Everyone who has watched a home flipping show on TV or sees how much a house is purchased for and then sold for 4 months later after a significant remodel says, “I can do that”. Yes, you can. Well most of you. The question is: should you? There are three variables that determine your profit: 1) how much you buy the property for, 2) how much it costs you to build/remodel, 3) how much you sell it for and your associated costs. Then you have to determine if it is worth your time for that profit and risk.
What you buy it for
Opportunities to flip or for spec homes don’t come along too regularly. You want to buy in a good neighborhood, on a good street, and something with little value in the building (i.e. a “tear-down” or something with good bones that needs a facelift). Not many are like this and also there might be other flippers/developers competing on this property. It is important to determine your price and stick to it. It’s also important to have a connected real estate agent as they may be able to give you pricing feedback from the listing agent so you don’t have to over bid. Email me if you need some feedback or real estate agent suggestions.
What you build/remodel it for
Especially if this is your first time, it’s very difficult to know how much it’s going to cost you to remodel or build. In addition to construction costs, there are soft costs like architectural costs, school fees, permitting costs, finance costs and then there are landscaping costs which you may not even think about until you get close to the end of your project. On subsequent projects, it will be easier to determine your budget and predict your profit. In addition, if you are remodeling, there are many unknowns that will uncover once you start ripping out drywall, exterior stucco/siding, and subfloors.
What you sell it for
This one can be the hardest because you don’t know what market you will sell into 4-18 months later after you start. If it’s a great market, you’ll probably do well. If it’s flat, you will probably be at less profit than you were hoping for. If it’s down, it might have been better to not have done the project and watched Netflix all day. Don’t forget when calculating your profit to take into consideration 5-6% of the sales price for real estate commissions.
I wouldn’t advise building spec homes unless you’ve done a few flips to understand your costs, learn the trade, and make sure you even like being in the industry. Building a home can be a long slog and you don’t want to burn out on something like that on your first go.