DURBAN – Buying a property with the sole purpose of renovating it and then selling it quickly thereafter at a higher price is not a new but is a popular form of property investment that has become more appealing thanks to a number of global reality TV shows in recent years.
South Africans are also joining the movement, including YouTuber Stephen Baron, who recently made a profit of nearly R1 million by reselling a house in Johannesburg.
The concept sounds simple enough, but Andrea Tucker, director of MortgageMe, says you need to know what you're doing.
“Investing in a home with the intent to resell is a big decision and you should go into it as informed as possible, always keeping in mind the risk/reward ratio.”
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Mike Greif, chief executive of Greif Christie's International Real Estate, said buying properties in need of repair has become popular in recent years, with many buyers and investors looking to capitalize on the opportunity.
“Because these properties are not highly sought after, you can almost always get a great price from an agent or motivated seller. Sellers of properties that need repairs are aware that the property may be harder to sell and will take this into account when determining the selling price of the home.”
Here's some advice from experts on how to successfully flip a property.
1. Set a budget
The first step is to know how much you can invest, which you can find out by getting pre-qualified through a bond issuer's service, which will tell you how much of a mortgage you qualify for.
Another factor to consider when creating a budget, says Tucker, is the “after repair value” (ARV) or “70% rule,” which in real estate refers to the estimated value of a property after it has been renovated.
“This way you have some cushion in your budget in case something goes wrong – you'll pay 70% of the property's ARV minus any necessary repairs.”
For example, if the ARV is R1 million and the property needs about R250,000 to repair, she says you should not pay more than R450,000 for the property.
“When searching for a property, keep this figure in mind and make sure you search within your budget.
“Also, remember that you will need around 8% of the value of the available bond to cover the costs incurred in the process of getting the mortgage and the costs it will cost your solicitor to transfer the property into your name.”
Craig Mott, regional sales manager for Lawson Property Group in Cape Town, says it is important for buyers to know the approximate cost of renovations before purchasing a property that needs repairs.
“Set budgets for individual items and sections of your home, such as setting a price per square metre for flooring, and stick to them. It's very easy to get too emotional about the project and end up choosing finishes with your heart rather than your wallet.
“To make a profit on a property in need of repair, the purchase price plus the cost of renovations must be low enough that you can recoup your investment with a sufficient profit in the not-too-distant future.”
Mott says that if you're new to flipping homes, you should always consult with a building professional before you buy, and be sure to choose a trusted contractor with contactable references for any construction work.
He also said some of the renovation budget should be dedicated to the garden.
Tucker agrees that you should look for reliable, competent subcontractors, such as builders, architects, electricians, plumbers, painters, handymen and landscapers, and get lots of quotes to compare prices.
“Contractors are best suited to structural alterations such as doors and windows and have a good knowledge of building regulations, but you can also appoint yourself as the main contractor if you prefer and rely on expert input from subcontractors.”
2. Choose the right area
According to Tucker, the most important factor when choosing a property is its location.
“Pay attention to the home's proximity to good schools, commercial areas and green spaces. Speak to a few real estate agents in the suburbs you're considering to get an idea of who currently lives in the area (singles, families, older couples, etc.). This information will not only help guide you in your home search, but also help you determine what you need to do to the home as part of the resale.
Mott says if your home is in a bad neighborhood, in an inconvenient location or too close to undesirable properties like cell phone towers or ugly apartment buildings, it's unlikely to sell at a good price, no matter how great your renovations.
Good locations, he points out, are homes in popular school districts, near central business districts or in trendy neighborhoods with access to highways and other amenities. They also tend to face north, have mature trees and attractive views.
“Just because an area is popular or trendy doesn't mean there aren't properties on the market that need fixing up. We often see older people moving from newer suburbs finding homes for sale that would be perfect for a renovation project.”
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3. Choose the right home
Mott says finding the right property is key to success, and choosing the wrong project could mean renovating it for more money than you can recoup from selling it.
“Buyers should spend time researching the market thoroughly, finding out what properties are available in their desired area.”
But even a perfect location doesn't necessarily mean the property is suitable for renovation, he says, because to keep renovation costs down, the structure of the property also needs to be sound. For example, a home with serious structural flaws like an unstable foundation or weathered roof beams could be costly to repair.
“For a buyer looking to resell at a profit in the short to medium term, this offers little value. If you're unsure of the structural condition of the property, we recommend a professional inspection. This is not the kind of issue you want to discover in the middle of a renovation.”
Mott said it would be a “mistake” to think all design flaws can be fixed by knocking down a few walls, and that the layout of the property also needs to be taken into consideration.
“If your kitchen or bathrooms are in odd places, or your bedrooms are all in the coldest, darkest parts of the house, it's going to be hard to solve the problem cost-effectively.”
Homes with a “cluster” of useful rooms are encouraged, including comfortable sleeping quarters, a central kitchen, dining and living areas, a logically arranged entrance hall, access to the garden, and bathrooms.
When searching for a house to resell, Tucker adds, it's a good idea to find a terrible house in a great area — in other words, an ugly house that can ideally be transformed with a simple cosmetic change.
“Some of the elements of a home that are relatively easy to remodel are floors, walls, roofs, cabinets, countertops and gardens.
“A fresh coat of paint will provide the highest return on investment compared to other home improvements. But be careful if structural repairs are needed, as they will be costly and time-consuming.”
Additionally, when embarking on a renovation or redecoration, Tucker says it's important to set aside your personal preferences and focus on current housing trends.
“Renovating your kitchen or bathroom is expensive, but it makes the biggest impression on potential buyers…. Consider upgrading your cabinets by replacing or repainting them, installing longer-lasting, easier-to-clean countertops, new hardware, sinks and backsplashes, warm, practical flooring and efficient, eco-friendly lighting.”
She adds: “First impressions matter, so set aside some money to create an attractive garden. Minimalist, indigenous plants wherever possible, water-saving and low-maintenance gardens are on trend right now. You can do it yourself if you're good at gardening, or hire a landscaper if your budget allows.”
To find out more about the recent South African house flipping project, check out the YouTube videos on Baron’s channel “Flipping Johannesburg.”
If you're looking for a home to resell or renovate for yourself, start your search here
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