Could You Be Over Renovating Or Under Renovating Your Fix & Flip Property?
As a professional real estate investor, you understand that flipping houses for investment requires time, energy, and adequate funding to properly renovate the home.
The last thing you want to discover is you over-renovated the property, meaning that you paid too much for renovations with little to no return on investment. Spending $100,000 to get $20,000 more on the sale price doesn’t make much sense. Some paint, new hardwood floors, and fixtures may be all that you need.
Under-renovating your property can end up costing more than expected just to save on a few renovations. For example, if you have laminate countertops in an expensive neighborhood where granite is standard, the buyer could offer $20,000 less than the sale price when you could have spent the $4,000 for granite countertops and gotten the full sale price.
Before you obtain financing, you need to know how much you need. If you flip houses professionally, you know that each property is unique.
Are you over renovating or under renovating your properties? If so, you could be slashing your profits and hurting your business. Before estimating the cost of renovation, you need to find out what market you are in.
What Market Are You In?
Determine the real estate market and trends in your neighborhood to find out how much or little you need to do for renovations. To identify your market, research the sale prices and amenities of homes around the neighborhood before you start. Research trends online, visit neighboring areas, or speak to a real estate agent.
Properties Sell Slowly In A Buyer’s Market
If many homes in the area have ‘For Sale’ signs but have not yet been sold, you are probably in a buyer’s market. The nicest houses at the lowest prices in the best neighborhoods will be the first to sell, leaving the others behind.
How do you sell in a buyer’s market? Increase the curb appeal of the home to make it stand out and sell faster.
Homes Are Snatched Up Fast In A Seller’s Market
If the ‘For Sale’ signs are coming down as fast as they are going up, then you are probably in a seller’s market. The selection of homes for sale is scant, so sellers can get offers above the asking price. When you are in a seller’s market, you may not need to upgrade your home as much as you think.
That does not mean you shouldn’t upgrade at all, just spend wisely on what matters. New counters and fresh paint will go a long way in making sure your house sells for the best price.
What Happens When You Over-Renovate: What is Over Renovating?
If you renovate to the point where the value of the home exceeds the neighboring homes, you have probably over-renovated the property.
When you renovate the property to the point that it is too valuable for the location, the appraiser will not be able to assign a value higher than the highest sale price in the location.
Examples of Over Renovating
For example, if you spend $100,000 on home renovations that only increase the property value by $20,000, you have probably over renovated or selected the wrong type of renovation.
Also, if houses on the same street are all valued below $400,000, and your upgrades elevate your property value to $500,000, you will have trouble getting competitive offers to get a return on your investment.
Consequences of Over Renovating
If you spend too much money on renovations, and the market is a buyer’s market, you could stand to lose a great deal of money. Not only will the property sell below the asking price, the amount spent on your renovations will be lost.
As a result, the whole transaction could end up being a bad investment.
How To Fix This:
• Observe the construction trends and sale prices of homes within a 1-mile radius of your neighborhood.
• Be aware of the type of construction quality or amenities they possess prior to starting major renovations.
• Consult a real estate appraiser or real estate agent familiar with your neighborhood. They will know the sale prices and quality of the homes in your area.
• Before committing to renovations, calculate your profit potential, or the new value of your home after renovations. A real estate appraiser familiar with your area can provide you with a future sales value based on the remodeling you are considering for the property, which is especially useful for investment properties. Next, spend less to make the renovation worth your while.
What Happens When You Under Renovate: What is Under Renovating?
When the other properties on the same street have nicer upgrades or exteriors than your property, your home may need certain renovations to sell for comparable sales prices for homes near your neighborhood.
For instance, a beautiful home in a nice neighborhood with a price range of $1 -$2 million dollars will probably have updated kitchens and bathrooms with modern fixtures.
Examples of Under Renovating
If your home has laminate countertops and the homes that sell in the area all have granite countertops, the buyer may perceive the home as less valuable and make a lower offer. Saving $7,000 in upgrades such as flooring and countertops is not worth the price of the home being discounted by $30,000.
Consequences of Under Renovating
In this type of situation, the failure to make necessary upgrades may end up costing you way more than just installing the granite countertops. In other situations, the flooring could be beautiful, but not up to par with the hardwood floors in neighboring homes.
The buyer may offer a lower price because they have to install new flooring, and the actual cost to install flooring may be far less than the price reduction.
Determine how your property compares with neighboring areas, identify the cost of necessary upgrades, and spend below your profit potential without compromising quality.
How To Fix This:
• Perform the necessary upgrades before selling.
• Do your research about recently sold homes in your area and make sure that your renovations are consistent and on par with similar homes.
• Pay attention to detail. Something as simple as outdated appliances could make a huge difference in perceived value of the home.
• If your counter tops and flooring are not up to date, carefully weigh the cost of the upgrade against the potential reduction on the buyer’s offer.
The Bottom Line: Research Your Renovations Before Making The Commitment
When it comes to renovating your property, take the time to learn how much or little renovation your property needs based on the real estate market, neighborhood, and trends. Strike the right balance of spending on renovations and maintaining profit to attract multiple offers from a wide selection of buyers.
Contact Orchard Funding Today
Orchard funding is a private lender that provides financing to professional real estate investors who want to seamlessly fix and flip multiple properties. After doing research on an area and what renovations are needed for a quick flip, you are ready to contact us to learn about how you can get loans up to $3,000,000 to help you fix and sell multiple properties without tying up your cash flow. Call Orchard Funding at (310) 356 – 7373 today.