It’s tough being me.
Each and every day I wake up and wonder – should I wear shorts and flip flops or jeans and dress shoes? Then I have to decide if I’m going to work at my office or at a remote location (i.e. Starbucks). By lunch time it’s do I eat the left over pot roast or splurge on the taco plate at Baja Fresh? And when I get home do I relax with a beer or glass of red wine?
So many decisions.
I have a similar dilemma whenever I purchase a house to fix and flip. Do I replace the existing 12” tile with 20”tile? Should I get rid of the laminate counter tops and install granite? Are black appliances okay or do I upgrade to stainless steel?
Most real estate investors I know struggle with knowing exactly how much, or how little, to spend on their rehab deals. That’s because if the house isn’t fixed up enough, it won’t sell. And if too many improvements are made the profit margins disappear.
So what’s the secret sauce? How do you find a happy medium? The answer is simple. Well, sort of.
Start by finding the most recent pending or closed comp for your fix and flip deal. Make sure it’s not a dumpy short sale or bank owned property. Do your best to find a normal sale (i.e. not distressed). Next, review the MLS listing and pictures for this comp. Drive by the house too. Go inside if possible (if it’s still a pending listing). Make mental notes of what was, and wasn’t done, to the property.
If the intent is to sell your flip for the same price, or slightly higher than the last comp, then guess what? You need to make identical improvements. If the plan is to sell your flip for significantly higher than the last comp (a risky bet because your deal may not appraise) then additional upgrades will be necessary.
Last month, I bought a fix and flip in an upper middle class neighborhood of Phoenix from a bank for $340,000. My Realtor, a very sharp guy named Bill Watson, brought the deal to me. He has an identical listing on the next street over pending for $450,000. So before I bought the REO we took a tour of this property (that’s his listing pictured above and to the right).
We decided that if I could remodel the $340,000 bank owned stinker for 30-40K and make it look like his $450,000 model-like home then money could be made.
At the time of this post I’m still remodeling the house. The market will tell me if I under or over did the rehab. There are a number of other factors that could affect the sales price too, like the time of year, landscaping, the earth’s gravitational pull, etc.
But at least I had a good idea where to start, and stop with the improvements. That’s a good feeling.
Marty – I enjoyed your piece. I run through a similar drill when I am in the process of rehabbing a flip. It’s very easy to fall in the trap of not doing enough, and sometimes you have to be careful not to let your emotions take over and you end up over-improving the property. As a Realtor I have easy access to comparable data and I also use my time in the field working with clients to my advantage by noting what materials and finishes work best and seem to be good alternatives from an investment/return perspective. I really enjoy the creative process of managing the decisions on which properties to buy, what to do with the properties from a rehab perspective, and then pricing the property to move in a targeted time frame. It’s all good, and it’s even better when you get that check at the closing table. Thanks for taking the time to put your perspective out there – It’s always great to read and learn from those who are actually executing in the real world and not just providing theory in the virtual world. Best of luck on your future deals!
Vito Boscaino
New Perspective Realty
Dublin, Ohio
614.571.9054
Vito, I often have to stop myself from over improving a house. I like granite, travertine and oil rubbed bronze fixtures. That stuff isn’t always necessary. Thanks for reading, and the feedback.
Marty, I noticed your advice to avoid comps that are short-sales or bank-owned (REOs?) I am curious about that, as I hear pros and cons about using them as comps for traditional sales all the time.
(Although…. I note your approach seems to be one where you find a recently sold comp in the condition you find desirable, then run numbers based on the goal of replicating that comp with your subject property. Intriguing.)
My approach for valuing a property is different, as I was trained as a listing agent handling REO properties for Wells Fargo. Naturally, I tend to evaluate properties using BPO (broker price opinion) techniques: 3 recently sold homes meeting basic criteria, and 3 actively-listed homes – to gage the competition and beat it.
I use short sales and REOs (in addition to traditional sales) as comps on grounds that, in this current market, they define the market and are the competition, and are therefore legitimate comparables.
However… I find very persuasive and compelling the arguments against using short sales and REOs as comps, because they note such statistically significant differences between sales prices, terms, days on market, etc. compared to “traditional sales” that they must be considered – even in today’s economy – a different market altogether (the “short sale & REO market”) and thus, not valid comparables to traditional sales.
I’d love to learn more about your thoughts on this topic!
Eric, the trick is finding an appraiser that is educated enough to know the difference between a normal sale and an REO/short sale. REO and short sales are “distress” sales and therefore sell for less. Most professionals will acknowledge this fact. As a fix and flipper I need to make sure that there are comparable normal sales in the area I purchase in AND that the appraiser gets this information. As you know this can be difficult because the buyer/seller/broker/lender aren’t allowed any contact with the appraiser under the HVCC.
A simple way to get an appraiser the information without breaking any laws is to make sure the appraiser contacts the listing agent for your flip. Most of the time the appraiser will contact the listing agent for access to the house. When this happens the listing agent has an opportunity to ask the appraiser for their contact info so they can send them a list of improvements to the home. In the same email include the comps. If you’re concerned that the appraiser won’t contact your listing agent then take the lock box off the house as soon as escrow is opened. The appraiser will have to call your listing agent then to figure out how to get inside the home.
Hi Marty,
Followed you over from BP. Seems like this deal should be all re-habbed by now. Any updates?
Best,
Keith
Keith, house is done and still active on the MLS. Demand isn’t as strong at this price point as we thought. Go figure. I’ll post an update after it goes into escrow. Thanks for reading!