Denver Real Estate Law Blog. (Vol 1.76) August 18, 2016
By Craig Franklin Chambers Esq. 7851 S. Elati Street #101, Littleton, CO 80120
The Littleton Lawyer.
As a Colorado real estate lawyer who focuses in civil ligation, real estate law and divorce and family law in Denver, Littleton, Centennial, Englewood, Lakewood, Highlands Ranch, and Unincorporated South Jeffco, I often help people with legal problems related to "fix n flips."
A "fix n flip" or a "fixer-upper" is when an investor buys a home at a discount with hopes of renovating the home and selling the home quickly at a profit.
No doubt some people are good at fix n' flips. My wife watches shows on tv which make buying and flipping a home look profitable and easy. My own observations as a real estate broker, real estate investor, and real estate lawyer are not quite as positive. Here are a few tips based on my 36 years of experience as a broker and 19 years experience as a lawyer.
- Put the Property in an LLC. As with any investment, you do not want to risk your own home or personal funds. Create an LLC or similar corporate entity for the fix n flip project. This will not necessarily protect you from all kinds of personal liability, but it does create one layer of protection for your personal assets. Anyone suing you for issues with the property will be suing the corporate entity and not you personally. Make sure and keep accurate records of your costs and do not use personal accounts for any cost related to the project.
- Chose your partners wisely. If you enter into a partnership or a Limited Liability Company as owners of real property, it is like entering a marriage. If you need a partner, make sure that the partner you choose is financially stable and has financial needs similar to yours. Avoid deals where one partner offers labor or services instead of money as his contribution to the transaction. These will types of business relationships are usually doomed from the start.
- Choose a property in close proximity to your home or office. You will be making many many trips to the fix 'n flip property from purchase, through the fix-up process, to closing and if it is an inconvenient location, these trips will grow old fast. This type of investment is rarely passive, and decisions will need to be made as you go through the process. Make sure you are buying the property at a good price, verifying the value with recent sold comparables of similar properties of the same floor-plan in the same area.
- Assume the fix up will cost more than anticipated. The best fix and flips only require minor cosmetic repairs, but frequently the contractors are unreliable or their bids are inaccurate. Choose reliable and reputable contractors. Ask for lien waivers from the general contractor as the work is completed. Even with the best contractors, unforeseen problems often arise, and the renovation work will take longer and cost more than anticipated.
- Assume the carrying costs, and time on the market will be higher and longer and that the ultimate net sales price will be lower. Realtors and investors tend to be overly optimistic about the ultimate resale price in deals like this, the market is often inconsistent, and buyers often require concessions such as closing costs or a reduction in purchase price.
All of these factors will result in a lower net profit after the close of the renovated property. Also the time for the renovated property to be on the market is likely to be longer than anticipated, because of the market and because buyers need time to qualify.
If after all of these considerations, the transaction is still worth pursing financially, go for it.
As a last recommendation, it is a mistake to be too greedy. Once the home is renovated and ready for resale, the sooner you get out of the property the better, and pricing the home too high only results in higher carrying costs and less profit.