Anyone who’s ever watched HGTV has likely been taken in by the idea of “flipping” a real estate purchase—that is to say, buying a property and refurbishing it, so that it can be sold for a decent profit. Under the right circumstances, flips can be an ideal investment; however, there are a number of danger signs that buyers should watch out for, as they can result in money lost rather than earned. Here are some basic guidelines to follow when shopping for a potential flip.
This is the first and most obvious red flag on the list. If a home’s foundation is in less than prime condition, the cost of replacing it will make it virtually impossible to earn a profit on the sale.
Layout and Design Flaws
Buyers should pay particular attention to kitchens and bathrooms. Are the layouts impractical? Would major appliances need to be relocated in the event of a renovation? If the answer to either of these questions is yes,reconsider the purchase. Replacing some outdated appliances is one thing, but a complete overhaul of the space will be prohibitively expensive.
Here’s where the home inspector comes in particularly handy. Be forthcoming with questions about overcrowded circuits, faulty wiring, and any other electrical issues that could arise. Take care of any problems before putting the house on the market, and be sure to advertise the upgrades to any potential buyers.
Roof and Ceiling Damage
For obvious reasons, a roof is one of the most important aspects of a home. Ensure that there are no leaks, holes, missing shingles, or dry rot. Indoors, inspect every inch of the ceiling for discoloration, which can be a sign of water damage. This could call out issues with the plumbing, as well as leaks coming in from outside.
The “70%” Rule
The best way to ensure a solid profit from the investment is to determine the home’s after repair value, or ARV. Ask a real estate agent how much the home should be worth following the repairs. Take 70% of this number, then subtract the repair costs. This is the amount that should be offered for the home in its current condition.