When some people imagine over-renovating a home, they’re thinking Italian marble floors and golden claw-foot bathtubs. But it can be more subtle than that.
The same goes for under-renovating a home. Going with less expensive fixtures may seem to make good financial sense, but you risk not maximizing the home’s resale value.
From countertops to flooring to appliances, real estate investors should know exactly what the home needs to avoid eating away at their bottom line — or worse yet, not being able to sell the property without significant price cuts. Here’s how to avoid both over-renovating and under-renovating your next fix-and-flip investment.
Consider the Neighborhood
The first thing a real estate investor should consider is the neighborhood — and there’s a lot to think about.
Property Types: First, look at the types of properties surrounding the home. Are there other single-family homes? Is it a single-family home on a commercial street? Is it mostly multi-family units? This will help you determine what’s the highest and best use of the space to maximize your exit strategy.
The Fundamentals: Speaking of highest and best use of space, consider if the home has the correct fundamentals for the neighborhood. Does the house have a carport while most homes in the area have two-car garages? Are the nearby homes mostly three-bedroom/two-bath while the home you’re buying is two-bedroom/two-bath? Renovate the home to match the level of the neighborhood.
For example, let’s say you’re buying a two-bedroom/two-bathroom house with an office space. The neighborhood mostly has three-bedroom/two-bathroom homes. If the house layout lets you convert the office space into a bedroom by adding a closet and an egress window, the value of the home will likely see a strong ROI.
On the flip side, if you have a four-bedroom house in a three-bedroom-house neighborhood and you opt to convert the office space into a fifth bedroom, that’s an example of over-renovating. Or, if you opt out of converting the carport to a garage when the neighborhood mostly has two-car garages, that’s under-renovating.
Know Who You’re Selling To
There is never a single right buyer. There is only the right buyer for a particular area and house at a particular time.
Finding the Best: With your knowledge of the neighborhood now in hand, consider who is the best person to sell to right now. Is it a high-end luxury family or a mid-market family? Will you target first-time home buyers or people who are looking to level up to their “forever home”? Or are you hoping to sell to a REIT?
Each of these buyers have different things they value, and you should take that into consideration when planning your renovation. For example, luxury home buyers are most likely looking for high-end materials and fixtures and place a premium on high-design and special touches that make the home unique. First-time home buyers are more likely to be fine with basic appliances and fixtures in a standard layout.
A Partner Can Help: It gets even easier if you can partner with a company that’ll help you de-risk and streamline your fix-and-flip investments. Stoa, for example, provides investors with a scope of work that’s based on the requirements of institutional investors. That way investors know in advance exactly what the end buyer wants so they don’t have to worry about over- or under-renovating.
There is never a single right buyer. There is only the right buyer for a particular area and house at a particular time.
Don’t Forget the Finishes
If you’re selling to the retail market, you want to find that sweet spot of renovating a fix-and-flip investment just enough for it to be a desirable property from a buyer’s perspective while not over-spending.
Find What’s Selling: One easy way to find that sweet spot is to find the nicest homes of a similar size in the neighborhood. Then, find out which ones are under contract or have sold recently, as well as how quickly they sold. This gives a good indication that if you make your home look like these homes, you have the best opportunity to sell your investment quickly and for top dollar.
Comparable Finishes: Next, look at how those homes have been renovated to get an idea of the level and type of finishes you need to budget for. Do most of the homes have hardwood floors or luxury vinyl plank? Granite or quartz countertops? Higher-end commercial-style or stainless steel appliances, or basic black or white?
This will let you know which finishes and materials will get you the best per-square-foot price in the area, or at the very least, allow you to exit quickly for a strong price. What you don’t want to do is go too far over or under the finishes in comparable homes. Otherwise, you could take a hit in the selling price, or worse, take longer to sell the home while you try to recoup some investment funds at the time of sale.
It’s All About Research
The most important thing to keep in mind is that preparation is the key to avoiding over- and under-renovating. Take a drive through the neighborhoods you’re considering investing in to see what the homes are like. Decide if this area is one that you feel you can compete successfully in.
From the MLS to county records to local newspapers, there are plenty of resources out there that can help you find that just-right level of renovation and maximize your ROI on each flip.
A bit of sweat equity up front will pay dividends later.
