Durban – Buying a property with the sole aim of renovating and then immediately selling it for a higher price is a popular form of property investment that, although not new, has become more appealing thanks to a number of global reality shows in recent years.
And South Africans are also getting in on the action, one of whom is YouTuber Stephen Baron who recently made almost R1 million profit flipping a Johannesburg house.
Although the concept sounds pretty straightforward, Andrea Tucker, director of MortgageMe, says you need to know what you are doing.
“Investing in a house in order to resell is a big decision and you need to go into it armed with as much information as possible, while keeping the risk/reward ratio at front of mind.”
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Mike Greeff, chief executive of Greeff Christie’s International Real Estate, says purchasing a fixer-upper has grown in popularity over recent years, with many buyers and investors looking to make a profit out of them.
“These properties are not high on the list of desirability and can therefore, in most cases, be bought at a fantastic price from an agency and a willing seller. Sellers of fixer-upper properties are aware their properties may be a difficult sell and will take this into consideration when deciding on a selling price for their home.”
Here is advice from the experts on how to successfully flip a property:
1. Set your budget
The first step is knowing how much you can afford to invest, and you can find this out by getting pre-qualified through the services of a bond originator. This will give you a good idea of the home loan amount you will qualify for.
Another factor to consider when doing your budget, Tucker says, is the ‘after repair value’ (ARV) or the ‘70% rule’, which, in the real estate world, is the estimated value of the property after it has been renovated.
“This allows you to build extra padding into your budget in case something goes wrong. So, you should pay 70% of the ARV of a property minus the repairs needed.”
For example, if the ARV is R1m, and the property needs about R250 000 in repairs, she says you should not pay much more than R450 000 for that property.
“Keep this figure in mind when looking at properties, and ensure you look within your budget.
“Also keep in mind that you’ll need approximately 8% of the value of the bond available to cover the expenses incurred in the process of taking on a home loan and for attorneys to transfer the property into your name.”
Craig Mott, Cape Town regional sales manager for the Rawson Property Group, says it is vital that buyers understand the renovation cost ballpark they are playing in before buying a fixer-upper.
“They should set budgets for individual items or sections of the home, such as setting a price per square metre for flooring, and then stick to it. It can be very easy to get emotionally caught up in a project and choose finishes with your heart and not your wallet.
“To make a profit on a fixer- upper, the purchase price plus the total renovation cost needs to be low enough that you can recoup your investment – with a healthy profit – not too far down the line.”
If you are new to flipping houses, Mott says you should always consult a construction expert before buying. And when it comes to the work, ensure you have chosen a reliable contractor with contactable references.
He adds that you should also assign a portion of your renovation budget to the garden.
Tucker agrees that you should look around for reliable and competent subcontractors in the form of builders, architects, electricians, plumbers, painters, handymen and landscapers and get many quotes to compare prices.
“Contractors are great for any structural changes like doors and windows, and they have knowledgeable on building regulations, but if you like you can appoint yourself as the main contractor and rely on professional input from your subcontractors.”
2. Choose the right area
The most important factor when choosing a property, Tucker says, is its location.
“Look at the home’s proximity to good schools, retail areas, and green spaces. Speak to a few estate agents in the suburbs that you’re looking at in order to understand who currently lives in this neighbourhood – for example singles, families, or older couples. Use this information to not only guide your house hunting journey but help you decide what needs to be done to the house as a part of the flip.
If a house is in a bad neighbourhood, an inconvenient position, or too close to an undesirable structure, like a cell phone tower or ugly apartment block, Mott says even the most spectacular renovation will struggle to see a favourable sale.
Good locations to look out for, he notes, are homes within popular school catchment areas, close to CBDs, or in trendy neighbourhoods with access to freeways and other amenities. A north-facing aspect, mature trees and attractive views are a bonus.
“Just because an area is popular or trendy doesn’t mean you won’t find fixer-uppers on the market. You often find elderly people moving out of up-and-coming suburbs who are selling homes that make perfect renovation projects.”
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3. Choose the right house
Finding the right property is vital to success as a poorly chosen project could cost more to renovate than could be recouped in a sale, Mott says.
“Buyers should spend time looking at what properties are available in their desired areas and study the markets thoroughly.”
But even having the ideal location doesn’t always make a property a good fixer-upper as, he says, a property must also have a sound structure to keep renovation costs down. Homes with serious structural faults, such as unstable foundations or weathered roof beams, for example, can be expensive to repair.
“This is seldom worthwhile for buyers hoping to resell for a profit in the short to medium term. If you’re not sure about the structural condition of a property, I’d recommend an expert inspection. This is not the kind of issue you want to discover halfway through a renovation.”
Mott says a property’s layout must also be considered because it is a “mistake” to assume every design flaw can be solved by knocking down a few walls.
“If the kitchen or bathrooms are in a weird location or the bedrooms are all in the coldest, darkest part of the home, it’s going to be difficult to solve that problem in a cost-effective manner.”
Homes with convenient room “clusters” – a comfortable bedroom wing, a central kitchen, dining and living area, and logically placed entrances, garden access and bathrooms, are recommended.
When looking for a house to flip, Tucker adds that it is a good idea to find the worst house, but in the best area – in other words, an ugly house that ideally only needs cosmetic changes in order to be transformed.
“Elements of a house that are relatively simple to transform include, floors, walls, roof, cabinets, counter tops, and the garden.
“A fresh coat of paint has one of the highest returns on investment compared to any other home improvement. But be wary of anything structural that needs to be fixed as this is going to be costly and time-consuming.”
Furthermore, when you start renovations and redecorations, rather put your own preferences aside and focus on current home trends, Tucker says.
“Kitchen and bathroom revamps can be costly but make the biggest impression on potential buyers...Look at improving the cabinets by replacing or repainting them, and putting in long-lasting easy to clean counters, fresh hardware, sinks, back splashes, warm and practical floors and efficient and eco-friendly lighting.”
She adds: “First impressions count, so put some money aside to create an appealing garden – minimalist, indigenous where possible, water-wise, and low maintenance gardens are the current trend. If you have a green thumb, you can do this yourself, or hire a landscaper if the budget allows.”