Strategies for Successful Fix and Flips
Determine if setting up an LLC makes sense.
Most of our borrowers choose to set up a Limited Liability Company (LLC) to purchase their investment property. Whether or not this is advisable for each individual investor is something he/she should discuss with his/her business advisors and/or attorney. There should be a further exploration of whether it makes sense for each individual investment property to be purchased through its own LLC, with each named after the address of the property being purchased.
Make sure to ask your prospective lender the right questions.
- Are you a lender or a broker?
- Do you have references that you can provide to me?
- How long have you been in business?
- How long does it take to get a term sheet?
- What fees will I have to pay?
- Is there a pre-payment penalty?
- Do you require an appraisal?
- How quickly can you close?
- Can I use any contractor that I want for my fix & flip?
- Does a third party perform draw inspections?
- How long does it take to receive funds from a draw?
- Are there any other services that you provide to your borrowers?
Building a good team is one factor that will promote success, and that includes the choice of lender.
Know the local market, inside and out.
If the geography in which you plan to invest is not your own neighborhood, it is essential that it be one with which you are intimately familiar. If you do not have the inside knowledge of the neighborhood, it makes sense to start with what data is publicly available. For Baltimore City, an example of a site that provides information on different neighborhoods is Live Baltimore. Another site is the Baltimore Neighborhood Indicators Alliance, who strives to provide “meaningful, accurate and open data at the community level.”
Publicly available information will not be sufficient though, as that data often lags the current market conditions. For example, in July 2020, the Long & Foster “Market Minute” focusing on the Baltimore City Housing Market was from May 2020. This is no fault of Long & Foster’s; it is simply a matter of when that data is aggregated and becomes available for analysis.
Investors should speak to neighborhood residents personally to get a feel for the sales prospects. Walking the neighborhood is obviously one way to connect with residents. Other ways are using an app like Nextdoor or joining a public Facebook group for the neighborhood in question. Investors should scour community websites and local news to further develop their knowledge of the target geography.
Select your contractor carefully.
If the real estate investment requires the work of a contractor (meaning that the purchaser himself is not a contractor), then it is critical that the contractor be selected carefully. We devoted a previous blog post to this very subject. Your contractor should meet the following requirements:
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The contractor must be licensed, bonded, and insured. This information will be confirmed—you cannot just take someone’s word on this. There is far too much risk associated with going any other route. The homeowner will end up holding the bag if the project does not meet code, if a worker is injured on the homeowner’s property, etc. The homeowner will also assume liability for payment to subcontractors. It may be tempting to hire someone who is unlicensed but comes highly recommended—but the potential pitfalls far outweigh any cost savings. Maryland’s Department of Labor provides a home improvement public query that enables members of the general public to check to ensure that a prospective contractor has an active license. The state of Maryland requires that only Maryland Home Improvement Commission (MHIC) licensed contractors enter into contracts with homeowners to perform home improvement work.
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Ask to see photos of the contractor’s past work. This mitigates the risk that the references provided are not being forthcoming regarding any negative experiences.
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Check for any negative reviews. While you certainly cannot make everyone happy, a negative review should be the exception rather than the norm. Note also that anyone may check a contractor’s complaint history by calling the state of Maryland’s Home Improvement Commission, Monday-Friday, 8:30 a.m. - 4:30 p.m., at the following telephone numbers: 1-888-218-5925 (toll free) or 410-230-6309 (Baltimore area), or by sending an e-mail to DLOPLMHIC-LABOR@maryland.gov. Complaints closed within the last three fiscal years are reportable to the public.
- Make sure that the contractor will commit to being easily accessible to the project owner. All too often, calls from project owners to their contractors go unanswered or are not answered promptly.
- Make sure the contractor is someone whose team has specialties— someone on the team is particularly skilled with painting, someone on the team is particularly skilled with floor installation, etc.
- Make sure the contractor is someone who does not take too many jobs at the same time (those who do end up being pulled in too many different directions and deadlines tend to become far too fluid).
