House flipping continues to expand across the United States and, more recently,
extending even into to the luxury real estate market. While many investors
enter the arena of luxury home buying believing that they will quickly
turn a hefty profit, it is important to understand a few obstacles unique
to the high-end real estate market.
Budgeting is Essential
The luxury real estate market caters to meticulous buyers who are often
unwilling to accept homes that do not completely meet their demands. Investors
may find it takes longer trying to sell a high-end home than flipping
low-cost properties. In fact, Attom Data estimates luxury real estate
sells on average approximately 208 days after being listed on the market.
This fact only emphasizes the need to take a cost-effective approach,
and why budgeting plays a crucial role in luxury house flipping.
Investors who solely rely on a home selling within three months of its
initial listing date may find themselves losing substantial equity if
the property takes additional time to attract a buyer. This risk is especially
true if the investor took out a hard-money loan to finance the deal, as
each additional month means another costly interest payment. The extended
time could cut into profits and cause the seller to barely break even
if he or she is not prepared to weather such delays. Luxury house flippers
should always be ready for the unexpected by employing budgets that provide
plenty of breathing room.
High-end buyers are not typically concerned with reduced home prices, and
therefore, do not want to purchase cheaply renovated homes. Kitchen renovations
must be fresh and modern, and every bathroom in the house should have
an underlying theme that speaks to discerning buyers. Paying the extra
money for an experienced designer is the best way to ensure prospective
clients will be willing to pay top market price for a renovated home.
Investors should factor the additional expense of a style developer into
their budget. This extra attention to detail will help to properly plan
the central aspects of the home and prevent costs from spilling over from
your profit pool.
Luxury Flipping with the Right Financing
Home flippers looking to finance large portions of their projects use private
lenders extensively. Hard-money loans are a type of short-term, high-interest
financing that is convenient for house flippers. The loans typically close
faster than traditional mortgages, and the loan amount can be based on
the future value of the property. This feature works well for flippers
who like to preserve their capital for additional upgrades, to provide
a cushion for unforeseen circumstances, or use for the escrow deposit
on their next project.
However, borrowing against a higher loan-to-value means investors must
budget wisely and borrow responsibly when venturing into the world of
luxury house flipping. Charging certain expenses to an established line
of credit makes more sense than asking a lender for more high-interest
money to pay for needed renovations. Establishing a solid foundation and
staying on good terms with multiple lenders will increase the likelihood
of quickly obtaining your next round of financing for future projects.
Regardless of which route investors choose to finance their renovation
efforts, it is important to note that luxury house flipping is entirely
different from conventional house flipping. High-end buyers are more demanding
and want their property in turnkey condition before they close. Striking
the right balance between quality, attention to detail, and design will
pay dividends with a shorter listing, a smaller punch list, and improved
chances of earning a profit windfall.
Melissa Martorella directly for more information.