue. And most of that comes from the many mistakes you make.
So I want to share with you some of what I learned:
HGTV isn’t reality.
Is it easy to find properties to renovate? NO. Is it easy to renovate a home and make your budget go a long way? NO. Is this a pretty surefire way of making money? NO. Are good, affordable contractors in abundance? Hell, NO.
This is the truth: Finding good deals is pretty darn hard. Serious renovation always takes more time and more money, and too often a lot more of each. There are way more horror stories than fairy tales. Heck, people get divorced because of difficult renovations.
Don’t let HGTV set your expectations.
The Market Overestimates the Costs of Cosmetic Repairs and Underestimates the Cost of Structural Repairs
It’s amazing what will scare off potential investors, especially the less experienced kind. So many are scared off by some bad paint and carpet. Or they think they can renovate a kitchen for $25k.
Maybe because people can see so clearly the stained carpet, the battered sheetrock, the 70s-era cabinets, that they just assume the worst. But those items above, those are the easy part. You can buy them reasonably quickly, find good deals on them, and get them into your home in no time.
It’s the things that you can’t see that present the real risk. People love to think it’ll cost $500 to open a wall or move some beams. Once you start moving parts of the structure around, the bill starts to climb pretty quickly. And you have no idea what you’re ultimately going to find. Because behind that wall you want to move may be some electric or plumbing that you didn’t know you were also going to have to move. And that’s just one example.
So if you’re going to do some work beneath the surface—opening walls or adding a bathroom—budget conservatively and be prepared for surprise costs.
Know Your Values AND Your Costs
One thing sellers love to do is tell you how much something cost them to justify selling their property at a higher price.
Here’s the way they would frame it: I put $15,000 into a professional grade outdoor grilling area, so I should get an extra $25,000 when I decide to sell it.
That’s not the way it works. If it were, people would add powder rooms and exotic granite countertops without a care in the world because there would be this guaranteed payoff on the back end. But the market puts a different value on that powder room, and it may not see an improvement in the same light as a current seller.
Those who thrive financially in real estate truly understand that a new project’s cost and value aren’t necessarily the same. A special kind of light fixture might do much more to push your FMV than a custom surround sound system.
That’s why it’s so important to make smart decisions at every step of the real estate process. Only by doing that do you guarantee the biggest value.
Summary
I know for certain that the renovations I’ve done myself on properties have made me a much better adviser to our clients. Understanding everything from construction materials to financing to contractor language has helped us understand the best ways to buy, renovate and sell.
And nothing makes us happier than to be able to pass it along every day.
