Lew Sichelman
High mortgage rates, soaring house prices and rising construction costs have driven many flippers – investors who purchase run-down houses, fix them up and resell them practically overnight – out of the market. And with their exit comes a great opportunity for people eager to buy a fixer-upper of their own.
Flippers have pulled back significantly because they can no longer earn the profit margins they’d become used to in recent years. ATTOM reports that the number of single-family U.S. homes flipped in 2023 was 29.3 percent lower than in 2022 – the largest drop in 15 years.
But profit is not the main driver for most buyers of fixer-uppers. Their goal is to find a bargain, then live in the place while they rehabilitate it and make it their own. Any profits will come years later, when they move out.
A recent RE/MAX survey found that more than half of today’s buyers would purchase a fixer-upper. If that’s you, you should know that purchasing rehab properties isn’t like buying a move-in ready house. In addition to the normal homebuying steps, you should find a home inspector, a contractor or two, and line up your financing – all in advance.
Act Fast, Get Financed
If you find a fixer that’s to your liking, act quickly: You can expect competition from other buyers like you, as well as from professional flippers. Flipping rates may have fallen dramatically, but some pros are still actively scouting the market.
Professionals sometimes make offers just minutes after a listing is posted. But they also make the deal contingent on an inspection to see what needs to be done to bring the place up to snuff. You don’t have to make an offer that rapidly, but you should be ready to, and an inspection contingency will buy you a week or two to give the place a thorough once-over.
When it comes to financing, there are a number of loan options available that will allow you to roll the property cost and the rehab costs into a single mortgage. Other than a few restrictions – no pools, say – you can do almost anything you want with the money.
With the Federal Housing Administration’s 203(k) mortgage, you can borrow up to $1,149,825 in high-cost areas and $498,257 everywhere else. The loan covers plumbing and electrical upgrades, roofing, HVAC systems and even landscaping.
Other options include Fannie Mae’s HomeStyle and Freddie Mac’s CHOICERenovation loans, which are designed for more extensive projects that involve structural repairs. These loans have the same borrowing limit as the 203(k) in high-cost areas, but in other markets, you can borrow as much $766,550.
A good lender will preapprove you based on your earnings and debt-to-income ratio, and can also tell you how much you can borrow. Of course, final approval depends on the house you pick and what it will cost to make it livable.
Know What You’re Dealing With
Line up an inspector in advance so they can be ready to pounce when you do. They’ll go over the place from top to bottom and tell you, in detail, what’s wrong: Is the furnace on its last legs? How about the roof? What shape are the appliances in?
Once you know what you’re dealing with, you could do the work yourself … but let’s face it: Not everyone is Chip Gaines or Jonathan Scott. So unless you are a skilled craftsman with the necessary tools and knowledge, the work is probably best left to a professional contractor.
Steve Davis, a Houston investor who has flipped more than 100 properties, says the best way to find a contractor is to attend a meeting of your local real estate investors club. Contractors attend those meetings looking for work, so the pickings should be good. But also, do your homework.
Vet your contractor by making sure they’re licensed and that their insurance is up to date. Check their references, and look for any complaints lodged with the Better Business Bureau or with your local consumer affairs office.
“Contractors are good until they are bad, so make sure you get three recent references,” Davis advised.
Protect Yourself
Another tip: Davis says that when fix-and-flip pros bid on a property, their offers often include a seven-day option – and so should yours. This option gives you and your team time to investigate the property. It will likely cost a few hundred dollars, which you won’t get back if you decide not to proceed (unlike earnest money). Think of this option as insurance.
Another form of insurance: Get it in writing that the contractor will do the work on time and within budget – especially if you plan to occupy the house while the work is done or move in by a certain date.
Many contractors spread themselves too thin, taking on too many jobs at once. This often leads to workers not showing up on time, or at all, for days at a time. A planned two-month rehab could easily drag on for twice that long.
To protect himself, Davis asks his contractor how long the job will take, then adds two weeks to that time frame in the contract. He then writes in a penalty clause that kicks in after the deadline – say, a $500 charge for each day late.
Such penalties are common in commercial real estate, but not in the residential sector, so your contractor may balk at first. But in Davis’ experience, they’ll come around.
If not, he warns, “it’s a pretty good sign he has multiple jobs and is pulling people off one to work on another.”
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
