Buying a Fix and Flip House: Knowing When to Turn Down a Deal

Posted by Walnut Street Finance Team on May 3, 2018

Whether it’s a side gig or a full-time job, fix and flip investing can be a great way to earn an additional stream of income. 

knowing when to say no to a fix and flip house

Successful flipping is all about finding the property that will help you hit your goals. That said, finding the perfect home takes time, patience, and research, and you’ll probably say “no” to more than a few along the way.

This guide is about helping you recognize when a piece of property isn’t right for you, and when you need to walk away.

1. Avoid Small or Uncertain Profit Margins

When you’re planning for a fix and flip investment, it can be easy to get caught up in looking for the ideal property that you overlook the price tag or underestimate the cost of improving the property

The reality is, the property you choose for your flip might not always be a glamorous one. Sometimes, it’s a regular house priced below market, other times it’s a run-down house selling at foreclosure. What matters far more than where the house is coming from is it’s potential for profit, which is largely determined by the up-front cost, cost of renovations, and the ARV (after-repair value, or the value of the home after all repairs have been completed).

This brings up another good point: knowing which high-impact renovations are worth your time and money, and which ones aren’t. The goal of flipping a house isn’t to build the perfect home - it’s to improve an existing one at the lowest possible cost. This means identifying high-impact renovations, sourcing reasonably-priced materials, and hiring highly-skilled contractors who will do the job right.

2. Don’t Buy the Right Home in the Wrong Neighborhood

Many fix and flip investors are so focused on finding the right property that they overlook something even more important: the neighborhood.

When you’re looking for a property, location is key to attracting the right crowd of buyers. Broadly speaking, you’ll want a neighborhood with decent schools, reasonable commuting options, and a healthy number of home sales in recent months.

It can also be helpful to identify a neighborhood in a period of transition. If you’re looking at an area that’s already been developed by investors, finding a home with good potential for profit might be difficult. Whatever the case, don’t splurge on a home unless you’re certain of the potential for ROI - when it comes to flipping, compromising on price is compromising on profit.

3. Identify Any Restrictions on the Property

Whether you’re looking at an historical property, one that’s backed up against a body of water (like a reservoir), or looking in a town with notoriously stringent permitting requirements, it’s important to know exactly what restrictions might apply to your fix and flip property.

The easiest way to avoid these mistakes is to simply do your homework ahead of time. Know which renovations you can and can’t do on historical properties, and the costs that often come along with them (e.g. updating electrical and plumbing). Figure out which permits your flip will require, and what the associated costs and timelines will be. If you can’t figure these details out ahead of time, the property probably isn’t right for your next flip.

4. Can’t Secure the Right Type of Financing

Perhaps the most crucial part of a successful fix and flip investment is securing financing from a qualified, local, hard money lender. The right lender will have years of experience financing projects in the area, and a record of helping borrowers successfully hit their goals.

The most common form of financing sought by flipper is the fix and flip loan, as it’s specifically structured for fix and flip investing: they’re fast and relatively easy to secure, and they pay in installments that match the cadence of your project.

Whatever the project, it’s always helpful to know ahead of time what you’re looking for in a property. For fix and flip investments, this means a workable piece of property in a good neighborhood, a reasonable path to profitability, and the right financing to get the job done.

If you’re interested in learning more about the basics of fix and flip investing, check out our free ebook, Essential Math for the Fix and Flipper.

Essential Math For the Fix and Flipper

Walnut Street Finance Team