Denver’s booming housing market has led to a resurgence of flipping activity with investors taking advantage of opportunities to make 10-50%+ returns on their money and fast. However, finding those opportunities can be a daunting task even for the most seasoned investor. In this competitive market, where and how do investors find properties that have a good equity margin and properties that they can turn around fast? I believe it comes down to careful preparation, planning and the ability to act quickly and aggressively when the opportunity arises.
First and foremost, the serious investor must have their financing lined up and/or the cash available to purchase a potential fix and flip the moment it becomes available. An investor who doesn’t have their financial ducks in a row just isn’t a serious investor in my opinion. In this market no one has the time for tire kickers, especially on investment/fix up properties which often sell in hours and where multiple offers are the norm. Every investor must have a budget for what they can spend all-in (including the purchase, improvements and holding costs) BEFORE he/she starts looking at properties.
So where does an investor find a good fix and flip once they are financially able and ready to take the plunge? Start by calling us as we are always looking for the best deals are and have a vast network of clients, agents, banks, friends and family who share these type of properties with us when encountered. We literally scour the MLS and other resources on daily basis for our clients. We have to cast the net widely in this market to stand any chance of finding a home or condo with enough equity to make the fix and flip plausible. There are several types of properties that may fall in the net and I wouldn’t say any property is “better” than another. One of the biggest misconceptions of the general public is that “foreclosures” or “short sales” are good deals… while sometimes true, this often isn’t the case. Many of these properties require too much work to get them in livable condition – every dime of equity is consumed just bringing the home up to an “average” condition for the neighborhood and at that point, the margins become too thin. I also believe that while some locales are hotter than others, there are opportunities across price points and in virtually every neighborhood in the Metro area.
Location aside, what type of property should you, the investor, pursue? Well, it’s really up to you and a lot depends on your budget. I’ve represented clients who purchased $100K condos as estate sales where those properties had a solid 25-50% equity margin. Since we only dealt with repairs/remodels within the confines of the condo (much simpler than a single family home), these investors got in and out quickly with minimal expenditure and made $10-$50K cash with minimal risk. On the other end of the spectrum, I’ve had clients purchase $400-500K homes in Wash Park, sink $100K in repairs into them and sell them for $700K+. Sure these properties sat a bit longer (think holding costs) and the overall risk was much higher, but in almost every case these investors walked away with a tidy sum when all was said and done.
Of course finding and buying the ultimate fix and flip can be a daunting task! In most cases, a home with “good bones” that has 20%+ equity in it will be a feeding frenzy for investors. However there are plenty of tricks I utilize with my clients to increase their odds of winning in competitive situations. Once we have a good handle on what we think the house is worth in its current condition and its potential future resale, I always write escalation clauses into my clients’ purchase contracts. If you recall from my previous newsletter, I include language that states we will increase our offer above any competing offers by $1000 increments and also put a ceiling on our bidding. There are too many investors buying overpriced fix and flips in this market, so I am always careful and make sure we preserve our target equity margin even with our “highest and best” offer.
Assuming you are the winning bidder, now what happens? In EVERY case, the seasoned investor fully understands what he/she is getting into BEFORE they close on the deal of the century! You would be amazed at the number of fix and flip homes I have seen or represented buyers on where major repairs weren’t accounted for or simply missed or overlooked. By looking at a property on paper, as an agent I can quickly determine its potential value once fully remodeled – that’s easy! The key is understanding exactly how much money it will take to fix up that property and how long it will take to repair, market and sell it. Thorough inspections and cost analyses are critical for every property. A couple years ago I had a client who purchased a fix and flip property in Park Hill. The investor on that property neglected to inspect the sewer when they bought the property and upon our inspection, we discovered the entire sewer line needed replacement at a cost of over $15,000! Guess what, that ate up most of the investor’s margin on the property and it would have only cost $99 for them to scope the sewer before they bought it! Regardless of the type of property including “as-is” sales, almost every seller will allow you to inspect the property and terminate as a buyer if the property has too many issues. Don’t be afraid to exercise your right to terminate if necessary!
Although there are potentially a million variables when pursuing the next opportunity, I find that the ideal fix and flip is a home or condo that:
1) has a 30%+ equity margin in it,
2) is structurally sound,
3) major mechanicals including HVAC, electrical and plumbing have had some updating and
4) the home requires mostly cosmetic work (no major additions, tear-downs, etc. required).
Repairs should take 30-60 days with the goal of selling within 90-120 days of the initial purchase. Otherwise there are just too many variables in the market over longer periods of time. Obviously there are many other aspects that come into play on a fix and flip as well (reliable contractors being one of them) and frankly, I don’t have the time to discuss all of them here. However, I would be more than happy to discuss every one of them in detail with you as my investor client and help you pursue YOUR ultimate fix and flip!