Are you considering buying a foreclosed home for a fix and flip in the near future? Fix and flips are suitable projects for the current economy; after all, it’s possible to acquire foreclosed homes anywhere from 10-40% below market value. While flipping a foreclosed home is an appealing prospect, it’s important to understand when it’s a good investment and when it is not.
In order to make money with a fix and flip investment, it’s essential to control your costs and stay on deadline. Here are some tips to assist you in your efforts if you’re considering buying a foreclosure.
Gather Relevant Information
The potential profit from a flipped foreclosure can entice the most experienced real estate investors. However, in order to purchase a foreclosed home, a real estate investor must educate themselves on several aspects of real estate investing including financing investment properties and in-depth knowledge of the local housing market. It’s critical that real estate investors have the following knowledge before jumping on the bandwagon:
- Determine what kind of properties are prevalent and what type of properties would sell fast in certain areas by researching the local areas and neighborhoods surrounding foreclosed homes.
- Be willing to negotiate with everyone. Negotiation is critical for cutting costs in fix and flips. Real estate investors should be skilled in negotiation to ensure they are receiving the lowest possible price for everything (without cutting corners, of course).
- In order to consider buying a foreclosed home, you will need to have your financial matters in order. Find out the most effective way to finance your foreclosed home purchase while maximizing the profit at the end of the flip. Financing options may include remortgaging a current asset or even getting a home equity line of credit on another property.
- Learn all you can about house-flipping and foreclosed homes— reach out to experienced investors and find a company/blog with useful information. All of this information can help you focus your goals into what can bring you value when taking on a short-term investment strategy.
Hire an Inspector
Hiring an inspector may be one of the most critical parts of a profitable fix and flip project. An inspector can save you tens of thousands of dollars. As you know there are numerous details to look out for when inspecting the property, and it’s beneficial to have another set of trained eyes.
Conduct a Comparative Market Analysis
Performing a comparative market analysis can help real estate investors when buying investment properties and again when selling them. Before listing foreclosed homes for sale real estate investors can conduct a market analysis to find out real estate comps for the property which can help in knowing the actual market value of the said property.
Keep an Eye out for Red Flags Specific to Foreclosed Homes
There’s several red flags you may encounter in the foreclosure market including neglect, possible liens and angry former owners. Unfortunately, previous owners are often one of the biggest red flags when it comes to foreclosures, as some are spiteful and will damage the home while they can. Other owners have let the property fall into a state of disrepair, which makes it difficult to assess the full picture during the inspection process. You may also find that some renovations aren’t up to code because the owner didn’t obtain the proper permits or they started renovations that they couldn’t finish. In these cases, you would have to remove unpermitted additions or structures, which can add to your costs.
Finally, some foreclosed homes have liens on them due to unpaid property taxes— it’s important to ensure the property has a clean title during your research.
Due Diligence is Crucial
Foreclosures present a lot of unique opportunities and issues within the fix and flip investing world. Due to this, you’ll want to be extra diligent when it comes to researching potential liens and anything else that may not be required to disclose. You can request a preliminary title report and review it for any liens or tax liabilities.
Beyond that, you should look at the sales activity in the neighborhood. Specifically, consider these questions:
- How long are homes sitting on the market?
- What are the recent price trends?
- Are there any other foreclosures in the area? If so, how many?
The answers to these questions can make a big difference in whether or not the property is a good investment.
Understand What You Need to Improve Value
Improving a property’s value is essential for conducting a successful fix and flip project. When venturing into flipping foreclosed homes, it’s important to know what tasks to assign to a contractor and what tasks can be completed with your own skills. However, if you don’t have the appropriate home improvement experience, it’s better to hire a contractor to achieve the best results.
You should only take on the renovation projects that will bring a return on investment; otherwise, it’s typically not worth aiming for improved aesthetics. Important projects to add value may include updating the flooring, renewing the kitchen, installing new appliances, and adding new windows. Of course, you will need to assess the condition of the property and all of its components.
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next fix & flip investment.