When I talk to new real estate investors, I’m always curious what they think the most important things are to consider when making an offer on a distressed property. When I ask them about this, they almost always have the same answer—price. Well, yes, the price of the house is definitely important since you’ll be using that to gauge the property’s after-repair value (ARV) and your profit margin when you sell.
However, there are a few other things that I want to encourage you to consider before you make an offer on a flip house. I think of these as an essential part of my research for any flip, and I think you should, too.
Market Trends Over the Past Two Years
First, I want to know that the market in the area where I’m buying isn’t going to fall flat or tank by the time I get done with rehabs and put the house on the market again. Markets all over the country are showing pretty steady improvements, and we’re seeing a lot of gentrification, which is great for flipping houses. However, there are never any guarantees, so always do your research first.
Look at the market values and the average time that houses have spent on the market in the area over the past two years. You’ll probably see some minor ups and downs, but if the trend is generally a steady increase, then you’re in a good spot to invest. If market values have plateaued, you may still be looking at a good deal, but be sure that you have a good margin to work with. If the trend is downward, you may be looking at a dying neighborhood, and you might want to avoid it until prices begin to rise again.
Your buyers want to live in neighborhoods where they feel safe. They may not care whether they can leave their doors unlocked all day and night, but they don’t want to feel like they have to have an armed escort to walk to their cars at night (or in the middle of the day).
People will look for statistics on crime rates in the areas where they’re thinking about buying. Savvy buyers will either avoid the area or try to bring you down on the price if they find that there have been a number of break-ins in the area.
That doesn’t mean that you can’t buy and flip houses in transitional areas with higher crime rates. It just means that you should know that you have some leverage on the price for the house you’re looking at, and you should be prepared to sell at a slightly lower market value, as well.
Nearby Schools and Amenities
Finally, think of your buyers’ kids. Are there good schools in the area? Are there other amenities around, like parks and grocery stores? If so, you’re looking at an area that’s bound to start booming at any moment. If not, you could be looking at a neighborhood that won’t see recovery until there’s a shift in the market and some catalysts (popular stores, parks, recreation centers, schools, etc.) start moving in.
To me, these are the three most important things to consider before making an offer on a potential flip property. You can still make a profit on a house in a neighborhood with a deflated market, higher crime rate, or few amenities, but you’ll have to work harder. Because you’ll be operating at a higher risk, you have some leverage on negotiating your price. On the other hand, you may decide that the risk is too high and it’s time to look elsewhere. Either way, you’ll have made a better decision than you would have if you hadn’t looked into these factors.