Fix & Flip Due Diligence
As a private lender who sees a variety of fix and flip projects, we thought it prudent to emphasize one of the easiest, but most important, items to not underestimate the importance of:
UPFRONT DUE DILIGENCE ON A FIX & FLIP PROJECT
Establishing proper acquisition price and performing due diligence are the cornerstones of a successful fix and flip operation. Imagine buying a house to flip, only to discover later it has a hidden foundation issue or the local permits for your renovation dreams are impossible to obtain. Proper acquisition and due diligence help you avoid these nightmarish scenarios. Here's a deeper dive into why they're so crucial:
Acquisition:
Finding the Right Property: In a fix and flip, buying the right property, at the right price, is key! Market analysis helps you identify undervalued properties in neighborhoods with good resale potential. This means understanding things like recent sales data, property taxes, and local trends. Imagine buying a fixer-upper in a declining neighborhood - you might struggle to sell it later, even after renovations.
Accurate Valuation & Repair Budget: You need to know not just the purchase price, but also how much renovations will cost. Renovation costs are extremely important on getting accurate, relative to the scope of improvements that are actually needed and eliminating those that are unnecessary. Due diligence involves inspections, contractor quotes, and realistic estimates of all entrance and exit costs (title, closing, financing, taxes, etc.). This helps you avoid nasty surprises down the road and ensures you can actually make a profit after all the work is done.
Negotiation Power: Knowing the property's true value (through market analysis and due diligence) empowers you to negotiate a better purchase price. This can significantly impact your profit margin. Be willing to walk away from a “deal” and not get emotionally involved in the potential project. This will help you with the proper mindset to negotiate the proper acquisition price.
Due Diligence:
Mitigating Risk: A THOROUGH AND DETAILED inspection can uncover hidden problems like structural issues, drainage issues, mechanical & electrical issues, plumbing issues. These can be expensive and time-consuming to fix, derailing your project timeline and budget. Due diligence also involves checking titles for liens or ownership disputes to avoid legal headaches later. Make sure to get a title commitment, at a minimum.
Informed Decision Making: With a clear picture of the property's condition, potential renovation costs, and any legal issues, you can make informed choices. This might involve adjusting your renovation plans, walking away from a risky deal, or having a stronger negotiating position.
Peace of Mind: Knowing you've done your homework reduces stress and avoids unpleasant surprises. You'll go into the project with a realistic understanding of the scope of work and potential challenges.
In short, acquisition and due diligence are like having a roadmap and a flashlight before venturing into the jungle of fix and flips. They equip you with the knowledge to find the right property, avoid hidden pitfalls, and make sound financial decisions that pave the way for a successful project.