Successful flipping isn’t just a matter of finding a house and fixing stuff that’s wrong with it. Successful flipping means finding a house with the right stuff wrong with it!
One of the problems with the flipping approach to properties is that the repairs and upgrades that tend to add the most value are typically the ones that are most cosmetic. Many flippers have had great success buying distressed properties, doing little more than mowing the lawn and slapping a coat of paint on the exterior, replacing some aging shutters, and then reselling the newly beautified house – for a profit many times greater than what they spent doing the repair!
On the other hand, digging out the foundation to replace an antiquated septic system is a lot like wetting your pants in a dark suit: It gives you a warm feeling, but nobody notices.*
On the other hand, the fact that many of the most effective upgrades are also very simple, cosmetic or minor fixes is one of the things that make successful property flipping possible!
Our last column focused on ROI, or Return on Investment. One look at the math will tell you: The return on investment that you get from the repairs or upgrades that you make to the house can be the difference between a successful flip and a flop!
So what repairs generate the most bang for the buck? Well, in theory, we have some data. In reality, though, that question has a lot to do with you – the individual investor – and your unique skill set, the accuracy of your cost estimates, the amount of sweat equity you contribute, and the team of contractors you have in your Rolodex.
Well, let’s look at the data.
According to the 2011 HomeGain Home Sale Maximizer Survey, the top home improvement projects that generated the most return per dollar invested were very simple things.
For example, using my own Pompano Beach, Florida ZIP Code of 33068, the top home improvement measures in my area – from an ROI perspective – were things like “home staging,” cleaning and decluttering, changing broken light bulbs, sprucing up the yard, and throwing open the blinds during the day to light the place up. These items alone cost nearly nothing to do, but the editors of HomeGain estimate a potential gain in home value of several thousand dollars between them.
Other top contenders were relatively simple items like replacing carpeting and putting a coat of paint on the house: HomeGain estimated that homes where these measures would result in a meaningful improvement in appearance would yield an ROI of 100 percent or more.
Nationwide, the numbers pretty much broke the same way:
Project Average Cost Average Price Increase ROI
Clean/declutter $290 $1,990 586%
Lighting & brightening $375 $1,550 313%
Landscaping $540 $1,932 258%
Repair electrical/plumbing $535 $1,505 181%
These are, of course, national averages. There are some projects that may be valuable in one place and wholly irrelevant in another. For example, winterizing a home is more important in Fargo, North Dakota than it is in Key West, Florida. But the items listed above are pretty much universal and ought to be on your “no-brainer” list, no matter where you are.
The 2011 – 2012 Cost vs. Value Survey
This study is published every year by the editors of Remodeling Magazine. Their methods are more statistically sound, in my estimate, than HomeGain’s study, above – and they break project categories down very differently. But the basic thrust is the same: When it comes to maximizing return on investment for your hard-earned dollars, the KISS principal applies: Keep it Simple, Stupid!
According to the most recent survey, the best projects for generating ROI were straightforward replacements, rather than remodels. According to the editors, seven of the top 10 projects as measured by ROI were things like door and window replacements – with an average ROI of more than 70 percent.
Moreover, replacement projects have consistently outpaced remodeling projects, on an ROI basis, since the inception of the survey.
Major Projects Less Successful
Of course, when you throw a hundred thousand dollars at a house, or multiple hundreds of thousands of dollars at a house, you naturally need to be looking for projects that yield more than a grand or two of value added at a time. Remember, what counts is your ROI on the whole flip, and not just your ROI on any single repair.
You want to look for ways you can make a big mark on a home, consistent with your budget and remodeling expertise.
And therein lies the problem: Once you get past the very basic cosmetic improvements, the data suggest that it is very difficult to get positive ROI out of more extensive projects. For example, the Remodeling Magazine survey indicates that adding a second story remodel to a house can cost an average of over $165,000. But it generally only adds about $107,000 of value to the home when you resell it. Those projects, on average, are money losers.
Does that mean they all are? Not by a long shot. There are a lot of variables that go into whether a remodel will actually add value to a home when the costs are included in the calculation.
Here’s what to keep in mind: A remodel that is a great idea for the new owner who plans on living in a house and raising a family there may be a bad idea for the property flipper. Circumstances matter, timing matters, costs matter, and the surrounding neighborhood matters.
Tip: Want to have the national cost versus value data at your fingertips the next time you look at a property? You can download the cost vs. value app on your iPhone!
*Credit where due: I got the “dark suit” analogy, of all things, from a Peanuts cartoon, by Charles M. Schultz, when I was about seven.
Jason Van Steenwyk is a veteran financial industry journalist who has been fighting to make the world safe for the retail investor since 1999. He lives at Ground Zero of the real estate bubble in Fort Lauderdale, Florida.