Buy, refurbish, put on sale

Flipping is a viable strategy for earning money from property but is not well developed locally thanks to the country’s low asset liquidity.

Flipping involves buying and reselling property, or buying, improving and selling property.

Though it is sometimes risky because prices can go down due to downturns in the property market, lack of quick buyers and investor exploitation by real estate fraudsters, this strategy is an effective and legal business that can be quite profitable, especially if the property’s condition accurately reflects its market value.

LOW ASSET LIQUIDITY HAS HINDERED ADOPTION OF FLIPPING

With a growth in demand for turnkey property such as homes and apartments, flipping can offer quick and high profits if well planned. Indeed, the world over, there are many investors who earn a living from flipping.

Buying, renovating and reselling a property within a specified period requires a lot of effort, so it is important to ensure that the right measures are put in place for flipping to succeed.

But it is equally important to note that it can also be a fraud-for-profit scheme with serious consequences. This usually happens when the property is bought and resold within a very short time, and at a grossly exaggeratedly price.

Typically, such cases tend to involve a fake evaluation of the property, which indicates that renovations were made when in fact, none was done, or if there were any, they were mainly superficial adjustments.

Although flipping is not well established locally, Mr Simon Ng’ang’a, a property consultant and the managing director of Granite Capital Kenya Ltd, a real estate firm, says while flipping is a tenable investment strategy, the country’s low asset liquidity has hindered its adoption.

Mr Ng’ang’a notes that the practice is well established in many developed countries and would be a worthwhile investment strategy if adopted in the country since it offers quick returns.

“Generally the investor’s focus while flipping is how soon the property can be resold for a profit, and not necessarily waiting until it can earn the highest profit. The key to success in this strategy is to avoid being acquisitive but by striving to reduce the property’s maintenance costs and other related financial transactions. And this is hard to accomplish in the country as there are not many who can do that,” says Mr Ng’ang’a.

These extra maintenance costs could be incurred through holding on to and running the property for long periods and might include utility charges taxes and indemnity, all which should be taken care of by the property’s new owner.

Sound knowledge of the operations of the real estate market is of utmost importance if you are to acquire a property in a marketable location with attractive features then refurbish and sell it quickly, observes Mr Ng’ang’a. He notes that areas like Ruaka, Kitengela, Ngong and Limuru are emerging as suitable for this investment strategy due to their rapid growth.

Networking extensively by engaging potential buyers before even looking for a property to flip and while at it building relationships with potential buyers is also key. If there is a ready buyer lined up when you buy a property, you can sell it as soon as the necessary upgrades are completed.

After drawing up a business plan, research the property market for a location with good potential for capital growth and acquaint yourself with the current market values to enable you to spot a good deal easily.

Thus set, you can look for property that is being sold below the prevailing market price/value, usually by those seeking to make a quick sale. With such a bargain, you are assured of making handsome returns. However, it is at this very stage that you should watch out for fraudsters.

Flipping property at the lower end of the market makes it less risky since there are more potential buyers who don’t expect high-end fittings and furnishings, making most upgrades on such property affordable.
Experts emphasise factors such as location, access to amenities and prospects for the area’s development as key to flipping.

“Since flipping should be done as fast as possible, a property in a desirable neighborhood, or in an area that is in high demand, is a big plus for the flipper. He/she should, therefore, study the neighbourhood and look for areas with growing real estate and employment opportunities,” says Mr Ng’ang’a.

When buying property, ensure that it is in a reasonably good condition so that you do not have to make any major refurbishments. Scrutinise it carefully before paying for it and consult experts with a sound knowledge of buildings, electrical works and plumbing to determine whether the property is structurally sound.

Ensure the appropriate fixtures have been installed and that they are readily available to eliminate the challenges associated with acquiring them later. In addition, look for a property whose construction materials are easily available to save on refurbishing expenses and time.

Other additional home modifications can also be included to boost the property’s kerb appeal by installing additional outdoor lights, replacing worn-out fixtures, and sprucing up the landscape.
With regard to kitchens in apartments, many experts recommend a complete overhaul as most buyers lay great emphasis on their kitchens.

But as you work, always keep in mind which renovations and repairs are affordable, which ones are not, and which improvements will increase the selling price of the house.

Once you have done all this, you can begin the work, concentrating on the focal points.

“In case of unused land, developments like building rental housing, connection to the electricity grid, putting up a greenhouse or drilling a borehole, among others, are potential ways of boosting the land’s street appeal while in case of an apartment, upgrades can be made to attract more clientele to the property,” Mr Ng’ang’a says.

Working quickly ensures that there is minimal exposure to unforeseen market slumps that can reduce the expected profits. For instance, with good planning, giving a property a new coat of paint, as well as installing new canopies, lights, flooring and fence can be easily done within a short time.

In the entire process, it is wise to involve experts, especially those conversant with the legal, financial and construction aspects of flipping property, a valuer at real estate firm Azizi Realtors advised..
Because flipping typically works against time, there is a need for quick and budgetary renovation of the property and its sale before maintenance expenses eat into the profits, hence working with experts such as a property adviser, a real estate agent, a lawyer, a contractor/renovator, accountant, a home inspector and an insurance agent will ensure the task is quickly and efficiently don.

As a property flipper, make an effort to learn some of the simpler tasks so that you can step in and do things yourself should time or money constraints arise.

To succeed, you should have a sound knowledge of the areas in which different properties are located, which makes it easy for you to decide which features are most desirable in a home in a given area, how much properties in the surrounding area are selling for, and whether there is a likelihood of future developments in the area, such as schools or a shopping centre, which could affect the demand for property.

You should also be a good estimator, such that you can buy and resell a property at a profit in a relatively short time as this usually involves a quick analysis of what prospective buyers are looking for and tailoring the property to their needs, bearing in mind the costs and profits involved.

As a flipper, you should exercise patience which will guide you and help you avoid overpaying for property or jumping into “sweet” deals which end up being disastrous,” cautions Mr Ng’ang’a.

It is only natural that people become attached to a property or develop some bond with it when they see it, which might make them enter into a contract on less-than-favourable terms. In contrast, a savvy and patient flipper should be able to avoid emotional purchases and understand that if they do not buy a property at a favourable price and on favourable terms, it will not earn them the anticipated profit, or even worse, make them lose money.

While property flipping looks fairly simple and can be very profitable, it is important to note that, if not well executed, it can lead to a great loss for the investor.

IN NUMBERS
20
The percentage you should add to the estimated cost of refurbishment to take care of contingencies

70
The maximum proportion of the after-repair value you should charge when flipping a property

Mr Ng’ang’a says the emergence of con real estate dealers poses a real challenge to prospective flippers since they might offer a good deal, at the right price, but which is less than honest, leaving honest investors embroiled in legal tussles for dealing in fraudulently acquired property.

Mr Ng’ang’a further advises that you shouldn’t flip a property unless you are sure you can meet expenses that might be occasioned by something going wrong with the sale, such as an anticipated transaction falling through or a belated discovery of a problem within the property.

“Researching extensively is key in flipping property so that you, as an investor, do not fall into the trap of con artists out to swindle and sell you fake assets. Also ensure you have good liquidity and adequate funds because depending on bank loans will eat into your profit margins since you will have to service the interest on the loans’ you take,” he says, adding that you should also be prepared for any losses such as those resulting from the property not selling as fast as anticipated or even not selling at all.

He, on the other hand offers optimism in that if the property doesn’t sell as fast as anticipated or doesn’t sell completely, you can rent it out and, thereby, still gain from it.

GETTING STARTED AS A FLIPPER

As with any other investment, it is important to do your homework on flipping before venturing into it.
Once you have a good background knowledge of the business, create appropriate budgets and strive to understand your prospective clients. Thereafter, when a property worth flipping becomes available, you can make arrangements to have it refurbished.

To successfully flip property, first create a business plan because it helps you make rational decisions based on research, and not on your feelings.

While it might not be necessary to seek funds from a financier such as a bank, if it is the only option, you need a good credit score since they will want to know your loan history before giving you any cash.

The business plan will help you make the appropriate decisions as well as show prospective financiers that the venture is viable, and that you can be counted on to repay your loan.

The plan has to specify factors such as the maximum amount that can be paid for a property to be flipped, list of property market zones, cost of expected repairs and remodelling, list of reliable and affordable contractors who can undertake repairs and estimate the after-repair value (ARV) of the flipped property, with the purchasing price ideally being not more than 70 per cent of the property’s ARV. In this regard it is worth noting that properties in areas with good security and access to amenities such as schools, shopping centres and better roads, among others, are easier to sell than isolated ones.

Experts advise that you add an extra 20 per cent charge to the final estimates when evaluating the total cost refurbishment as it often tends to be more than expected.

The plan should also indicate the targeted buyers, for instance, there are those who might want the property just as it is while others might require some renovations.

Insiders also advise that you provide a margin for miscalculation and find possible ways of surviving a possible delay in the sale of the property, unexpected expenses, plans going awry and a strategy for repaying the financier’s loan in case you seek funding.

"Generally the investor’s focus while flipping is how soon the property can be resold for a profit, and not necessarily waiting until it can earn the highest profit.” – Mr Simon Ng’ang’a, MD, Granite Capital.