Have you heard this advice? It’s often touted in the real estate industry. Some believe the best way to a successful flip is to choose the worst house in the best neighborhood. I’m going to talk about why it isn’t about the house being the worst that matters, it’s the potential. Could the worst house also have the most potential? Absolutely.
When you find a house to flip, especially if it ends up being the worst on the block, run through the following questions to ensure you’re not making a mistake. You’ll be asking these questions for all the houses you are buying, but they’re especially important to ask when you’re taking a chance on the worst house on the block.
Question 1: How are the bones?
The “bones” of a home are the construction. Think: Materials and foundation. As mentioned, we’re looking for potential. Nothing can be done with the house if the bones aren’t good. If the house doesn’t have good bones, it’s a pass.
Keep in mind that the bones of a home could be the very reason a house is the worst on the block! Look out for obvious shortcomings like: Small rooms, low ceilings, cracks in the foundation, a problem roof, or old plumbing.
Question 2: Is there room for improvement and profit?
Does the location support a high enough resale price to allow room for improvements and profit? Regardless of the home you’re looking to buy (worst on the block or not), you need to ask yourself this question. It really will make or break your purchase decision.
When you’re flipping a home, you want to make sensible changes, and if a home is worse off than usual, you’ll be making more changes which means more money. Ensure the price is leaving room for improvement in the form of adding finished square footage or additional beds and bath to maximize the value of the home. There needs to be some distinct value add differences made to support the new resale price.
Question 3: How is the location?
It’s true what they say… Location, location, location. When you’re flipping, you can make a lot of changes, but the location isn’t one of them.
Ask yourself these two things:
- Are the qualities of the location ones that buyers are looking for?
- Is the area in transition, established, or up and coming?
Location matters for more reasons than one!
An area in transition can go either way. Do your research, look into comps, and consider the potential in the home. As long as the location and property check the important boxes, you can make a great buy. Up and coming properties may offer lower prices but may also have a vast range of price points when it comes to resale. They may have less appeal to buyers who are looking for areas with a long term reputation for value and desirability. When it comes to established areas those are often where the most significant opportunity lies. These are areas that have long been sought after by buyers. Think of areas with highly regarded school districts, a history of desirability for home owners, access to parks, trails and other amenities that people seek in a community. This is also likely an area where there will be both older homes and new construction homes. This mix demonstrates that buyers want to live here but are often challenged with finding homes that offer the space they seek. A prime indicator that improving older homes and adding livable square footage is a perfect option.
Question 4: Is there a realistic backup plan?
Would a backup plan work for this house if it didn’t sell as a renovated flip? Some backup plans could be long-term rental or short-term rental.
You’re probably wondering how you know if a house is a good option for renting. Along with the basic things we went over that also matter for rentals (bones, location, profit), consider these things to determine if renting out the property is realistic and smart. Be sure to check local regulations to determine rules around either type of rental. It’s a good idea to check this before you purchase the property so you are prepared.
The 1% ruleThe one percent rule is a way to determine if a rental place will be profitable. The gross monthly rent before expenses ideally should be equal to or greater than 1% of the total cost of the property. This is not a hard and fast rule. And keep in mind if renting the property doesn’t quite cover the expenses there are still tax benefits to having a property that may outweigh taking a loss on a sale.
So Should You Buy the Worst House in the Best Neighborhood?
Not necessarily. If it’s got too many issues and not enough opportunities to create value than it should be a pass. As always, flip projects should be chosen with the end result in mind and comparable sales to support the renovations and resale value. Following that formula will help to determine your flipping success.
Ready to take that next step when it comes to flipping?
Here are some resources I’ve put together to help you get the information you need to move forward on creating your flipping life.
Make sure you have the Fixer Upper Checklist so you know which areas are critical to added value in a home.
If you are interested in learning more about the House Flip Blueprint course, go here!
There are several videos on finding houses, renovations, and funding on YouTube. Check out your favorite flipping topics and new videos weekly.
