Finding a good residential flip deal is a time consuming task. There are so many factors that go into a flip deal that it can almost feel like a cosmic alignment when financing, the type of repairs, the purchase price and the anticipated After Repair Value all point to a successful flip. Then, after all that, comes the closing.
Understanding what can go wrong at a closing is part of the job of the real estate investor. Knowing what sort of problems can crop up at the last minute and the severity of each one is part of the business, and like anything else being forewarned is better than flying by the seat of your pants.
Condition of the Investment Property During Closing
Flip properties, almost by definition, have problems. The first time flipper has decided that the problems presented by the property are manageable, meaning they can be corrected within the budget and the time horizon. However, the final walk through on a property happens the day before and sometimes the day of the closing. That walk through can disrupt the entire deal.
New damage to the property that turns up at the final walk through has to be seriously considered. Vacant properties are subject to vandalism, and a vacant flip property is a great target. Storm damage can happen overnight. The first time flipper has to immediately evaluate if the damage will disrupt the flip timetable.
Damage that would be repaired under the original plan can be either disregarded or taken in stride. Graffiti on walls that were scheduled for repainting is a great example, as is a forced entry through an entranceway that needed repairs in the first place.
However, damage to a new area of the house requires closer scrutiny. Water damage and broken windows are two examples of new physical problems that require the buyer to reevaluate deal.
Be Aware of Title Problems Before the Closing
Flip properties often have problems with the title. Liens against the title for unpaid taxes, prior work or legal judgments can postpone a closing. However, sometimes postponing a closing can put the financing arrangement at risk. The first time flipper should not be surprised that an apparently solid transaction falls apart piece by piece.
Other more significant problems require the flipper to consider walking away from the deal, and taking a loss for the time spent evaluating the transaction. Covenants that restrict what can be done with a property may not be disclosed before closing, and the buyer needs to evaluate if they interfere with the remodeling plans.
For example, a small deck off the kitchen that is badly rotted may get the flipper planning for the impact a new, larger deck will have on market value. Learning that the old deck was the maximum permitted size should cause the flipper to reconsider the whole deal. Anything that prevents the flipper from implementing their remodel plan should be considered a potential deal breaker.
Unfortunately, many flippers are too emotionally invested by the time of closing to seriously consider walking away, no matter what they learn at that time. This is a mistake. Like any real estate investment, flipping a house is a financial transaction that requires a clear and dispassionate evaluation of the numbers.