Everyone’s eyes would shine to a sight of new stainless steel appliances, amazing granite countertops, incredible hardwood floor, colors that go with backsplash, tile, baths and the entire house in general. Well, that’s what flip is. Most homes that have been bought by an investor remodeled and sold for profit will usually fall into this flip category. You will be wooed by all this, but how do you know which investors really took their work into account and which ones only did shoddy work to make you consider buying it. How would you recognize a promising flop from a beautiful flip?
Real estate is here to stay for a very long time, but unfortunately, some buyers are rushing to purchase homes without taking some key points into account. Don’t let your eyes divert your attention from determining the true value of the home you just purchased. Make use of the checklist below to make your cash count.
1. See the house in person
The real estate market is a hot market and homes are selling real quick before you even have time t make a decision about it. The competitive investors market has put a lot of pressure on buyers to make a purchase in a nick of time. Let’s are honest here, this is a really big investment of your life that you will ever make, do not rush into it. Never ignore home inspections, even if the seller is requesting no inspection contingencies. Nonetheless, before anything else, make a visit to the house and give it your own inspection. You can bring anyone you know that has experience in real estate or construction and check every corner of the house. Take your time, take pictures, check everywhere you wouldn’t think of (between wall and floor, between countertop and wall, window frames, door frames, etcetera). This part is very essential. Dig deeper into the history of the property, a most public website such as Zillow and Redfin offer Property History reports, which they pull straight from public records. Title companies can offer this as well.
The first thing to check is the most recent change of ownership. If it was in the past 12 months, then most definitely it’s an investor flip or a recent buyer discovered something wrong with the house. Either of the reason should prompt you to research more into the property. The prices for these change of ownership transactions should help you know if it is really a flip or just someone selling quickly after purchasing. Second, check for signs of any unusual activity. This could be multiple changes in price and many listed or not even listed actions. If it was a flip and has been on sale for a while now with so many unusual activities, then you have to find out why. The problem could be either with the home or that it was just overpriced. But one of the fastest ways to know potential property issues is to check the history of the property.
2. Know more about the flipping process
Just because the investor is making $50k doesn’t mean they are ripping you off, which is the most thought misconception. Buyers would see a home purchase 6 months ago, for $400k and they are under contract for $550k on the resale. They would say, “They are making $150k off me?”. We need to understand the full process of a flip because the investor’s profit is considerably less than just the difference of numbers. You should also note all the approximate expenses this investor has: closing commissions (6%), holding cost (2%), closing costs(1%), renovations( $35-$65/sqft =$50k+), loan costs(9%), possible closing costs on purchase(1%). Take a look at the example below.
Closing/Commissions/Holding (9%): $49,500
Loan Coasts/Origination + Interest (9% of loan amount): $32,500
After deducting all the expenses incurred, the investor will be left with $18,500. You would think it’s a lot of money but it’s only $3k a month which isn’t exactly a status of a millionaire.
Understanding the rip-off concern, we can now spot is the home is being overpriced or it is just a fair price basing on the market comparisons and investment history. Next, find out about all the choices the investors have when flipping the home. Well, they redid the floor, but is everything under it also in good shape as the shining floor? Investors moving too quickly tend to make a common mistake of sloppy floors. Check if all the electrical and plumbing connections were done correctly and to the expected code. The roof and the exterior stucco were redone correctly, but was all the vents installed correctly too? Don’t be lied to by the glimmer of the house. You could also request for all permits of the house so just you be sure if there were any additions or structural changes to the house.
3. Always use a certified home inspector
As noted earlier, this is an essential part of the home buying process and shouldn’t be ignored on a flipped house just because of the glimmer. We are not experts, but home inspectors are. So, make good use of them and listen to what they have to say. Demand any fixes to be made prior to the close of the purchase. Required fixes should always be negotiated into the deal as credits or completed by seller.
With more experts, the better. You could bring in a couple of trusted experts with knowledge in construction. In most cases, the inspector notifies the buyer of areas with the problem and asks them to consult an expert in that specific area. Use the experts as your source to uncover potential issues and to get the real price quoted to you for these repairs. This will deem beneficial for any negotiations and decisions regarding the purchase of the property (http://realtormag.realtor.org/home-and-design/feature/article/2016/08/beware-flip)
4.Get familiar with the material
Get to know the difference between hardwood and laminate hardwood, or quartz vs granite. Each has a different price, which may help explain why the home is priced higher or lower than others you’ve seen the area. This will also help you know if it is the right home for you. Many would prefer hardwood to the others but they can’t really tell the difference between engineered and laminate.
Here is an example:
Solid(Real) Hardwood: more expensive, expands/contracts in weather, no true pattern as it is cut straight from solid wood or nature, the pattern will never repeat itself.
Engineered Hardwood: usually cheaper than solid hardwood, both can be refurbished, not affected by humidity/temperature as much, more versatile.
Laminate Hardwood: much cheaper, still durable but not strong against water, will bubble, versatile.
The above checklist will help buyers on decisions they make concerning the purchase of a newly fixed-up, flipped home. Most of the renovated houses are of high quality but there are a few flips to give a second thought before buying. Find everything you will need to help not have a poor judgment on the property. The more information the better. Use your trusted experts and listen to their opinions seriously. But most importantly, trust your instinct!