10 things you need to know before you remodel for a sale.
There are so many shows on tv now that show you how easy it is to buy a fixer way below market, fix it up, and make a nice profit. If you have ever renovated a house, you know that the process will probably yank more tears then dicing a large onion. I have broken down some things to understand before you venture into the flipping world or undertake a remodel in your primary nest.
Most renovation shows are 30 minutes long and when they come across a “Big Issue”, it’s resolved before the commercial break. This is never the case. For example, if you accidentally tear down a load bearing wall and need to fix it, you have really opened a can of worms. Resolving a load bearing issue will require an engineer, possible permitting, inspections and custom pieces made to support the load. All of these take time and it could add up to much more than a month of lost time.
One item that bugs me out is the kitchen cabinet process. Joe contractor somehow gets a full set of custom cabinets delivered in 3 days that fit perfect and don’t require “adjustments”. The truth about custom cabinets,…. they can take up to 3 months to get and they never fit like a glove. Permit approval for your design must be completed ahead of time which pushes out when your cabinets can be ordered. Don’t make the mistake of ordering before your plans are approved. You don’t just ship them back if they don’t fit. They go into the bonfire pile.
Understand the permitting process in your area. You will make many visits to the permit office and some permits and inspections take a while.
General contractors make the big bucks for a reason. Sourcing your own tradesman to do the work is fine but understand that each trade has has a place in the timeline that their work is done. Some trades need to do pre-work before coming back to finish. Do floors go in before cabinets? The last thing you want is multiple trades working on top of each other, this will take more time, not less. Do your research. Ask your trades how long it takes and how many visits are required. Build yourself a calendar in G Cal and plan it out.
3. Accidents happen
If your painters do a beautiful job spraying your kitchen before the cabinets come, expect that your painters will be back for a full day doing touch up. Electricians break plumbing and plumbers break electrical… This is why you factor in extra time. Taking note to Scheduling in the above section will help to cut down on breakage.
Your architect will not be purchasing perfect accessories to match their vision, so take this into consideration and have an interior designer give you some feedback when you are in the planning stage. If you buy furniture ahead of time, ask for a delayed delivery so you don’t end up with an over sprayed couch that you were storing in the garage.
5. Living in a construction zone
As a bachelor going through a remodel while living in it was somewhat manageable. Putting a family through the process is a different story. If you are buying a home to move into, make an attempt to rent back the home you are moving our of for 2 months. You will be making double payments but the time savings and hassle factor will be worth it. Start your design process when you go into escrow on the new place.
Consult a CPA when flipping a home or moving in. There are tax liabilities for flipping that can be offset with 1031 exchanges but there are rules. Talk to your CPA!
7. The nicest house on the block
If you have a grand mansion in a blue collar neighborhood you will be hosting lots of parties but your appraiser will not be able to justify what your home would bring in a more upscale neighborhood. Don’t put $10,000 counter tops in a starter home. Consider keeping square footage and fixtures within the bounds of the neighborhood.
8. Stay neutral
Your favorite look might be a trendy mosaic tile or a mismatching items for style. Don’t do it, stay away from fads. Buyers go through a home and imagine a blank canvas with their touches added. It can sometimes be hard to get over finishes or colors that have a certain taste. Don’t lose a buyer because of accents you added.
The flip shows will show you a handsome profit and they don’t tell the whole story. Much of the items supplied during a tv show like appliances, materials and labor are supplied by sponsors. you will pay much more to do the same. Also consider the expense of selling a home. 5-6% goes to brokers to sell the home, credit card interest should be factored in and your own time should be assessed to know what you’re worth. It might be fun to flip a house but you’re worth more than $5 an hour to accomplish the task.
10.What doesn’t work:
Purchase Fixer $300,000
Fees to purchase $4,000
Renovation expenses $60,000
Mortgage and utilities during rehab $6,000
If you sell the home for $400,000…
You are paying roughly $24,000 to sell the property
Days on market. Every 30 days costs you $3,000.
Bottom line. In this scenario, you are negative if the sales process takes more than 60 days, ouch…Use this equation every time.
There is money out there to be made. Go find your perfect home or investment property, but keep in mind the big picture.
Realtor and Investment expert.