Top Challenges in Flipping Commercial Real Estate and How to Avoid Them
By Space Coast Daily // May 3, 2024
Flipping commercial real estate remains one of the top strategies to mine the potential that is the US real estate market.
But like many things, it is easier said than done. Is it not just to select properties, improve them, and sell them for a profit? While it sounds simple, many challenges can turn a viable project into a loss-making venture.
Consequently, investors must be aware of these challenges and put plans in place to overcome them. Below we consider four such challenges and what you can do to avoid them.
At Williams & Goodwin, The Property People, they pride ourselves on being more than just estate agents; they are your dedicated partners in navigating the property market.
Selecting the right properties
Your goal as a flipper is to find existing properties so you can sell them for a profit. But if you choose the wrong property, you can end up incurring losses.
A property that requires too many fundamental changes and improvements – problems with the foundation, drainage systems, and electrical wirings – will lead to significant repair costs which will eat into your profit margin.
You should only do this if you are very confident you can still meet your profit margins even after the huge spending on repairs
Similarly, low-quality properties in bad locations (called Class C properties) will be difficult to sell. While there might be an opportunity to improve the value of the property, all your efforts will be pointless if you can’t sell it.
On the other hand, Class A properties – high-quality properties in good locations – are undesirable not because you can’t sell them but because the opportunities to improve their value are limited.
In essence, you should focus on Class B properties – they don’t have the quality of Class A properties but they are in good locations – that are both easy to improve and sell.
Wrong mindset about repairs
Many flippers have spent too much improving properties because they treated them like their personal house.
It makes sense for you to impose your aesthetic value on your house. However, with CRE, the goal is to make the property more valuable to the final buyer. Instead of fixing what is not broken, focus on those improvements that will make the final buyer willing to pay your price.
You might think a particular brand of door you like should be installed throughout the property while the final buyer would have loved a larger parking space or solar-powered electrification.
Not studying the market
Before you even purchase the property, you should do a market survey to determine if there will be demand for the improved property and at what price.
If the retail store was abandoned, was it because the owner made many business mistakes, or was the location not just appropriate for a retail store? The right answer to this question can be the difference between success and failure.
Once you are convinced there is a market, extend your research to determine a range of prices that buyers would be willing to pay. You can do this together with an agent who is familiar with the market or check out nestfully.com, which is also a reliable platform for any fresh information. Seek the help of the Southern Estate Lawyers in Alabama to stay clear of the legal complications that may arise in the process.
Not having your finances in order
Before waging war, an army must check its arsenal and war chest to be sure they are well equipped for the fight.
In the same way, a flipper must be sure he has the necessary finances to purchase and improve the property. This might mean getting preapproval for a mortgage or seeking other creative financing options.
With the popularity of earnest money deposits, flippers must also ensure they have it ready before starting conversations with the seller. Most sellers won’t allow you to inspect the property or negotiate its price if you don’t have your EMD at hand.
If you don’t have the cash to pay, you can secure your deposits from Duckfund, an earnest money financing company that caters to CRE investors. Duckfund will provide you with EMD for as many deals as you are pursuing without requesting for a credit report.
You can complete your application in 2 minutes and get access to the necessary funds within 48 hours.
Once you have secured your EMD, you can then focus on securing the finance you will need to purchase and improve the property. This will ensure that you don’t get stuck along the way.
