Feb
26
Get Emotional About House Flipping Profits
February 26, 2007 |
We’ve already talked about the primary source of house flipping profits, which is buying properties for less than their actual value. The second weapon in the flipper aresnal is another obvious one, which is making repairs and renovations on homes that increase the potential selling price.
Although that seems straightforward, it actually bears a closer look. There are actually a fair number of moving parts to that equation, and it’s not simply a matter of doing anything to increase the sale price when you unload the property. Spending $5K on certain repairs to increase the selling price from $100,000 to $105,000 isn’t increasing your bottom line (although there could be some value in those repairs if they speed up how quickly you can sell the house, of if they’re a basic necessity such as a new roof or furnace), so you can’t just dwell on the higher sticker price and ignore the costs involved.
If you’re doing some of the repair work yourself, you also have to factor in your labor costs. If it takes you 50 hours to re-tile that bathroom, are you really “saving” the $750 that it would have cost to have a professional do it for you? If that tile work you do increases the selling price by $750, is that extra money really “profit”?
Complicating things even further is the fact that just because a house is in need of obvious repairs, it doesn’t mean that making those repairs will produce a profit. If the seller correctly discounted their asking price based on the repairs, you’re not necessarily extracting extra profits by making those repairs. On paper, you only buy the house at a discount idue to disrepair if the seller incorrectly judges the expense involved in making assorted repairs; if the seller judges that cost accurately, it’s a wash.
The important part there (and the real point of this) is the “on paper” part, which could also be substituted with “In a vacuum”. That logic starts to fall down pretty quickly, as buying and selling homes almost never happens in a vacuum, and instead involves much emotion, on the part of both parties.
As a flipper, what you’re really looking for are properties that need repairs in certain emotional hot spots, which can produce a profit in excess of the actual cost and labor you put into fixing them. If you can do these repairs yourself, even better, as that magnifies your profit even more. Emotional profits happen when you spend $1 in a certain area to produce an emotional response from a buyer that leads them to want to pay you $2 in return
What exactly are these emotional hot spots, then, that flippers can focus on to increase their profits? Let’s look at some repairs that both do and don’t falling into that category.
1) Kitchens and bathrooms: You can’t throw a monkey at a house flipping show on television without hearing someone talk about how important updating and renovating the kitchen and bathrooms are, as far as getting bang for your buck. Is there some special vortex in those areas of the house that causes potential buyers to lose their minds and whip out their checkbooks?
Nope. The reason they can make flippers money is that they often voke an emotional response with buyers, especially those who are either looking to buy their first home or upgrade to a nicer home. You’re appealing to that voice in their head that’s whispering “I’ve always wanted granite kitchen countertops, just like in fancy, classy houses” or “I’d love to have a bathroom with a double sink vanity and tile shower, instead of our cramped little tiny bathroom I can barely turn around in,” or “I’m so sick of living in houses with cheap vinyl tile on the floors of the bathroom and kitchen.”
If they’re using words like “want” and “love”, you’ve done your job. The great thing about kitchens and baths is that some of the upgrades that resonate with buyers actually aren’t expensive or hard to do yourself, such as installing ceramic floor tile, updating fixtures, and refinishing kitchen cabinets or vanities. Every $1 you spend here can easily return $1.50-$2.00, especially if you can do some of the labor yourself.
Upgrading kitchen appliances falls into this category, too, especially with stainless appliances, but this is usually more of a break-even proposition, as far as getting back $1 for every $1 you spend. It’s usually money well spent, though, as long as you correctly judge the market and the house. Putting granite and all stainless appliances in a starter house in a lower income area isn’t smart, just as putting Formica countertops and a used oven in a higher-end home is equally dumb.
2) Roofs, furnaces, and water heaters: These are not sexy upgrades. In theory, people like it if they’re brand new, as they know they won’t have to worry about replacing them for many years, and you’ll often recoup most of your expense from making repairs in these areas.
You’re just not going to get any emotional profits out of them, as very few buyers get insanely excited about something that’s considered a basic necessity. You still need to make the upgrade, but for every $1 you spend you’ll likely get back only .75-$1.00. You also typically have to hire out these jobs so there’s no room to save money by doing the work yourself.
3) Painting walls, ceilings, and siding: Paint is the flipper’s best friend. Color is a great way to evoke emotion and it’s relatively cheap and easy to apply. There’s really no excuse for not painting your flip properties yourself, as it’s one of those areas that is expensive to hire out but requires no special skills or abilities (which are relatively rare in the world of home renovation and should always be embraced when available).
Putting color to work for you throughout the house is a great way to spend $1 and get back $2 in return, especially if you do the painting yourself.
4) Plumbing and electrical: Not sexy. These can kill a flip as they’re not only a necessity that’s hidden away, but hiring an electrician or plumber to handle the reapirs is usually very expensive. If you tell a buyer that all the plumbing and electrical has been updated they’ll nod and say “Cool”, but no one is going to gush “OH MY GOD I’ve always wanted to leave in a house with updated plumbing!”
I’m just guessing here but I wouldn’t be surprised at all if you only get back .50-.80 for every $1 you spend on plumbing and electrical repairs.
5) Landscaping: This one straddles both worlds. Some basic landscaping is expected by most buyers and is simply part of the price of admission, such as a decent lawn, trimmed trees, etc.
Other landscaping can be more emotional, such as adding a patio or deck to a plain, empty backyard. Lots of buyers see those and think “Ahh, I’d love to finally have a spot to relax after work in the backyard,” or “It’d be lovely to eat breakfast out on the deck in the morning,” or “It’d be great to be able to have family over for a cookout.”
Another plus here is that landscaping and deck materials are reasonably inexpensive and are projects well within the capacity of most flippers, as far as doing the work yourself. Yeah, it’s a lot of time and sweat equity, but it doesn’t require an engineering degree or advanced skills other than being able to push around a wheelbarrow or use a level and hammer.
Basic landscaping is usually about break-even, but adding a simple deck or patio can often return $1.00-$1.25 for every $1 you spend.
6) Windows and doors: With the exception of the front door, windows and doors aren’t sexy, plus they’re pretty pricey. Yes, putting in all new windows is a nice feature to point out to buyers, but in most cases the new windows are, in the end, functional, and not something that causes buyers to do backflips of joy. Remember, the buyer didn’t see the old, decrepit windows that were there before, so they’re not goingto be as wowed as you are when brand-new, shiny windows are in place.
You’ll usually take a small hit here, as far as getting back .75-.80 for every $1 you spend on new windows and doors.
7) Flooring: Depending on the individual house, this one can get emotional and profitable. Refinishing hardwood floors in older homes that had previously been covered by carpet can be a huge source of profits, especially if you do the work yourself. (Don’t laugh, it’s dusty, boring work but well within the capabilites of many flippers, if you’re careful and patient.)
Laminates are also a good choice, especially for starter homes, as they evoke the emotional appeal of hardwood floors but at a fraction of the cost and are, again, within the capabilities of most flippers to install, with some patience. Ceramic tile is another nice option, especially to replace vinyl tile in bathrooms and kitchens, as it’s inexpensive and not that hard to install.
While it’s hard to get much emotional bang from replacing old carpet with new, neutral carpet, you can get a lot of bang for your buck if you’re refinishing hardwood floors or upgrading from vinyl to tile.
8) Outlets, switch plates, and hardware: These are actually a great source of flipping profits, despite the fact that you’d think they were tiny little details that wouldn’t budge your bottom line much.
I’m always amazed at how many houses I see for sale where people don’t even bother to take the thirty seconds (and $.50 or so in expense) to screw in a switchplate for a light switch that’s completely missing one. Ditto for leaving old, painted over plugs in outlets, outlets sitting there bare, etc.
Will updating these make you thousands of dollars? Of course not. But in the realistic world of house flipping, you’ve got to eke out profits anywhere you can. You should be overjoyed at finding a house where you can spend $100 and invest an hour of work for a return of $200 when you sell the house. Making $100/hour is, in my book, a pretty nice salary and return on investment. If your inclination is to say “Ahh, screw it, it’s just $100″, then you likely should stick to watching all of the house flipping shows on television.
Comments
4 Comments so far
Recently found you’re blog and I wanted to say that I’m enjoying it very much. “Flipping” has interested me for awhile, now. I hope to tackle my first one this year. You have very solid points and I can tell you’ve put much research into this prospect and appreciate you sharing the expierience. Best of luck to you!
Another great post! I love your analytic style. It would be cool to see you tie in these flipping generalities to your specific property (and future properties). Which of these points does S Main have going for it?
[…] Get Emotional About House Flipping Profits […]
Loving this blog!….
I was wondering. I found a 1500 sq.ft, 2/1 house in foreclosure in an upscale neighborhood in Miami for a great price. Of course, it’s priced to sell and when I drove by, I saw why. There is roof damage. I have flipped one place before, which came easy, but I was wondering, would I be biting more than I could chew if I tried to flip this place? Asking price is at 129,000, and comps in the neighborhood are between 270 and 300k for the same style. I’m thinking budgeting 20k for a brand new roof and 30k for the remaining repairs. The numbers make sense, but I do know Murphy loves to visit at times like these. The last home sold in the area was in mid July at 290,000. Should I risk it, or play it safe given the current market conditions? Using hard money doesn’t allow me the option of holding. I’m being told its too risky, but I say, the numbers speak! Am I getting emotionally attached!!