Choosing Your Home Flipping Strategy
Back in May, I was presented with a little house over in Alexandria. The house was vacant and, of course, it was in really rough shape. It was also very small with only two bedrooms, one bathroom and a dated layout that would not appeal to the modern buyer.
This little rambler had less than 900 square feet of living space on the main level. It was originally built on a crawl space but someone along the line had dug it out and created a full basement complete with cement block walls and poured concrete slab. However, the only real access to the basement was a steep stair well under a storm door on the outside of the house. There was also a hatch access in the floor in one of the closets but it was cramped and the ladder was steep.
My first thought for this house was to do a pop-top renovation. We’d remove the roof completely, add a second floor, thereby creating a nearly 1,800-square-foot Colonial-style house with a modern layout on all levels and full interior stairs.
In this scenario, my total costs would have been somewhere around $406,000 and the house would be worth around $480,000. I estimated profit would have been about $73,000. However, this project would take a significant amount of time, probably around nine months from purchase to sale, possibly more. And this type of project is always wrought with risk. You can never be sure what hurdles the county building department will put in front of you or structural issues that might arise.
Even more worrisome is the fact that there were no real comparable sales in the area. The neighborhood was full of ramblers. There were very few two-level Colonials and none of them had sold recently. Without those solid comps to fall back on I can never be sure what value an appraiser will put on a house. In cases like that, appraisers will either go out of the area to get comparables and you’re never really sure which area they’ll choose or they’ll use a square foot cost to adjust for the size difference of the comps in the area.
Either of those scenarios leaves a lot to the appraiser’s discretion and a lot of possible outcomes. Many possible outcomes equal uncertainty which is something we don’t like in this business.
My other option was to just do a simple renovation, keeping the home layout as is and just redoing the bathroom and kitchen and new flooring and paint. The house needed new siding roof and windows as well. In this scenario, I estimated a total profit of about $13,000 which is dangerously low. There are almost always additional costs in any project and it really left no cushion on the sales price or room for error. If I had to come down on my end sales price at all I would be in trouble. I also felt the house would be tough to market with its current layout. On the bright side, however, the project would be very quick. I could have this one done and be moved on to the next one in just a couple months.
But there was a third option. We could maintain the house’s foot print and keep it as a simple rambler. However, we would modify the interior layout, adding full interior stairs to the basement and a second bathroom. Then we could get a legal bedroom downstairs and then market it as a three-bedroom, two- bath house which is much more appealing to families. I estimated my total costs would be around $320,000 and there were pretty good comparable sales in the area that made me confident I could get about $380,000 for the house — leaving me with a profit of about $47,000.
This seemed to be a good middle ground. The potential profit was there with plenty of cushion to keep me in the black and even though it would require quite a few building permits it would still be relatively quick and easy.
So with that decision we set to work. My contractor had the project completed in about 10 weeks, which was perfect because it was just in time for the fall market.
Typically, I really like the fall market. Right after Labor Day, the buyers seem to come out and the housing market is normally pretty healthy until late October or early November. But this year seemed different. Most of September seemed very slow and I wasn’t seeing the little market pop that I normally expect in September. Other realty (I’m not used to seeing Realty Agents. I would call them real estate agents but I can live with either) agents confirmed seeing the same thing in most areas around the city.
After several weeks on the market, my house had no offers or real serious interest. I originally priced the house at $385,000, which I had thought was going to be a steal since one very similar house had recently sold for $400,000. My house just sat. The traffic was pretty good but most people said it was too small for them.
By this time a couple of Colonials had come on the market and sold and another investor around the corner had just started a pop-top renovation. I started thinking I should have gone with option one and added a second level to the house.
Getting top dollar for your house is all about appealing to the buyers who are out at the time and the buyers who were out when I listed this house seemed to be interested in more square footage. So I probably didn’t make the optimal choice in hindsight.
I’m not in the business of holding houses so I did a significant price drop to $365,000 and immediately got a contract on the house at asking price.
The fall market pop did eventually come this year but it seemed to have come late. After I got the house under contract I had several people call on it with a lot of interest. It’s always hard to judge or time the market and most times you just follow your gut and or play the odds. Luckily, real estate isn’t like Vegas. You don’t either win big or lose big. If you know what you’re doing you’ll either win big or you’ll just win. In this case I just won.
In the end, I netted about $20,000 of profit on this deal and my investor who provided most of the funds made more than $25,000 — well over an 18 percent annualized return on her money. So even though profit was not as high as it probably could have been it was still a good little deal and we gave the home buyer a very good value, which is also a win.
Justin Pierce is the founder of Snow Goose Homes, LLC and a contributing writer at The Washington Post. He is a licensed Real Estate Agent in Virginia and buy’s homes in the Washington D.C. area.
You can follow him on Twitter at https://twitter.com/justinpierce1