Fast Money: 7 Things to Consider Before Flipping New Construction
Whether you’re addicted to house flipping shows on TV or you’ve flipped a home for profit in the past, you know it can be tricky. Flipping existing homes can come with unexpected twists, turns and structural issues. Renovations eat into your profit and can turn a sure thing into a total dud. One way to bypass the unexpected is flipping new construction. It seems like a win-win: you put up the capital for a new home and you get to sell without the potential problems. But before you buy a new build for flipping, you’d better consider how it works and where you’ll make the most. Market conditions will dictate your profit.
Consider the market
The biggest factor in whether or not a new build will flip well is the current market. New homes rarely do as well in sluggish markets because of bargain-hunting buyers. They’re willing to renovate if it gets them a better deal. If there’s a hotspot in your area, however, it just might work. Look for areas where development is going quickly and new jobs are easy to find. Buyers there will be more interested in buying a ready-made, brand-new house, especially if they’re in a time crunch. If the market is hot, flipping new construction could be lucrative. If the market is slow, you might be better off with a traditional flip. Appeal to the broadest buyers for your best bet.
Spec vs. custom
Know the difference between a custom home and spec home so you can find the right builder. A custom home is one built to an owner’s specifications. A spec home is one built by an investor to sell for profit. If you’re flipping new construction, you’ll want a builder who has done spec homes in the past. That way, you’re working with an expert who knows where to spend your building budget and where to hold back for the best chances at profit. Modest homes usually sell faster.
Location, location, location
Location is one of the first things to consider in any home building or buying situation, but it’s especially important for flipping. Building the most beautiful home in a ghost town will likely leave you paying to mortgage for a long period of time. Choose a location thoughtfully, opting for a place with plenty of development, fast sales and a booming job market. A more modest house in a great location is cheaper to build and will bring the most profit. House hunters are always looking for the best location, so a solid lot may be the most lucrative part of your investment. Consider your target homeowner when designing the layout.
The hardest part of building for profit is remembering that you aren’t the homeowner. The features you might spend more for may not be everyone’s cup of tea. To appeal to the most buyers, you’ll need to work with your builder to design the home thoughtfully. Consider things like:
- What floor plans are selling well?
- What type of family would most likely live in this home?
- Where should you spend the bulk of your building budget?
- What features do local buyers want?
- How much are similar homes going for in the area?
By creating a profile of the type of buyer who would love your spec home, you can build with a specific end goal in mind. If you’re building in a family area, you could design an open-concept home with plenty of bedrooms. Building in a burgeoning city occupied by millennials? Focus on entertainment spaces. Your builder should be able to point you in the right direction. A master bathroom can drive up the selling prices.
Spend or save?
Know when to spend your budget and when to hold back. It’s important to invest in the spaces that become real selling points for potential buyers. The best part about building spec is that you get to start from scratch without any demolition or renovations. Your goal should be to give buyers spaces that they don’t even have to think about renovating. Traditionally, two spaces sell homes: kitchens and master bathrooms. Spending more of your budget on high-end cabinets and fixtures there will likely bring a return on your investment. Spending money on pricey paint treatments and landscaping may be money pits because both can be easily adjusted to buyers’ tastes. Save where you can so you can spend more money on showstopper rooms that really sell the home for you. Talk to your builder about incentives.
Lower initial capital
Save your money by lowering the investment capital as much as possible. Builders often offer incentives, such as upgrades, design center credits, and even better interest rates for certain criteria. It might be using their mortgage company, building in a certain month, or even opting for a specific location. Exhausting as many incentives as possible lower your upfront capital and increase your chances for profit, so explore all of your options. Keep funds handy for emergency purchases.
Building a slush fund
Once your builder gives you a price, make sure you take around 10 to 15 percent of that price to keep on hand in case of delays and issues. If you sign a contract, the price is set in stone. Still, you might have unexpected land issues or find yourself closing on and carrying the mortgage for a few months until it sells. Consider your slush fund a “down payment” of sorts. It might eat into your profit, but it can help you stay afloat while waiting for a sale. Flipping new home construction definitely has its benefits. Building and selling a brand-new home appeals to a certain type of home buyer and, with a tight turnaround, could net your profit quicker than an existing build. Still, it’s not a no-brainer. Consider your options. With the right builder, a new home flip might be your best bet for an investment property – no demo needed.