Savvy investors know to look for a fix and flip home with a 70% ARV (i.e., cost plus rehab should not equal more than 70% of your selling price). But certain features of an existing home could drive up rehab costs. They are usually spotted during the home inspection, but not always.
Watch out for these fix and flip red flags:
Keep Clear of Kitchens with an Awkward Layout
Expect to spend between 5-15% of the home’s total value to rehab the kitchen. Out-of-date appliances and cabinets that need to be replaced can drive costs closer to the high-end of that range, but you should still be able to turn a profit. However, if the kitchen layout would turn off today’s buyers, it might require a more costly renovation. Kitchens lacking storage, or layouts that would require moving appliances to create a more functional space, can drive rehab costs out of the acceptable range.
An In-ground Pool Won’t Always Raise the Selling Price
In-ground pools don’t always raise the selling price of a property. In fact, unless you are investing in an area where all the surrounding properties have pools, an in-ground pool could be a detriment to the sale.
Even worse is an in-ground pool that is in poor condition and needs to be removed. Expect to spend an average of $6,500 to remove an inground pool, and even more if the pool is big or difficult to access.
Avoid Lead Paint or Asbestos
Most homes built prior to 1978 contain lead-based paint. Inhaling lead dust can create serious health problems in children, ranging from learning disabilities to kidney problems or even death. Test for lead before closing to better estimate your renovation costs. The presence of lead doesn’t have to be a deal-breaker, but it’s not as simple as painting over the areas. You’ll need to use sealant over the walls or lay new drywall, adding costs to your project.
Similarly, bound asbestos may not be a problem, but if you need to rip up a floor or ceiling that contains asbestos, you’ll be looking at added renovation costs that you may prefer to avoid.
Beware of Black Mold
Black mold can lurk in corners of a house, even behind walls, and cause respiratory problems and other illnesses. When you inspect a property, look for signs of any color of mold, but especially black spots or dark, fuzzy stains. Be aware of musty smells or any signs of leaks or water damage, including water spots or rings on the ceiling or walls, because these could be signs of mold. Any mold should be removed before you sell the property, and the removal could add time and money to your rehab project.
Run the Numbers Before You Bid
Alone, any one of these problems may not cause a seasoned investor to walk away from a deal. But they are all typical of older homes and if two or more issues pop up during renovation, they could substantially cut into your profits and lower your ARV. Fortunately, they can all be avoided—or used as bargaining chips for a lower purchase price—if you spot them before closing.
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Original publication date: 12/18/18; updated: 1/15/20