This is all about crunching the numbers. It’s difficult to pinpoint the single most important aspect of flipping a house, but assessing the post-rehab value and the cost of rehab are critical.
When you look at a house, the first question you should ask is: How can I make this work.? Be open-mined to the possibilities.
If it’s not a slam dunk, let it settle for a day. After you’ve had time to let it settle, review it again.
Keep this in mind: This is not your house. You are not fixing it up to live in it. You’re fixing it up to sell. Rehab it for the neighborhood, not your ego.
If you are new to flipping and construction, get professionals to give you estimates for repairs. As you become more familiar with the process, you will be able to eyeball properties and make your own estimates.
Don’t be afraid to walk away if you stumble on problems that suddenly make the home more trouble than it’s worth. For example, if you can put your finger in a crack in the basement wall, the cost to fix this can add up quickly.
You may look at a house and, after fees, determine that you can clear $15,000. If that is the case, your decision should be predicated on such factors as your total investment in time and treasure.
For example, if you buy a house for $40,000, invest $20,000 in expenses, but can have it on the market in 30 days, you might think it’s a good investment.
However, if you buy it for $200,000 and have $80,000 in expenses, and it takes you four months to complete the rehab, then a $15,000 profit is probably not worth the investment.
Let’s say you’ve found a house at a decent price in a preferred neighborhood. Before you make an offer, you must walk through your checklist and estimate the cost of rehab.
Consider the big ticket items first.
- Integrity of the foundation – If there is paneling or drywall covering the basement walls, find a way to check them. A damaged foundation is a major expense.
- Mechanicals – furnace, air conditioner, hot water heater, water softener
- Electrical – If you buy an older home, you may have to replace old knob-and-tube electrical service. New electrical service is a major expense.
- Plumbing – Old cast iron pipes clog. Run water and flush toilets to see if water drains.
- Siding and gutters
From there, move to the detail work.
- Kitchens – Assume every house will need an updated kitchen. Depending on the house, neighborhood and degree of rehab, this can include new cabinets, counter tops, flooring, appliances, sink fixtures and lighting. It is easy to spend $10,000-$15,000 on a kitchen rehab.
- Bathrooms – Again, assume every house will need updated bathrooms. As always, the cost depends on how fancy you want to get. Are you going to use linoleum or granite on the floors? Is the shower going to be decorative tile or a plastic insert? Allocating $5,000 is a safe estimate.
- Paint – Interior walls and trim, and exterior walls and trim, basement walls and floor.
- Flooring – Carpeting, laminate and tile. If you have hardwood floors, get an estimate for refinishing.
- Trim package – Base trim and interior doors and hardware.
- Exterior – Doors, shutters, landscaping.
Note: Always add a minimum of 10 percent to your costs. You are going to run into unexpected costs, or you may change your mind and add upgrades.
An important point to reiterate here is this: This is not your house. You are not fixing it up to live in it. Your goal should be to toe that line between expenses and a quality job. You want to spend just enough money to make just enough improvements to entice someone to give you your price.
There are times when you will spend money to make an improvement that you will not recoup when it is sold. This is not bad if the enhancement makes the house more desirable and helps make a quicker sale.
You are not in the house flipping business. You are in the making money business.
Keep this in mind when planning the rehab of your flip.