Flipping Homes: Facelift to Teardown
June 20, 2016 |
Co-Founder, Palmyra Development Co.
Any experienced fix and flip investor will agree that selecting the proper criteria for the flips you’re looking to perform is a crucial first step. The three most important components in forming your criteria should be location, price range and the amount of work needed in order to properly renovate the home for profit.
These factors combined form what is known as the available “margins” within a given neighborhood or sub-market. The key concept, which I refer to as “price bandwidth,” can be more simply defined as the difference between the lowest price that a property can be initially purchased and the highest price that it can then be quickly sold for after improvements have been made.
Other factors that contribute to the degree of “price bandwidth” in a neighborhood are the ages of homes in the area, lot sizes, local zoning rules and the demographic makeup of the target buyer pool for the completed flip. In fact, key buyer demographics such as age, family status and income level can play a major role when deciding just how much improvement is appropriate for a given property.
Obviously “comps” or comparative market sales, will ultimately be the final factor in establishing the correct margins available to a given property. Yet, it’s the above market dynamics that drive the pricing behavior that creates those comps. Once the comparative sales data, as well as the market influencers behind it, have been properly understood there are three general categories or levels of work to be done – which most flips fall into.
Maximum Price Bandwidth
Starting with the very top end of the spectrum, a neighborhood with maximum price bandwidth is one where the demand is so high that in order to achieve the greatest amount of profit it’s best to tear down the existing home – and build an entirely new one. In this case, the acquisition price is essentially determined by the value of the lot only, since the existing home will be completely demolished. Additionally, in most “teardown” cases, the new home will be built larger than the existing home, adding to the price difference between the initial acquisition and the final exit sales price for the flip.
Additional benefits of a teardown include the ability to work with a “blank canvas.” A teardown enables freedom of design, selection of the latest materials and making the best possible use of the build site in terms of size of structure, elevation and outdoor space. On the other hand, a full teardown requires the most time, money and resources – a luxury not every flip investor may have for the investment.
Far more common than teardowns, are many flips that fall into a category known as the structural remodel. In this scenario, a property investor will work within and around the existing home, but will still make major changes to the floorplan. Changes may include adding or removing existing walls, building an addition onto the house, enclosing a patio or a parking area to increase the livable square footage of the home.
The structural remodel is often an attractive option because the experienced flip investor can make changes to the layout or finishes of a home that do a lot to increase its value – without necessarily taking an exorbitant amount of time or money. However, some things to watch out for include dealing with load bearing walls and subterranean plumbing. Additionally, one should be careful when repurposing existing parts of the house like patio or parking areas to gain more square footage. Bigger is not always better. Converting such areas to interior livable space should only be done when the new space really adds benefit to the floorplan. The investor should not sacrifice valuable outdoor or utility areas simply for the sake of making the home larger – if there is no practical purpose for the newly gained space.
Smaller Price Bandwidth
In smaller price bandwidth scenarios, the end result of the renovated property will still be similar in size and features as non-renovated properties in the area – the difference in price from acquisition to exit will be much lower. This type of flip is where interior finishes play a big role and is commonly known as a “facelift.” Aesthetic trends in home styling tend to change every 10-15 years. Often times with properties that are in great condition and already have desirable features, a flip investor can earn a profit simply by changing items such as flooring, cabinets, paint, fixtures and landscaping. This type of flip avoids the headaches that can come with moving walls, electric and plumbing lines. However, since these items will be kept intact, ensuring existing electrical, mechanical and plumbing systems in the property are up to current standards becomes critical. There is nothing worse then updating a home with all of the latest finishes and later realizing there is a major, underlying defect that was overlooked.
Typically, less experienced flip investors will start with facelift type renovations. Once facelifts become a comfortable transaction, flip investors may work their way up into structural remodels and sometimes teardowns.
Experienced pros are attracted to all 3 flip categories. A professional flipper realizes that the economies of scale and higher margins on big projects can also be far more costly and time intensive. There is often less of a profit on smaller projects, but once flip experience has been gained, a seasoned investor may be able to perform several flips at once during favorable market conditions.
The most important aspect of a flip is knowing which strategy best fits the property at hand. Great success can come from doing the right amount of improvements, where as equally great failure can result from a “misdiagnosis” on both the high and low ends of the price bandwidth spectrum.
I will provide more details about this topic at the upcoming Find It, Fix It, Flip It Seminar at the Arizona School of Real Estate & Business on July 29th at the Scottsdale campus.
Isaac A. Kahn co-founded Palmyra Development Co. in 2013 and has been practicing real estate in the Valley for over 13 years. Isaac holds a Master’s Degree in Real Estate Development and remains very active flipping and renovating properties for his company. He regularly supports many investors with buying, selling and flipping hundreds of homes in Phoenix metro under his mentorship. Isaac can be reached at Isaac@ikahnproperty.com or 480-650-9073.
Find It, Fix It, Flip It Seminar
FRIDAY, JULY 29, 2016 – 9:00 AM TO 12:30 PM
Join Isaac Kahn, Palmyra Development Co., Jace Johnson, featured on “Property Wars”, Brian North, North & Co. and many other “flipping” experts. Each speaker will share best practices and proven strategies for success.
Credit: 3 hrs. Legal Issues