Renovating homes for profit; sometimes referred to as “flipping” houses has gained popularity in recent years. The recent market downturn created an unprecedented opportunity to do this and several popular television shows have gained viewership which depict various people doing this and follow them through the process. This article is a resource and snapshot of information about what the opportunities are, if any, in the Atlanta Metro Area as of the time of my publishing this article. It will talk about my personal experiences and offer some sound advice to those who have a desire to begin doing such a thing. I caution you that the executive summary of things is essentially that you have really missed the boat and it is unlikely that you will be able to find any good opportunities. However, depending on the specific area, price range and even luck, if you do stumble upon an opportunity you will find some good information contained in this article.
For starters, I would like to talk about ways to acquire properties. Many investors buy homes at the county foreclosure auction which takes place the first Tuesday of each month at the county courthouse for the county in which the property is located. If there is any place left where there is any opportunity at all, this is it however it is not for the inexperienced or the risk averse. When you buy at this auction, it is VERY high risk as it is truly a pay immediately with absolutely no refunds and no exchanges situation. Furthermore, if the home you purchase has tax liens or other liens associated with it, you inherit the liens in many cases and end up having to pay off someone else’s debt. So, before bidding on any home at the county auction it is essential that you do a thorough title search to know exactly what you are buying or you could really get burned. County auction purchases are also cash only sales; so you must have certified funds to cover the entire bid amount with you at the auction and surrender it in full immediately upon winning the bid. In most cases, you will be buying the county auction properties without the luxury of seeing the inside of the home. You can drive by and if the property is vacant you can likely walk the lot and perhaps even peak in the windows; but you can’t really get in without risking a breaking and entering charge. I have heard horror stories of people buying homes at auction that are in much worse condition than they imagined or, worse yet have uncorrectable flaws like the number of bedrooms and baths not matching what was in the public record, etc. Finally, the auction list is very dynamic and changes right up to minutes before the auction; so you must do all the title searches and analysis on the homes and be ready to bid when it is quite possible the ones you are interested in fall off the list at the last minute and you go home empty handed from the auction after a great deal of preparation efforts.
If you don’t have the cash and/or the stomach to buy at the auction, then the other option is to get the homes that don’t sell at auction and get assigned to a listing broker as a foreclosure or what we in the industry call an REO listing. When buying REO listings, you can finance the home, you do have an opportunity to see it first, and you can even do an inspection and change your mind if you find any huge surprises. However, be aware that you will pay a very substantial premium for this as the prices you can expect to pay for these homes are typically much higher than the same home would go for at the county auction.
Since the rent vs. buy equation in Metro Atlanta is so far in favor of the buy side right now (i.e. costs a lot more – almost double per month to rent than it does to own the same home), many investors prefer to buy homes with the intent of renting them until the market values recover more and then plan to sell for substantial profit in the future. Because of the over abundance of individuals and even large corporations and hedge funds following this business model, the prices of distressed homes is going through the roof as longer term investors are always willing to pay much more than the person who needs to ensure a profit on a quick flip that they will sell immediately in the same market conditions. The sheer number of investors with the longer term model has all but eliminated any possibility for the short term flipper to get any good inventory particularly at the lower end of the price spectrum.
If you are lucky enough to find a home that you believe you can fix up and sell for a substantial profit in a short time period, things to consider if you want to be successful are:
- Appraisal comps – if you over improve for the neighborhood you will get burned. If buying a home to renovate and resell, it is imperative that you check the recent sales in the neighborhood and make sure there are very recent examples of very similar age and size homes; preferably right in the same subdivision that have sold at prices that you intend to resell for. If not, you could easily end up in a situation where you create a beautiful product, buyer after buyer are willing to pay your price; but it is not able to get an appraisal at the contract sale price and you will not be able to sell it to any buyer who requires financing.
- If buying with a more long term strategy that involves renting the home out for some time, make sure to check the homeowner association covenants to see if there are any rules or regulations that would prohibit you from renting the home out. This is extremely common in the condo and townhome markets; but can even happen with single family homes.
- Build in a full service real estate commission into your price (budget 6% of sale price going to real estate brokers). Don’t assume you will be able to sell by owner and save on commissions, etc. In some cases, you will get lucky and sell without an agent; but more often than not you will end up needing one. If your margin is so tight that you will take a loss if you have to pay commissions then you should not buy the house.
- Leave room for unexpected repairs in your budget.
- Use professional contractors that are reliable or you will spend more than you save when your cheap day laborer doesn’t show up to the job site and you lose a month or two of time. Time is definitely money when you have a vacant home that you are trying to sell.
There is a lot more to it than this but it would get way to long for a blog post. Due to the difficulty in finding properties right now and the fact that I have my own desire to do this if I do find a one-off opportunity, I am not seeking clients who are looking to purchase low end REO homes for flipping at this time. However, that can change as the market changes; so if substantial time has passed since I wrote this article; feel free to reach out to me for assistance at that time. For those looking for rental properties, I sometimes look for those myself; but at times I am tapped out and don’t have the cash flow to buy one when I stumble upon a good opportunity. I do keep a database of folks who might be interested if I see an opportunity like that and will be glad to add you to that list.