Appraisers can be Your Flipping Advisor
February 26, 2019
Northwest Real Estate Services
With the advent of HGTV and a plethora of “Fix It and Flip It” shows, there are misconceptions galore regarding how to flip properties, and what it entails.
These shows feature a complete remodeling in a week or two, including the inevitable drama of an unexpected foundation problem or construction issue, and the big reveal at the end. However, there’s a false expectation of profit. Never is there a mention of how the remodel is financed, the challenges that arise, the expense of a down payment, or what collateral is required!
Appraisers may well have a bad taste in their mouths when the word “FLIP” comes up. In the recession of the ’80s, the news reported collusion between investors, lenders, and appraisers in flipping schemes. Tightened lending guidelines, appraisal standards, and greater attention to prior sale dates and prices in home flip scenarios by Fannie Mae and Freddie Mac were the result.
Yet flipping properties, particularly homes, serves a greater public good as older homes receive badly needed rehab and are restored to their former glory.
Appraisers Can Be Trusted Advisors in Remodeling Plans
Appraisers are well positioned to advise investors wishing to flip homes for profit. The reason: they know the improvements that should be made for maximum profit, while advising against upgrades that over-improve for the area and won’t see a positive ROI (return on investment).
Example: Installing granite counters and upscale cabinetry in an area or neighborhood where these home upgrades are not common may result in what investors want to avoid, trying to sell a home that is far and away the “best” in the neighborhood. Upgrades that may not return a profit will slow the marketing time and therefore holding costs of the project. A nice-but-average rehab more fitting for that neighborhood will sell much faster and in-turn yield a higher ROI.
The same can be said for adding to the physical footprint of a home beyond the typical size for the neighborhood. Economic principles tell us that the market value of an over-built home will be pulled down by the smaller homes in the neighborhood. That’s an error that a newbie flipper can easily make.
It’s not unusual for appraisers to become involved in flipping transactions by being asked to:
- Prepare an initial appraisal on the home “before” the remodel
- Prepare an appraisal “as complete,” based upon documented remodeling plans and costs provided by the lender
- Provide an estimate of time of completion for the remodeling
It’s not uncommon for investors to assume that they will get a dollar-for-dollar return for every dollar spent on the remodel. It’s often a shock when the “as complete” value shows that this is not true. This is because the contributary value of amenities or upgrades does not necessarily match the costs of materials and labor.
Financing or Funding A Flip May Not Be Easy
Although there are financing vehicles for flipping homes, it’s going to require collateral to get a loan. It’s possible that the lender may require additional collateral aside from the real estate itself, possibly the investor’s home or other real estate to secure the debt.
It’s also not uncommon for immature buyers to seek foreclosures as a cheap way to start flipping homes, without the funds to buy materials and pay labor for the work. The false assumption is that they can do the work themselves to save on labor costs for the project, often lacking the skills to accomplish those tasks. As a result, projects may go unfinished, or take more time and money than anticipated.
Take Some Sound Advice When Flipping
Do your research. Consult with a real estate agent or appraiser experienced in remodeling projects. Get quotes ahead of time for labor you can’t provide yourself, along with firm costs. And anticipate over-runs and surprises; remember that you don’t know what’s behind the drywall. It’s not uncommon to run into unexpected scenarios once construction begins.
An appraiser’s advice can be valuable to investors looking to make wise decisions as to what property to purchase with the intent of remodeling and reselling. Their expertise with regards to demand in the marketplace can guide the flipper down the right path to planning for profit.