So you’ve purchased a great fix and flip property for a great price, but what if there is so much rehab work needed to increase the property's market value, it might make more sense to just tear it down and start over with a ground-up rebuild?
How do you decide whether to repair and upgrade your existing fix and flip property vs. demolishing it and building something brand new? Below are some questions you can ask about the condition of your property that will help you determine which construction strategy to choose:
4 Reasons to Choose Rehabbing over Rebuilding Your Flip Property:
If you can answer YES to any of these four questions, it will likely make more sense to keep the existing structure and spend your construction budget on repairs and upgrades instead of on demolishing and rebuilding the home:
- Is the home located in a neighborhood of historic homes or does it contain historical elements that add substantial value to the property?
----- If your property is made more valuable by its existing architecture, constructing a modern home in its place, or drastically changing its appearance compared to other homes in the neighborhood could be a huge mistake.
- Is there an HOA (home owners association) with CC&Rs (covenants, conditions and restrictions) that will prevent you from making substantial structural changes?
----- Some HOAs have strict regulations on any structural changes that will be allowed. For example, in a housing development of single-story ranch style homes, your plan to build a modern, two-story home may violate the HOA's CC&Rs and your construction plan will be rejected.
- Will buyers in the local market likely reject a dramatically upgraded or enlarged home?
----- If your flip property is located in a neighborhood where a large, new modern home would be surrounded by homes of significantly lower cost and appearance, you may struggle to find a buyer for your newly built home.
- Does your estimated scope of work for your flip property contain mostly cosmetic fixes, such as new windows and doors and/or upgraded materials and appliances?
----- If your return on investment can be maximized with simple repairs and upgrades, rehabbing the existing structure makes sense.
4 Reasons to Rebuild Your Flip Property:
If you can answer YES to any of these four questions, you may want to consider spending your construction budget on demolishing and rebuilding the home:
- Does the current floorplan of the home as it is situated on the footprint of the property prevent you from receiving the maximum return on your investment?
----- For example, if you can maximize your ROI by turning a single-story home into a two-story home while simultaneously making room on the property for a backyard pool, constructing a new home may be a great decision that can reap a huge profit.
- Are there multiple structural elements that will need to be replaced, such as the foundation, roof and electrical and plumbing systems?
----- If your flip property is an older home that has multiple major problems, building a new home can help you avoid investing your time and capital in a money pit.
- Is there a significant issue with asbestos or mold throughout the property that will require extensive, costly abatement?
----- Asbestos abatement and mold remediation can be extremely costly depending on how extensive the problem is. If prospective buyers are aware of extensive abatement/remediation performed on your flip property, they may be wary of purchasing it. If you can still maximize ROI with a rebuild, consider demolishing an asbestos or mold filled home to build a new home buyers will have confidence in.
- Is there catastrophic flood, fire, earthquake or storm damage?
----- There are so many unforeseeable issues that can arise in these types of catastrophically damaged homes, it is often risky to repair rather than replace them. If you are able to maximize ROI with a rebuild, you should. By replacing a catastrophically damaged home with a new one, you can avoid having your rehabbed home sit on the market later due to buyers' concerns about hidden or unknown issues they might get stuck with in the future.
Using a Hard Money Construction Loan to Rebuild
If you determine that new construction is your best strategy to maximize ROI, but cash on hand is limiting your construction budget, you may want to consider a construction loan from a hard money lender.
Anchor Loans' construction loans are available at up to 80% loan-to-cost for terms of 6-12 months—with extension options available if needed. While there is no maximum loan amount, the minimum amount of an Anchor new construction loan is $50,000.
With a construction loan you’ll make monthly interest-only payments on the outstanding loan balance and there is no penalty for paying the loan off early. For loans with scheduled holdbacks, interest is only paid on funds drawn. A balloon payment of the unpaid principal balance is due at the end of the term.
How do I get a new construction loan from Anchor Loans?
You can sign up for a free Anchor account at www.anchorloans.com in 60 seconds or less. Use Anchor’s secure borrower portal to submit a free application and an account executive will contact you to answer any questions you have about your specific construction project.
As with our fix-and-flip loan program, our construction loans are hard money loans. That means they are asset-based loans secured by real property, so there is more flexibility with credit score and financial history.
A few essential qualifications that will help you get approved:
- Although hard money loans are not credit driven, good credit has its benefits. Ask your account executive how your credit score can affect the terms of your loan.
- Loan applicants should be prepared to contribute 20% or more of the project’s total cost as a down payment, and should have adequate cash reserves for construction overages and monthly interest payments.
- Anchor Loans prefers to work with experienced investors, but each construction project is reviewed on a case-by-case basis. Prior experience with new construction or considerable fix-and-flip experience is a significant plus.
If you meet these general qualifications, you’re ready to apply. The Anchor Loans borrower application can be completed in as little as 10 minutes. Once your borrower application is approved you can submit your deal specifics, purchase contract and transaction documents. After loan documents are signed and closing details are in place, your funds will be wired within 24 hours. From start to finish, this whole process typically takes 5 to 7 days.