Pittsburgh-based investor and house flipper John Walker of Turnkey Investment Properties and his business partner, Jim Auten, usually have around 10 flips on the go at any time. When rates were low, and business was booming, that number doubled. However, high rates and low inventory have seen many of their fellow flippers exit the market.
“It’s a case of the last man standing right now,” Walker says.
According to recent Bank of America research, it’s a scenario played out across the country, with sellers staying put for fear of sacrificing a low mortgage interest rate. About 80% of outstanding U.S. mortgages are at interest rates below 5%.
“It’s a needle-in-a-haystack scenario, with the margins thinner than ever,” says Walker. “You’re buying high and attempting to push the comps as far as they will go to eke out a profit. The good news is that generally, if you do a good flip, you’ll find a buyer because there’s so little on the market. Still, you have to be meticulous on the buy and construction sides to make a profit.”
North New Jersey-based flipper Shaheer Williams of Urban Luxury Development is a 30-year real estate veteran. He routinely has several flips going on. And he says the market is currently tighter than he has ever known.
“Right now, my advantage over many newer flippers is my reputation,” says Williams. “The other metrics, such as construction costs and the buy price, don’t allow much room for negotiation, so I’m getting deals because of my track record and personal network.”
Looking to flip houses but concerned about risk? Here are some tips from Walker and Williams for minimizing risk and keeping deals flowing in a tight real estate market.
1. Use Private Money With a Deed-In-Lieu of Foreclosure
Building a long-term relationship with private lenders who get paid once the deal closes rather than demanding monthly payments takes away the stress of coming out of pocket in the midst of a flip. Using a deed-in-lieu of foreclosure—which guarantees the property reverts to the lender should the deal fail to close—in the lending agreement also puts the investor’s mind at ease while ensuring that none of the flipper’s personal money is tied up in the project.
Says Walker: “We don’t mind paying 10% to 12% for private money, knowing there are no headaches or additional hurdles to jump. We are 100% funded for the purchase and rehab. We always deliver, even if we have to take a hit on our profit, which happened when rates went up.”
2. Always Close
“Realtors know I will always close, which is why they bring me their deals first,” says Williams. “In this business, your reputation counts for everything. You make your money on the buy side, so when a good deal comes along, a Realtor needs to know there won’t be any hiccups and their buyer will deliver.”
3. Fine-Tune Renovations to Save Money
Flippers should go through every inch of a home looking for ways to save money. Here are a few tried-and-tested tips to minimize the expenses of your renovation:
- Save and refinish existing hardwood floors, or use vinyl plank flooring instead of new hardwood planks.
- Repair rather than replace older windows.
- Reglaze tubs and shower surrounds.
- Refinish kitchen cabinets with paint and new hardware.
- Convert attics and basements to add extra livable square footage. A chic, partially finished basement resembling a trendy coffee shop adds a wow factor and costs a fraction of a fully finished subterranean man cave. Rafters in flat black, exposed industrial can lights and conduit, painted brick walls, and floors covered with a commercial-grade rug photograph well and are a hit with buyers.
- Use gravel instead of asphalt or concrete on the home’s exterior, or repair rather than replace concrete.
- Get your real estate license to access new deals and save on commissions.
4. Reliable Contractors Are Key
Most flippers agree that good contractors are worth their weight in gold-plated fixtures. The cheapest contractor is not always the best if it means they will drag out a project. A fast flip saves money, as it gets a property listed quickly, eliminating holding costs.
“Broke contractors always charge less to get a job,” says Walker.
“Don’t be fooled by their sticker price.” Williams concurs. “I used to manage my own crews to save money, but it was a constant headache and cost me valuable time in the long run when I could have been finding other deals. Now I use a few reliable GCs I know will complete the job on time.”
5. Renovate Based on ARV
Extra bedrooms add value, but pricey chandeliers don’t. Similarly, a high-end luxury appliance isn’t going to move the needle on your ARV. Choose appliances and fixtures that match your sales price. Sometimes an antique or vintage store can unearth low-priced treasures that pop in the right setting.
6. Virtually Stage
Moving furniture in and out of a house leaves scuff marks, and staging can be expensive, especially when a home sits on the market for a while. Virtually staging a home costs a fraction of the price, especially when using overseas stagers on freelance sites such as Fiverr.
7. Stay on Top of Design Trends, and Keep Your Buyer in Mind
No one wants a home that looks dated. Equally, a home resembling a futuristic nightclub might limit your buyer pool. Always renovate with your target buyer in mind. Understanding the demographics of your neighborhood and the people attracted to your home’s price point is critical to achieving a quick sale.
8. Interest Rates Should Determine Your Renovation Budget and Sales Price
Higher interest rates have thrown a spanner into the works of homebuying affordability. Coupled with higher home prices and wages that have failed to keep up, potential buyers are getting squeezed out of the market.
In June 2023, the cost of a typical home reached a record of $410,200, up more than 14% on the previous year, according to the National Association of Realtors, marking an increase of over 40% from October 2019, before the pandemic. However, that number dropped to $387,600 in November.
Even with projected interest rate cuts in 2024, increases in construction costs mean that if you want to snag a buyer for your flip, you will have to scale back your finishes and buy less expensive homes than when rates were lower.
9. Future-Proof Your Home
Ensuring your home is equipped for the future is relatively cheap but will give you an advantage over other homes on the market, allowing you to push the sales price.
Future-proofing add-ons include:
- Provide an all-electric home with smart energy-efficient appliances and extras like Nest thermostats and remotely operated camera doorbells.
- Provide Level 2 EV charger-compliant wiring.
- Conserve water with low-flow fixtures, appliances, and greywater systems.
Final Thoughts
Low inventory means that house flipping is still viable, but meticulous attention to detail is needed in every aspect of the process. Buying right in the first place is more important than ever.
Often, this means getting back to old-school granular techniques like driving for dollars, knocking on doors, and local networking because personal interaction is liable to carry more weight with a seller than AI-generated content on a mass-mailing campaign. Online marketplaces (Facebook and Craigslist), social media, and property auctions are also still proving effective.
During renovation, itemize every proposed upgrade. Investigate ways to save costs.
Finally, all-cash buyers jump to the front of the line when selling. Consider negotiating a discount to minimize your holding costs to ensure a fast sale.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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