Fix and Flip: Renovating and Reselling Residential Real Estate

It has become common over the past several years for real estate investors to buy distressed properties, renovate them, and resell them at a profit. Commonly called a "fix and flip," this strategy can work extremely well if done properly.  It's important to understand the process, risks, and essential steps of fix and flip investments before undertaking one yourself.

Renovating Distressed Properties

A "fix and flip" investment involves acquiring a property at a comparatively low price, renovating it, and then selling it at a higher price, aiming not just to recover the initial investment but to secure a profit. In Hawaii, many properties that are considered "affordable" and good targets for a fix-and flip exist on the line between a tear-down and a rehabilitation.  Working with a skilled contractor and project manager, and engaging someone with experience navigating the permit process are essential.  

Four Steps to a Fix and Flip

At its most basic, this process involves four critical steps:

1. Selecting the Appropriate Property: Finding a property that, once renovated, can sell at a significantly higher price. Essential steps include conducting a thorough property inspection to determine what structural elements and other high-cost items will need to be replaced, identifying what renovations or other work will be the most profitable and, most importantly, and obtaining an accurate cost estimate for these renovations from a contractor.
2. Financing the Project: Often the hardest part of the process, it is vital to explore the best loan options. Using private or hard money lenders can be advantageous but risky because of high interest rates and the potential for delays.  An accurate, objective financial underwriting showing the worst, best, and most likely scenarios is critical. Any loans must be documented and should be reviewed by your legal counsel given the lack of any meaningful federal or state regulation over private money lenders. If you are sourcing private money, you should make sure your loan documents adequately protect you as the project's sponsor.
3. Renovating the Property: Engage a licensed contractor with appropriate amounts of insurance to carry out the renovations, ensuring adherence to your loan application's outlined plan to avoid overspending. Make sure you have a detailed written agreement with your contractor.
4. Selling for Profit: Engage a professional real estate agent to sell the renovated property. The real estate agent will understand the market and have the processes in place to ensure a smooth closing.

Rehabilitating distressed properties includes a significant amount of risk, which can be mitigated by an experienced team and solid transaction documents. Having a strong and well-drafted purchase contract, loan agreements, and agreements with your contractor are all critical in a successful fix and flip.  

Please contact our firm here if you would like more information.