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INVESTORS’ CORNER: Have a backup plan

For the savvy that care to prepare, remain vigilant! This article addresses your backup plan for properties that do not sell.

The intent with short-term investment properties (colloquially known as “flips”) is to hold the property temporarily. The investment strategy is relatively simple; homes are purchased, improved and subsequently sold. Rinse and repeat ad infinitum.

The issue occurs when the properties do not sell. What now?!

Scenario A – The Textbook Turnaround: Let’s take an idyllic hypothetical in which a couple of months are devoted to the remodel and then a day or two on the market in Charlotte’s sizzling real estate climate. In this scenario, little of the gross profit is expended to by way of holding costs since the property was held for only a very short time. Excellent work! Lot’s of money was made.

Scenario B –In this scenario, let’s allow the same term for the remodel (only a couple of months) before the property is actively listed. Day one elapses, then two… ten (still not worried) … thirty days (another payment to the lender, doubt begins to enter)… sixty days (second payment and now we’re really getting worried)… months… torment… more months… and now we are completely off course with no recourse.

As dreary as it may be to contemplate, Scenario B is not uncommon. Contingencies must be formulated in advance.

Your business plan: Every investment property is unique; each is its own business unit. You should enter the investment with a business plan in place. Such business plan should contemplate a scenario such as The Perdition. Prior to purchasing the property a budget should be created in which resources are calculated. A surplus should exist in which you, the owner, can access monies needed for holding costs.

Your business plan should also have a game plan articulating the strategy for managing a “flip” that does not sell. One of the primary considerations is the length of time you will actively market the property prior to inserting a tenant.   An additional consideration of extreme import is financing the property long-term. Converting the property to a long-term, tenant occupied property can be challenging if you acquired a “hard money” loan with high interest rates. The problems associated with usurious hard money interest rates are often overlooked due to the intended short-term strategy; high interest rates are generally not problematic if the property is held for a short time. But, if the property is to be held long-term, then a hard money loan can be onerous and potentially terminal.

Attorney Craig Morgan is a member of Metrolina Real Estate Investors Association, www.MetrolinaREIA.com, which provides education, networking, and mentoring to investors in Greater Charlotte area. He can be reached at Craig@providencelawcarolina.com, (www.providencelawcarolina.com).

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