Do The Math
Flipping is a game of numbers. The obvious numbers are: the cost (what you pay for a property) plus the total expenses (what it cost you to repair, prepare, and market the property for sale) equals gross profit. Also if you are borrowing money learning how to calculate interest on loans is imperative. However there
are a few more numbers you need to be familiar with that can make or break your project.
You need to know:
- how to correctly measure square footage
- a breakdown of labor and materials for every job you hire a contractor for
- how to estimate time required for projects
Measuring Square Footage
Square footage is generally a length multiplied by width equation which seems simple enough. Yet many areas are not a regular rectangle and some have irregular shapes and other considerations. For example measuring square footage for carpeting to cover stairs, a round or circular area, or homes with triangular or erratic shapes can present a challenge. And when you are measuring for carpet, tile, ceiling panels or other replacement materials, paying for excess material that is generally scrap or unusable can add up and quickly eat your profit.
Divide irregular shapes into manageable areas to measure. Measure each shape, multiply width by length and then add the totals.
You can also estimate square footage using the subtraction method. Make a rectangle out of an area, measure the length and width, multiply, then measure any area that will not be included and subtract that sum from the total.
Estimating how long a project should take to complete or the labor required will take experience. While you can look up labor references for specific projects on the web, each situation is unique. For example fixing a leaky pipe could be a simple 1 hour job or if during the process the contractor discovers the pipe in question is also leaking inside a wall, the project becomes more involved and expensive. Having a contractor you can trust will help.
In the Bedroom
Another component where you can lose out on money is on bedrooms. In most markets more bedrooms usually equates to more property value which means more money in your pocket when you sell. If you see an opportunity to create an additional bedroom without a lot of cost, or perhaps restore a room that was an originally a bedroom that was converted to another use, this could generate a considerable amount of value.
Also make sure your bedrooms legally qualify as bedrooms. Many local codes require certain sized windows for a bedroom; this often comes in play in basements, and some codes require a closet in every bedroom.
Buying a property and finding out that a room does not qualify as a bedroom can cost you money. This loss can occur when you sell as you must state the number of legal bedrooms when marketing a house. Making the changes needed to make a bedroom qualify legally can be expensive also.
Hidden Damage that can make you Flip
No one can feasibly be prepared for every possible scenario when flipping real estate. There are a host of hidden surprises that await investors and flippers at every turn. Hidden foundation issues, mold growing inside walls, bats in the attic, broken underground sewer and sprinkler pipes, chimney issues, asbestos, lead paint, and termites can all be out of sight and cost thousands to repair or remove.
You can minimize surprises with an eye for inspecting property or by hiring a competent inspector that is bonded and or insured. You will still want to have a cash fund that can take care of surprises and to keep your projects from getting stalled waiting for repairs.
There are a host of legal issues involved when flipping property from your first offer all the way through the process including your sale.
Contracts and Loan Documents
Use the legal contracts for your state. Read everything and insert any necessary inclusions that cover you for particular situations. Have a real estate lawyer on retainer to review contracts when needed.
Zoning, a variety of rights, lot measurements, descriptions, and clear title are all property specific issues. Be sure you know how a property is zoned before you buy. Purchasing a
property with the intent of making money if you can get it rezoned can often be a costly mistake. Unless you are sure the property will be easily rezoned this can involve tons of government red tape and become a futile venture.
In many cases mineral rights can be valuable. Check your area and specific property records to see if mineral rights are relevant and of value.
Generally a survey is not needed when buying property however there are instances when boundaries or structure locations are an issue. If there are any doubts about property lines or code adherence a survey can be costly in many areas.
If there has been any recent (usually in the last 12 months) major construction on a property such as new garage, room addition, or new barn you might want to check local records to find out if permits were awarded for these projects. In some areas building without a permit is a violation that can have costly consequences even for a new owner. You do not want to purchase a property and inherent a battle with local government.
You also need to be familiar with time restrictions on re-sales when flipping. This is referred to as ‘the Seasoning Issue.’ There are laws about flipping and FHA-insured loans. For example an FHA or HUD insured loan does not allow a resale within 90 days or less after acquisition. You can read more about these laws here:
These are a few tips that can make all the difference in your pocket at a sale closing. You do not want to learn these lessons the hard way with sleepless nights and deals that go in the red. Most any property flipper will be able to share war stories about the time they lost money. Hopefully you can now steer clear of these issues!