As I look through expired listings (homes that didn’t sell within a specified time frame). for my area, I am amazed at how many beautifully renovated homes are still sitting on the market. For many of these homes, it comes down to price. If its not priced to sell, the house will sit. If you are new, you may be asking – why is this an issue? I’ll tell you why – Time is Money. While your flip is sitting on the market, you may be accruing interest on a loan, making monthly mortgage & utilities payments or delaying the start of your next project. It’s in your best financial interest to sell the property versus hoping someone eventually agrees to pay your price.
So how do you avoid this situation?
- Create a buyer avatar.
For every home you flip, you should have an idea of who the end buyer will be. This includes their age, income, education level, etc. You find this out by obtaining market statistics from your real estate agent. By knowing this information, you can tailor your renovations to make the home more appealing and affordable to prospective buyers. For example, a family may find value in a finished bonus room, where as a single person may not.
- Use a conservative ARV
The ARV is the after repair value. This is how much you can expect to sell the home for, after all of the repairs have been completed. While it’s great to hope for the best, you must prepare for a less than best outcome. By using a conservative number, you create a win/win scenario. Whether the home sells on or above target, you win. However, don’t expect cosmetic changes to help you achieve the ARV you want. While helpful, the ROI is much less on lower priced homes. Remember, the ARV is about more than the home itself, it’s also about location. Oftentimes, distressed properties are located in some of the least popular neighborhoods. Therefore, your ARV should be hyper local and that’s why its important to work with an agent who is familiar with the area.
- Be smart about your renovations
Sticking to a renovation budget is easier said than done. As investors, that is something you must be prepared to deal with. In addition to major repairs and cosmetic updates, your renovation budget should include padding for the unexpected. If everything goes as planned, great. If not, at least you were prepared for it. You also want to renovate according to the ARV. In the Hampton Roads area, homes priced below $150k are generally starter homes. They are usually 3 bedrooms, 1 bathroom, less than 1200 sf and are located in older communities. If you renovate one of these homes and put in granite counter tops, laminate flooring and stainless steel appliances – its no longer comparable to the other homes in the neighbor. While those features are nice, if a buyer is cost sensitive – you may price yourself out of the market. However, by re-directing some of the renovation budget into adding a half bath – you may stand a chance of selling at a higher price point. Why? Because it now has something that none of the other homes possess and it has a functional value that homebuyers are willing to pay for. However, if a home already has 2.5 bathrooms, adding another will not be as valuable. The higher the ARV, the more valuable cosmetic upgrades become. Why? As the price point goes up, it becomes less about “what can I afford?” and more about “what do I want?”
In closing, I would like to emphasize the importance of working with a real estate agent who understands your goals as the investor and is willing to partner with you throughout the process.
If you are interested in investing in the Hampton Roads area, feel free to contact me to get started.