With Terry Story, 29-year veteran Real Estate Agent with Keller Williams in Boca Raton, FL
Steve starts the first segment of Real Estate Round-Up for 2018 with Terry Story’s tips on the requirements to be a successful home flipper.
Do Your Research
For starters, Terry says, effective home flippers know how to find a great deal and purchase homes at about 44% below market. Finding homes at steep discounts isn’t easy though. Expert flippers spend time looking for below-market properties online and by digging through courthouse records for bargains. They often purchase properties sight unseen because they really know the neighborhood and what comparable properties sell for.
Steve likens successful home flippers to stock investors who recognize the real value of beaten-down stocks and are willing to take deep positions in them.
Know Your Market
Further, home flippers know the end game all along, the full market value and final sales price of the home they buy, and the right target audience. To make a profit, they know exactly how much to invest in the house, and what to price it at for a quick sale.
Steve warns buyers of flipped homes to beware of shoddy, cosmetically focused workmanship and recommends inspecting the home thoroughly to make sure renovations were up to the mark.
Terry adds that home flippers typically sell in the $100,000 to $200,000 price range, with average gross returns of about 60%, and with a flip typically completed in about 128 days from purchase to renovation to sale, which is incredibly quick. To do so, flippers have a whole system in place, with clear renovation plans, workers at the ready, and funds on hand to make it all go smoothly.
Steve compares this to evaluating a company’s inventory turns. Inventory ties up capital and warehouse space, so the sooner it’s cleared it out, the better. Similarly, if you sit on a home that you’ve renovated, you cannot free up capital to deploy it elsewhere, and your profits will be lower.
How To Spot Markets Ripe For A Flip
To spot markets that are ripe for flipping, successful home flippers look for telltale signs in markets across the country. For instance, they look at future development plans or applications for building permits to get a sense of whether a developer, a major business, or a retailer plans to move in and make the neighborhood more attractive and drive up housing.
When Does Home Remodeling Make Sense?
Next, Steve wants to know if people should remodel homes to sell them for more. Terry’s answer is a firm “no” because you only get back about 60% of what you put into the remodel. So remodeling only makes sense if you plan to enjoy the upgrades for yourself or if the house is falling apart and needs major repairs.
Moreover, buyers may not have the same taste as yours, so there’s added risk if you remodel just to get a higher price for your home. Instead, save your money for necessary infrastructure improvements such as a new roof or a new air conditioning system.
Older Citizens Selling Homes
In closing, Terry notes that she’s seeing a new trend of older, cash-strapped citizens looking to sell their homes, something she hasn’t come across before. Steve sees a similar trend in his investment advisory practice where people have a lot of money tied up in their homes. If money is an issue, he believes one should release that equity, thereby turning an illiquid asset into a liquid asset, invest some of it, and carefully spend the remaining principal to improve one’s quality of life in retirement, without the added headache of worrying about maintaining a property.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Roundup. This is the time, every single week, we get together with noted real estate agent, Terry Story. Terry is a 29-year veteran with Keller Williams located in Boca Raton. Welcome back to the show, Terry.
Terry Story: Hey, Steve.
Steve Pomeranz: Hey, you know, years ago there was a big deal, a big fad about home flipping.
But you put together some information that says what is required to be a successful home flipper. Tell us about that.
Terry Story: Yeah, you really have to know what you’re doing, first of all. But the habits of effective home flippers…first, they know how to find a great deal.
Home flippers, in the most profitable markets, purchase properties on average nearly 44% below market. Now, saying that, you’re going to say, well, jeez, who doesn’t want to buy a house 44% below market? And where do you find those properties? That’s not easy. A lot of it is done by going to the courthouse steps or doing it online.
That’s how they do it now today. And purchasing properties that you never even get a chance to look at. But how do you do that if you don’t even know what you’re getting into? Well, in order to do that, you really have to know the neighborhood that that property is located in and really know your numbers.
Steve Pomeranz: You got to know the market.
Terry Story: Yes.
Steve Pomeranz: You’ve got to know the market. You can’t just get in this thing willy-nilly and just think you’re going to be successful. Alright, so what’s the second thing?
Terry Story: They begin with the final sales price in mind. So the first thing you want to do is know what you can get for that house.
Envision where you’re taking that home that needs a lot of work and where you’re going to be able to sell it at. So what’s the end game? And then know who your customer’s most likely going to be. So when you’re going to renovate a house, keep in mind who the audience is.
Nearly 29% of the flippers sold to cash buyers, compared to 22% who sold to, say, FHA buyers, which are most likely the first-time homebuyers. So know your customers.
Steve Pomeranz: I think if you’re a buyer, too, buying from a flipper, you’d better really look hard and make sure the renovations they’ve done were good quality.
That’s something always to remember.
Terry Story: Right, and they have an average gross return for home flippers. It’s anywhere from 100 to 200, in that price range was about 60%, so they know their numbers. They know what they can get.
Steve Pomeranz: I guess they have to turn over these properties quick too, right?
Terry Story: Yeah, in this one particular case, they’re turning them and flipping them in about 128 days.
Steve Pomeranz: Wow, okay.
Terry Story: And you really just have to have systems in place, have the workers in place, know what you’re doing, have the resources and the funds to make it run smoothly.
Steve Pomeranz: Yeah, one of the features that we look at when we’re buying a company, let’s say, the shares of a company, is how quickly their inventory turns, because if you’re sitting on inventory for a long time, that’s not making you any money. That’s actually costing you money. And this is a really good example that if you’re sitting on a home that you’ve renovated and you’ve got all that money out, and it’s not turning, you’re not turning those properties, your profits are going to be much less.
What’s the very last thing?
Terry Story: And finally, know how to spot emerging flip markets. They’re good at this. They go into areas and they just know what would be a profitable flip market. And you just look for trends in different marketplaces across the country. I mean the people that do this very successfully are doing this on a large scale.
Steve Pomeranz: Yeah, and they can smell it, you know, right?
Terry Story: Yeah.
Steve Pomeranz: It becomes an inner sense. You can say, all these indications are in place. This is an upcoming market, an upcoming area. People are starting to move out here. We saw an exit on the highway, or there’s a major business hotel that’s going up.
They can feel it. You can feel it.
Terry Story: That’s right.
Steve Pomeranz: Okay, what about remodeling for profit? Not flipping a house but actually remodeling it.
Terry Story: Yeah, a lot of people will say to me, does it make sense for me to remodel my house and then put it on the market?
The answer is no. First of all, when you remodel the home, do it for yourself. And if you take into account what it costs to remodel a house versus what you’re going to get out of it, it’s averaging about 60%. The most profitable rate of returns are kitchens and baths.
And so, when you remodel them, say it costs you $20,000, $30,000, whatever the number is, you’re going to get about 60% back. So does it make sense to put the money in those places? No, not likely. Unless it’s completely falling apart, that’s a different story. But probably a more important place to put the money would be in items like roofs, air conditioning.
A new buyer doesn’t like to have to spend money on those items. They really want to spend the money on the fun things like kitchens and baths.
Steve Pomeranz: Yeah, but I still think that if you renovate a kitchen nicely, you’ll sell your house faster, and you’ll sell it for more money.
Would you agree with that?
Terry Story: You will sell it for more money, but know that if it costs you 30,000 to do the kitchen, you’re not getting $50,000 more for the house.
Steve Pomeranz: Yeah, you’re going to get 18, if you’re getting 60% you’re going to get 18,000 of it back by a higher price.
Terry Story: Right.
Steve Pomeranz: So part of this has to do with the fact that you want to live in a place that has a really nice kitchen.
Terry Story: Correct.
Steve Pomeranz: If you can afford to do that. So you always want to remember, this is your home. It is your primary residence.
Terry Story: Right.
Steve Pomeranz: You want to live there.
Terry Story: Yeah, do it for yourself.
Steve Pomeranz: Absolutely.
Terry Story: But if you’re looking to do it, people say to me, I want to sell my house. Should I redo my kitchen and baths?
Steve Pomeranz: I got you, I got you.
Terry Story: And the answer to that is no.
Steve Pomeranz: No.
Terry Story: Because you’re going to do it. And then the person interested in your house might say well, I don’t even like what you did.
Steve Pomeranz: Yeah, I know. That’s the thing about putting in new carpet and all that, right?
Terry Story: Yeah, so put the money in the new roof or the air conditioning.
Steve Pomeranz: Excellent advice, good, Terry. All right. So I want to ask you, what’s going on in your own market and your day to day life as an agent. What are you starting to see that you’ve seen recently? Go ahead.
Terry Story: You know, just recently I’ve not really run into this much in my career but what I’ve run into just recently, is older citizens looking to sell their homes.
They really don’t have much money. All the money that they have is tied up in their house. And, you know, where do they go? I would think the best thing for them to do is to go ahead and rent something. Take the money out of their house. Invest it, live off it, and rent.
Steve Pomeranz: Yeah, I would agree. We see this from time to time in my investment advisory practice and people have a lot of their money tied up in their home. And their home, it’s kind of an illiquid asset. You’ve got all this equity that’s in there that’s actually not working for you.
So, if you can release that equity, turn this illiquid asset into a liquid asset and then take some of the income off of that, maybe spend down the principal a little bit, maybe carefully, use that money to rent, I think your life would be a lot better.
Terry Story: I agree, and then you don’t have the headaches of worrying about maintaining a property.
Steve Pomeranz: Which is expensive in and of itself, and if you don’t have the extra money to handle that then the property will decline. Terry, we are out of time. My guest, as always, is Terry Story. She’s a 29-year veteran with Keller Williams located in Boca Raton. And she can be found at terrystory.com.
Terry Story: Thanks for having me, Steve.