Money Maker or Money Pit? Five Warning Signs It’s Not a Good Fix-and-Flip Investment

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For a fix-and-flip investor, there's no thrill quite like finding that diamond in the rough fixer property.  It's almost like a love story, isn't it? Investor meets off-market, neglected property with a highly motivated seller who will settle for a ridiculously low price. The place is ugly, but the investor's eye sees underneath the layers of aging paint, out-of-date fixtures, hideous kitchen, and neglected landscaping—envisioning instead a beautifully transformed property any buyer would be proud to call home. So what if the place is an ugly duckling? The price is great. The smitten flipper is beyond confident that after repairs and upgrades, that little ugly duckling will become a gorgeous swan yielding a hefty ROI. 

Unfortunately, sometimes the house flipping love story does not end so happily ever after. Sometimes the investor falls in love too quickly and is so eager to snap up that ugly duckling property, they don't thoroughly investigate every aspect of the property's as-is condition or it's ARV. And, when they find out too late that there's an expensive problem that will eat up their entire profit margin—let's just say that's a painful heartbreak no fix-and-flip investor ever wants to experience.

Thankfully, in most cases these badly ending stories can be avoided in the first place with the right amount of due diligence and attention to detail. Here are five  "money pit" signs to look for when considering a fix-and-flip investment property purchase:

  • Too Long on the Market

If the fix-and-flip property you are considering has been sitting for too many months on the MLS, especially if it is showing a few "pending sales" that ultimately fell through—chances are there is something seriously wrong with the property that will likely be expensive to remedy.

You can ask the property owner or their agent if there are known problems that are preventing a sale, but you may not get a completely truthful response to your question, so it may not be wise to depend on the seller for advice here.

Under no circumstances should you purchase this type of property as-is unless you are able to negotiate a price drop so significant that it would more than cover the cost of  whatever unforeseen catastrophes might arise. And, if you do plan to buy as-is, before you fully commit, you should have the property inspected by a skilled and trusted professional who can give you a clear understanding of the scope of needed repairs.

 

  •  Foundation Issues

If you’re going to buy a fix-and-flip investment property with foundation issues, be prepared to spend thousands of extra dollars—with possibly several weeks more time added to your construction calendar as well. 

Patching foundation cracks can cost several thousands of dollars, but the patching does not address whatever is causing the problem in the first place. To produce a quality flip you can be proud to sell to a home buyer, you could end up spending tens of thousands of dollars addressing foundation issues, and if an entirely new foundation is the only remedy—depending on the size of the home, the price tag could end up being in excess of $100,000. 

  • Sewage and Drainage Issues

Sewage and drainage issues are easy to overlook with a fix-and-flip investment property purchase, and if the property seller chooses not to be upfront about existing problems, this will be an expensive bullet to bite later.

Be sure that the water is turned on for the property inspection, and have your inspector focus specifically on the sewage system. Depending on their findings, you may want to consider having a video scope performed to give you a clear picture of costs you might incur if there are breaches or leaks in the pipes. Also. be sure to look for signs of standing water on the property, which, depending on the scope of the problem can be quite expensive to fix.

  •  Roof Damage

Depending on the size of the fix-and-flip investment property you are considering, and the types of roofing materials being used on local comps, repairing or replacing the roof on your flip can cost you tens of thousands of dollars.

Have your inspector thoroughly examine the roof for age and condition. If the house has several layers of shingles, make sure you add the cost of removing and replacing the entire roof to your renovation budget before making an offer to purchase the house.

  •  Mold 

The presence of mold in a fix-and-flip investment property is not an automatic deal breaker, but the extent of the infestation is key. A little bit of mold near the washing machine drain pipe is one thing, but mold can take hold in the drywall, framing, floors, HVAC ducts, attic and crawl spaces of a home — and depending on the home's square footage, it could cost you $10,000 or more to completely mitigate.

One of the most difficult issues with buying a property that shows evidence of mold, is that it is impossible to know the extent of the problem with a simple visual diagnosis. During renovations is typically when the true scope of the problem is realized, and at that point you'll have to cough up the cost of abatement. If there is evidence of extensive mold in a property you are considering, you might be able to use that fact to bring the purchase price down accordingly.

Do Your Homework

Before you sign on the dotted line on that fix-and-flip investment property, you’ve got to do your homework—thoroughly—if you don’t want to get sidelined by surprises that can turn your house flip into an investment flop.

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