20 Dec 2013
Flipping success in a smaller city
K&V Investment Group is a real estate company focused on distressed property rehabilitation, management and investment sales. Their goal is to grow their portfolio steadily, aiming for long-term success through all economic and real estate market fluctuations.
Company: K&V Investment Group
Co-founder: James W. Vermillion III
Location: Lexington, KY
Years experience: 3
Number of properties flipped: 2-9 currently under contract
Why did you decide to start flipping real estate?
I initially became interested in real estate because of the abundance of options. With so many strategies, financing options and types of investments, it was only a matter of figuring out which strategy best fit my goals and personal situation. After researching, I decided rehabbing was a good starting point.
How did you get started?
After I decided to start rehabbing, I teamed up with a personal friend and we spent several months learning all we could about the business. As we were learning, we constantly developed and modified our business plan until we felt comfortable enough to start executing.
With our business plan in place, we set the foundation for our flipping business. We formed a Limited Liability Company (LLC), met with potential lenders, became licensed agents and began our search for contractors. At the same time, we were hunting for our first property to rehab. We went to foreclosure auctions, searched the MLS and bid on online auctions, all with no success. While frustrating, we continued searching until we got our first property under contract.
How do you decide where and what to buy?
We look for properties in desirable areas that we can buy at a discount, which enables us to renovate the property and exit with a profit. You cannot rely on one indicator to analyze a property and need to consider as many variables as possible to ensure you are purchasing the right property at the right price.
How do you find your properties?
We search the MLS daily and do our best to keep tabs on the market and maintain an awareness of changes in conditions. In addition to using the MLS, we discuss investing with other real estate investors which can lead to opportunities. Recently, we have seen the market tightening up and have expanded to several smaller cities and towns where there is less competition.
How do you finance your real estate investments?
The majority of our purchases are financed through the commercial lending portion of a local bank. The lender finances both the purchase and rehab costs, which leaves us responsible for the down-payment, closing costs, holding costs, renovation costs beyond the approved budget and any other associated costs.
In addition, we have started using a hard money lender when a fast closing is required or we are unable to get financing from the bank. In a few circumstances, we have also used private funds and plan to expand that method in the future.
What are the most common rehabs you have to make when flipping a property?
First impressions are critical to buyers, so enhancing curb appeal is important to make a quick sale. While landscaping and exterior improvements do not always need to be drastic, presenting a clean, attractive property will go a long way in getting people in the door.
Once in the door though, we provide a “new” looking home that is consistent throughout. I always recommend rehabbers budget for a professional paint job, new light fixtures, interior doors, door and cabinet hardware, floors, etc. There are times when not all of those items will need to be replaced, but unless they look brand new, we upgrade them.
How long does it typically take for you to complete a flip project?
Usually between 4-6 months, although project lengths have varied from less than 2 weeks, to 9 months.
What are some ways you sell the property once you have completed the rehab?
We start by marketing the property while the renovations are underway. This can lead to a contract to sell before the property is even completed, limiting the holding expenses. When it comes to marketing our completed rehabs, we do not do anything special. Since we are licensed and real estate agents, we list the properties ourselves.
How much do you typically make on a flip?
Unlike many rehabbers, we have experienced a wide-range of profit levels due to the range of properties we have flipped. Rehabbers in larger markets are able to focus on a few areas where most properties are very similar, thus they have little variance in purchase price, holding costs, rehab costs and ARV.
Being in a smaller market, we have had to take on a variety of projects, from historic single family properties, to townhouses and duplexes. In addition, the scope of work in our projects has ranged from primarily cosmetic to complete renovations.
Have you lost money from a flip?
While we have made our share of mistakes, we are fortunate to have not lost any money on a project. I credit this to focusing a lot of energy on analysis ahead of purchasing and including contingency funds in our budget for unexpected events or holding time.
What is the most common way people lose money when flipping properties?
There are several very common errors that lead to most failed flips. The first is overpaying for a property. The profit in flipping comes primarily from the purchase, so being able to identify solid flip candidates and purchasing them for the right price is a critical step. Overpaying for a property dooms the deal from the beginning.
Another common mistake is underestimating the rehab budget and timeline. Investors are notorious for using best-case scenarios in determining the renovation cost and timeline, which leads to blown budgets and additional holding costs.
The other major mistake I have seen repeatedly is overestimating ARV, again, due to using best case scenarios during analysis. This happens when rehabbers pick comps that support the top price point, and ignore those that validate a lower price.
What are some things you recommend staying away from when trying to increase a property’s value?
There aren’t any specific aspects I would warn investors about, just make sure you do your due diligence. We have rehabbed properties with foundation issues, water damage, mold, etc., and while many investors look at those problems as red-flags, we look at them as potential opportunities. The key is to make sure you are aware of the issues and are able to accurately budget for the solution.
Not sure what house flipping is? Read our article 4 essential house flipping rules for beginners to learn more!