This question is a good one.
Often times, homeowners and property heirs are teased with the POTENTIAL huge profits of flipping their own property instead of selling to an investor. Sometimes selling to an investor feels like the homeowner is getting the shorter end of the stick. Thoughts arise like…I should just rehab my home and put it on the market and I will make much more money. The possibility to make more money after flipping is just that…POTENTIAL. This blog will address some of the factors associated with choosing to flip yourself.
Flipping Costs Money…PERIOD!
If you have a significant amount of cash or an available line of credit, you may be in a position to pay for your rehab. Generally speaking, smaller rehabs range on the low end around 65K – 100K. This takes in consideration that your home will be completely renovated from top to bottom and is approx. 2500 square feet or less. These rehab estimations do not account for basement dig outs, additions or conversions. The days of using the following proverbial prophetic phrase... “I’m gonna put 30K in it and have a nice rehab” is over! If you have an extra 80K available to flip you may be positioned with enough cash to consider completing the renovation yourself.
Flipping Comes With Liability…FOR SURE!
Renovating a home is not as simple as carpet and paint in most instances. In order to get the POTENTIAL huge profit which drove you to enter the flip arena in the first place, you most likely will need complete cosmetic and noncosmetic alterations. One of the most typical alterations you will need to complete to get the biggest bang for your renovation buck is the opening of your main level floor plan. Thus you will need an architect to provide you with architectural plans. In addition, you will likely need a structural engineer to determine loads for the typical newly installed island cabinet and granite additions, load bearing wall deletions, structural deficiency repairs, etc. In the event you do not have solid consultants on your team, your renovation may have a negative impact on you and your future buyer. If you sell a home that causes damage to human life, as a result of something falling on the occupant or building materials giving way due to your negligence; even after you sell, you can be prosecuted and face jail time. Ignorance can get you into a ton of trouble. Deceitful, money hungry, fly by night, fake residential developers have put a bad taste in the mouth of prosecutors and if you appear to fall into this category (the category of a person that has taken short cuts to make a fast buck) it could have devastating consequences.
Flipping Does Not Mandate That You Are Licensed...HOWEVER
Because you are the homeowner, you do not need a license to renovate your home on a small scale. However, it behooves the home owner to obtain the services of a contractor that has a general contractor’s license to play it safe if you plan on completing a significant amount of repairs.
This license in the state of MD your contractor should have obtained is called the Maryland Home Improvement Commission (MHIC) License. If you are adding a bathroom, demoing a wall, increasing the electrical panel size or completing any number of renovations to your home you will need to pull permits. In order for a permit to be pulled, the homeowner will need the services of a Master Mechanical, Electrician or Plumbing Contractor (MEP). Often times homeowners will take short cuts out of ignorance. As mentioned above, this too can be disastrous.
The Home Inspection Is Coming!
If you have made it this far…AWESOME!!! Your rehab may look great at completion. You probably think you are finished…and once you obtain a contract you will think you are home free……don’t fool yourself. Your rehab may be lipstick on a pig and you just don’t know it yet. Once you are under contract, the potential buyer’s home inspector will rip your rehab to shreds checking every minute detail of your newly renovated home. Special Note – EVEN IF YOU PULLED AND HAVE APPROVED PERMITS YOU CAN AND WILL STILL GET WACKED ON THE HOME INSPECTION UNLESS YOU KNOW WHAT YOU ARE DOING. You can pass with the county basic inspections and fail miserably with the FHA Home Inspector. This happens routinely to new investors and homeowners attempting to flip their private residence. The home inspection will likely reveal many things; including but not limited to, Is there proper insulation, arch fault circuits installed, proper venting in the attic, lap and sealed vapor barrier in the crawl space, termite treatments completed, mold remediated and tested, drain tile with mirror drain installed, fire block and/or fire-stop in the basement framing, shut offs for all hose bibs, permits stamped, plans visible, chimney liner replaced, correctly sized duct work, etc. These aspects of the rehab are line items that you probably did not even consider as you grinned with the feeling of accomplishment at your gleaming hardwood floors, beautiful granite counter-tops and stately kitchen cabinets. Needless to say, you will be floored when your inspection reads with more red ink than black.
You will now be tasked with rectifying all of the mistakes you did not know about. In many instances you will need to rip open numerous walls to make repairs or at a minimum, pay for all of the costly items you did not take into consideration. Your contractor will likely have already been paid in full and will not want to take on these additional
punchout items so it is on to the next contractor to go behind your first guy to complete these compulsory renovations. After needing to complete many repairs your potential buyer will likely have retracted their offer as they do not want to buy a home that was completed by someone that either took shortcuts or was not seasoned. Only after a significant amount of time where you were forced to complete the inspection repairs will you be back on the open market hoping to find a buyer. Days on the market are higher and potential home buyers question why the house is still for sale after such a long time.
The longer a home is on the market, the less likely you will receive your POTENTIAL lots of money. After spending the time it takes to manage an 80K rehab, obtain the services of a realtor and market your home, hopefully it was worth it.
For the novice homeowner, if an investor offers you a fair offer (WE WILL COVER WHAT A FAIR OFFER IS IN OUR NEXT BLOG POST) I have a saying…TAKE THE MONEY AND RUN! You will be glad you did.
Written by Ckori Jones Sr.
BroCAR Renovations Owner
BroCAR Properties Managing Member