With the serious shortage of inventory in Silicon Valley, it harder to find a property let alone a fixer upper that you can use for flip for profit. But there are still gems in some pockets of the valley that are ideal candidates for remodeling.
Let’s assume you were lucky enough to find a Fixer Upper from REOs or Short Sales or at the Court House foreclosure auction. Below are the Top 5 mistakes that investors make when they buy fixer uppers for flips:
Determine Rehab Costs: Even savvy flippers under-estimate their cost of flips. Make sure you allow 10-15% for contingencies since you will run into repairs that you were not anticipating. Also, make certain you include the cost of the delays associated with securing Building Permits from the City where your fixer upper is located.
Determine Holding Costs: Some towns have horrible Planning Commissions who will take their sweet time to review your remodeling projects. And there is no guarantee that they will approve it even if you meet ALL their requirements. Unless you are buying cash, you need to allocate about 8-10% interest for your loan from a Hard Money Lender in addition to points they will charge.
Determine After Repair Value (ARV): Calculate the resale value of your Fixer Upper before buying it. property. This will also help you avoid over-building your immediate neighborhood. You can will need help from a realtor to find you remodeled comps that have sold in the last few months with similar floor plan, age, and proximity to your investment property.
Commission Costs: Commission costs have to be part of any investors calculations and can NOT be avoided. You will need to allocate at least 3-4% of the After Repair Value to sales commission. We offer our investors deep discount on listing their fixer upper after they have been remodeled since they offer us repeat business.
Determine Maximum Offer Amount (MOA): This is critical step that gets some investors into trouble since they get greedy and emotionally attached to their fixer upper flip. You need to be realistic in determining how much you should offer to purchase a fixer upper. Use your Repair, Holding Costs and your ARV you can use the following formula to determine your MOA.
MOA = (ARV x 75% ) – Total Cost
For example if you are purchasing a fixer upper for with ARV = 2,000,000 and your repair costs are $400,000 you should not be paying more than $1,10,000 to purchase this Fixer Upper. Do you use a different formula that has worked for you!?
Bottom line is that even most savvy flipper will make mistake and get emotionally attached to a project. If you can answer the above 5 questions, your odds of success will improve significantly.
Finally, you can review our post on estimating rehab costs of a specific repairs for Fixer Uppers and let us know how we can help you with your Fixer Upper projects.