In the 2000s, house flipping—the process of quickly buying and selling a home to make a —came to symbolize an era of ill-gained profits. The heyday of flipping was just before the collapse of the real estate market and came as investors sought to take advantage of a mortgage and housing industry run amuck due to lack of financial oversight. House flippers in those days rarely did anything at all to improve the homes they were buying and selling because real estate prices increased so rapidly that merely sitting on a house for a short time could lead to notable profits. Mortgage loans were approved so automatically that adequate inspections were rarely done, and flippers could enjoy their profits without doing much of anything. Substandard homes with serious problems were often flipped to unwitting homeowners who inherited a host of problems in their eagerness to get into a housing market that seemed to have no direction but up.
House Flipping Today
Real estate investors today face a different environment for quickly buying and selling residential real estate for a profit. The mortgage loan approval process has thankfully become more responsible, and unqualified buyers are less likely to be taken advantage of by unscrupulous sellers and enders. Housing prices, after the nosedive of 2008 to 2009, have settled into more predictable and sustainable increases. All this means that investors seeking to flip a property today will likely need to invest in some kind of remodeling or improvement to the home in order to make it competitive in the market.
There are, of course, instances, where a home is so substandard that major upgrades are necessary just to make a home sellable in the marketplace. Loan approvals are now contingent on fairly in-depth inspections, and owners of a substandard home almost always will have to bring these homes up to code in order for the property to qualify for a mortgage loan at all. An investor who is in the flipping business usually is privy to this at the time he or she buys the property, and already understands that major work is necessary in order to sell the home. While surprises sometimes occur, generally speaking, the flipper knows when a property will require major work. Truth-in-house disclosures and purchase inspections should make such surprises rare.
But what about when you have invested in a property that is basically sound, and you simply want to make the improvements necessary to command the best selling price while spending a modest amount of money? In other words, what work should you do to maximize your profit potential? In this case, the improvements usually fall into the category of "light remodeling"—projects that serve mostly to improve the appearance or practical function of your home rather than affecting the structure or mechanical systems. There is a wide range of improvements that fall within that category. So just which projects are the best investment if your goal is to maximize profits for your house flip?
First of all, when flipping a house it is best to approach home improvements from an ethically sound foundation. For example, using foreign-made drywall prone to mold, or hiring unlicensed plumbers or electricians is not likely to help your reputation as a good business person.
When a house is remodeled just enough to pass the "smell test" from the buyers and inspector, but not good enough to last long-term, it has to be considered a bad house-flip. But when you lightly remodel the home and everything is made transparent to the buyer, house flipping becomes what it is supposed to be: the honest buying, fixing, and selling of homes for a profit. As long as your cost-saving remodels are clear and obvious, it is not a dishonest house-flip.
Tips for Profitable House Flipping
Here are 10 tips that are most likely to maximize your profits when buying and selling a home.
Work with Familiar Contractors
It is a rule of thumb in the building trades that contractors offer deals for a large volume of work. If you flip homes regularly, the carpenters, electricians, plumbers, and other contractors can grow familiar with your needs and budgets, and can work with you when your budget is tight. Further, working regularly with the same contractors can help assure you that the quality of work is good. This strategy works best if you are an established flipper with a track record, but even newcomers to house flipping can establish new relationships with good contractors if they present themselves as honest business people.
Time is money in the house flipping business. Profitable house flipping requires turning the property over quickly—preferably in a matter of a few weeks or at most a few months of purchasing it. Most investors aren't in a position to tie up money on more than one property at a time, and you cannot fund the next purchase and fix-up until you sell the current property.
Focus on Kitchens and Bathrooms
Kitchens and bathrooms where most prospective buyers focus their attention. Virtually all buyers go immediately to the kitchen when the lockbox opens and the real estate agent begins the showing. Next stop: the bathrooms. If you choose only two spaces to remodel in a home, chose the kitchen and the master bathroom.
Improve Your Kitchen Lighting
Dim lighting in the kitchen does little to show off your new remodels, and it can make the space depressing. It may even make potential buyers think you are trying to hide something. Best of all, kitchen lighting improvements don't have to cost a lot.
- Go super-cheap by increasing bulb wattage of existing fixtures (safely and within manufacturers' specifications) with LED bulbs.
- Changing out those dull center-of-room ceiling lights with recessed lights.
- Pendant lighting will always be popular in the kitchen because it brings the light source closer to the work surface.
Refinish or Reface Kitchen Cabinets
Cabinets can comprise 50 percent or more of your kitchen's wall space, so make them look good. At open houses, real estate agents tend to hang out in the kitchen. Buyers start in the kitchen, loop around the house, and end up in the kitchen again to continue the conversation with the agent. In the room that is most important to remodel, the cabinets are the most important feature within that room.
But rather than spending $50,000 on new cabinets (yes, you can easily spend that much), reduce costs by:
- Refacing existing cabinets.
- Strike a balance between attractive and rock-bottom cheap with self-installed, ready-to-assemble (RTA) cabinets or IKEA cabinets.
- Consider painting the cabinets. In certain kitchen styles, painted cabinets are entirely appropriate, and will always look better than dark, dingy cabinetry.
Expose (or Install) Hard Floors
Hard flooring, especially solid hardwood, is a trend that will never go away, and it is more popular now than ever. This makes it hard to understand why so many great hardwood floors were covered over with carpeting in the 1980s and 1990s, but if nothing else, this trend protected those floors for many years. If you flip up a corner of carpet on your property and discover solid hardwood flooring, you're in luck. Remove the carpet and sand the floors. The expense is modest, and the payback will be great.
Don't have hardwood underneath? Install engineered wood flooring, laminate flooring, ceramic/porcelain, or luxury vinyl flooring (LVF). These days, any hard flooring material will be seen as a great improvement over carpeting.
Kitchens are the rooms best suited for hard flooring, preferably ceramic/porcelain, engineered wood, or luxury vinyl flooring (LVF) planks. Bathrooms should always have water-resistant hard flooring such as LVF, ceramic tile, or vinyl sheet flooring. It is shocking how often homes will have carpeting in the kitchen and bathroom, and it is always a turn-off for prospective buyers. In other rooms, a good-quality laminate flooring installed in place of old carpeting is a great investment. If the carpeting is in good condition and is a pleasing, neutral color, it is acceptable for living rooms and bedrooms, but if the carpeting is old or discolored, replacing it with a hard flooring will be a good investment.
Focus on Paint and Hardware
The cosmetic touches make a huge difference in how a house presents to prospective buyers, and it is almost always money well spent. A complete interior paint job, new door and cabinet hardware, and new light fixtures can be completed for a relatively modest cost but can cause buyers to eagerly compete to buy your property. Keep styles and colors relatively neutral. Bold colors and dramatic styles may appeal to a small number of buyers, but will likely turn off more of them.
Add Closet Space
A relatively inexpensive home improvement that can have a big impact is to build in additional closet space where it is logical. In a big spare room, creating a closet where none exists can allow the room to reasonably serve as a bedroom—a huge plus when presenting a home for sale.
Work on the Curb Appeal
Buyers won't even enter the house if the outside turns them off. All that talk about curb appeal is 100 percent accurate. Fair or not, psychologists have found that it's human nature to assign superior qualities to a person with a beautiful face. It works the same way with your house: If its facade (or face) is stunning, potential buyers will be far more forgiving of deficiencies within the house—up to a point. New exterior paint cannot make up for sagging floors and broken windows, but it will soften the edges of poor interior paint or outdated appliances.
Most importantly, stunning (or at least acceptable) curb appeal will get those buyers through the front door.
- Focus on the entryway. A new door—or even a freshly painted one—can make a huge difference in how the home presents.
- Take care of the lawn. A weedy lawn with bare spots will ruin the appearance of the best home. Hiring a lawn service immediately after you buy the home, as your improvements are just starting, is a good idea. Make sure to keep it fertilized, and mow it before any showing. Keep hedges and other shrubs nicely trimmed. Lawn work is one area that you may be able to handle yourself to save money.
- Shutters can be remarkably effective at improving curb appeal for minimal cost.
- Change out the exterior lighting fixtures and hardware. New porch light fixtures, door handles and knocker, and a new mailbox can make a home present much better from the street.
Do Some of the Work Yourself (If You Are Competent)
If you've been flipping homes regularly, you may have some of the necessary skills to do some of the home improvements yourself, and any money you save by not hiring contractors contributes to the profit margin. But this applies only if you are competent and are able to do good, safe, professional-looking work, and can do it in a timely fashion. There is no profit in taking months to complete a project that a pro can do in days, and a bad DIY job may actually hinder your ability to sell the home. Poorly fitting miter joints on trim moldings or belt-sander marks on a refinished hardwood floor can repel buyers without them even realizing the reason why.
Forget About These "Improvements"
Once thought to be great investments, some improvements will do little to wow buyers, and you're unlikely to get your money back through a higher selling price:
- Slab granite countertops: Not only does the cost of slab granite drive up the total cost of your house-flip, but designers say it's a fad that is long gone, largely replaced by engineered stone (quartz) as the trend of the moment.
- Piano finish floors: Piano finish flooring—that super high-gloss—does not appeal to a broad range of home-buyers. Stick to conventional lower-gloss finishes.
- Plank flooring: Wide-plank wood flooring is beautiful stuff, but its high cost usually will not be returned upon sale.
- Hot tubs: This is a trend that has come and gone, and for prospective buyers with small children, a hot tub on a deck or patio can be a liability. If the home has a hot tub that is in good shape, clean it up and have it serviced. Old hot tubs might be better removed.