Way back in the mid-eighties, when there were still dinosaurs roaming the earth, Tom Hanks and Shelley Long starred in a movie called The Money Pit.  They played a young couple who couldn’t resist the “opportunity” to buy a run-down house for a song, in hopes of restoring it and making both a home and a profit.

Needless to say, the house needed more than a little work, the budget went WAY over (as budgets do), and the couple nearly broke up over the stress.  Fortunately for movie-goers, everything worked out. The couple got their fairy tale and their dream home.

In real life, this sometimes happens when people buy a house that’s falling down, too.  The same way that in real life, some people win the lottery.

A Money Pit is a Real Thing

A comedy about the allure of making money (gone wrong) by renovating a distressed property could have been made in any decade.  More recent years have seen an explosion in the popularity of shows about flippers – not comedies – that has made this concept go completely mainstream.  It seems as though everyone has thought about, even if they haven’t tried, buying a fixer-upper to restore.

As exciting as a project house can be,  it’s very important to stop and think things through.  Profit is not guaranteed, and older homes can be full of surprises.

It’s not all doom and gloom and caution tape, though.  With the right amount of due diligence and self-education, you can enjoy a successful flip project.

What Kind of Due Diligence to Do

When buying a house to flip, the first thing you’ll need to do is to clarify your goals.  Do you want to get in and out quickly? Restore and resell?  Or do you intend to hold the property for a while after you fix it up?

In either scenario, you will need to research the market and find out what comparable properties are selling for, both renovated and unrenovated.  This will help you to estimate not only the current value, but also the after repair value (ARV).

Many advisors consider a short term flip to be riskier than a buy-and-hold strategy, since you are relying on the market to hold steady.  Especially in a super-heated market like Hamilton’s, where even distressed properties sell in competition, there is a danger of overpaying for a property.  Be sure to do your math carefully, and to account for closing costs, taxes, and carrying costs for the duration of your renovation.

If you intend to hold on to the property for a few years and rent it out, there may be more room to allow for appreciation.  Take some time to learn what the market trends have been, and research some forecasts for the near future from experts who can offer a reason for their predictions.

Deal Breakers?

In the movie, everything that could go wrong with the house went wrong.  Plumbing exploded, electrical wires caught fire, doors fell of their hinges.  An inspection might have been a wise idea!

When you buy a fixer-upper, the entire point is to find something that needs work.  However, it’s important that you know which items are budget-breakers before go in headlong, especially if you are in a high-pressure or multiple offer situation where you are tempted to forgo an inspection condition.

We have compiled a list of some common updates that houses often need, depending on their age.  You can read that here.

Besides cosmetic and maintenance-type updates, though,  there could be problems with a property that you should consider as potential deal-breakers.  If your goal is to make a profit, the numbers have to work.  Some repairs have the potential to cost more than you can recuperate in the short term.  These include:

• Foundation or structural problems.  If the house leans to one side, or if you notice bulging floors, buckled foundation blocks or step-cracks, doors that don’t close, etc. –  know that this is not normal, no matter the age of the building.  And be aware that this is not easy or cheap to fix, if it can be fixed at all. There could be drainage issues or poor soil conditions that make it a major challenge to stabilize a house with these issues.
• Mould.  Follow your nose on this one.  If a leaky house is neglected long enough, it can develop a mould problem that is very costly to remediate.  Cleaning is not enough.  Often, walls must be torn out and wood replaced to get rid of the problem.  It’s next to impossible to know the full extent of the problem until you start tearing things up, and you may have to be prepared to completely gut the place and start over.
• Poor electrical wiring.  Not only is this a fire hazard, it can be a very expensive project.  Especially if the attic and basement are all finished will you want to have a thorough inspection of the electrical wiring.  Some wiring problems will prevent you from getting insurance, which means you may not get a mortgage.  And even if you can obtain insurance and financing, any re-wiring you have to do will result in damage to walls, ceilings, and floors that will add to your expenses.
• Septic Systems. If you are looking at a country property, be aware that replacing the septic system can be a hefty expense.  It is not unusual for this to cost $20-30,000.  Always insist on an inspection of this crucial component – or assume that you will have to spend some money on it.  Remember, too, that just because there was a septic bed on the property when it was built, that doesn’t guarantee that you’ll be allowed to put a new one in.  By-laws may have changed, and some areas now require a holding tank where a septic bed once was.  This is particularly true on Conservation controlled land, and near rivers and lakes.
• Stigmas.  Every once in a while, you may see a property with a disclosure attached to let you know that it is a former grow-op.  A stigma like this can reduce the market value of a property substantially, even on resale after a renovation.  Many buyers also avoid buying a property that has been the scene of a murder or suicide, or even a natural death.  Laws about what must be disclosed are fuzzy, so ask lots of questions and find out as much as you can about the history of a property to avoid taking a financial hit.

Here’s the Good News

Once you have done your research and gained an idea of what your investment options are, you will be armed to choose your project wisely.  Real estate can be a very solid investment when done carefully.

Take advantage of the expertise that is available to you: Read everything you can. Speak to mortgage professionals and lenders about your financing options.  Work with a tax accountant who knows real estate investing to ensure that you keep proper records, and consult with an experienced realtor in the area where you would like to work.

With a team of experts on your side, you increase your chances of creating the cash flow and profits that every flipper dreams of!