I think your answer is going to be heavily influenced by your location and its effect on renovation costs.

I am in the MD suburbs of DC - a high income and high cost-of-living area.

Guy across the street bought his 43 year old home in June (Forclosure.) . 2000 Sq ft, 2 story colonial w' basement. House was vacant for years. Total gut job. two + new baths, new kitchen, all sheet rock and insulation removed - all new thru entire house. New flooring through out. New roof and gutters, lots of exterior repairs due to dry rot.

In average shape house would have sold for $510-$530K in June. He got it for $430. $100K renovation budget. I think he'll recover most of his $100K in appreciation. But if he was flipping it, obviously no ROI.

My gut reaction is that the ROI for your flipper is going to be low also.

You said he is an experienced flipper. The ROI must be satisfactory to him, or he would not have purchased the property. Experienced flippers I've known have crews and other resources they use so that everything gets done quickly and as inexpensively as possible. (often they use construction people that want to do some work on the side or they are able to do a lot of work on their own) Because of their resources and connections they are often able to do things for a lower cost than an average homeowner. For the sake of argument--let's say he can get it all done in 2 months and sold in another month. Maybe he makes $50K for those 3 months. That's not a bad paycheck.

I like rrah's answer better than mine!

Salti, rrah, Thank you for the responses.

We are in Scottsdale, AZ, in a neighborhood where lots of remodeling are happening, it seems crews are not sitting idle for work in this area at all. Completely gut jobs around here sold between $1.3M - $1.5 M, Houses in the neighborhood are not shabbily put together.

The numbers puzzle me, assumptions are as follows:

Sold price: $750k

Cost of house: $575K

Realtor fee : $37.5K - assume 5% of the sold price for both listing and buyer's realtors.

It leaves out $137.5 K for selling fees, labor, material for kitchen, bathrooms, utility room, flooring, partial yard re-landscape, and profit.

5 years ago when the market was coming out of recession, we got quotes for similar type of kitchen remodeling, the cheapest one was $80k with very very average cabinets, appliances and fixtures. Now it would cost at least $100k.

3 years ago we paid over $80k for 3 bathrooms redone. We had top quality workmanship, but high quality (not top of the line) fixtures.

How could the flipper swing the project?

Again, I am looking at these numbers not as a nosy neighbor, I want to understand if we should undertake the kitchen remodeling, or adjust numbers to be competitive if we decide to do that.

The flipper might have a discount deal going with the realtor. Also, since most of the cost of remodeling is the labor, he likely has crews that help him keep his labor costs low plus vendors he buys material from at discounted prices.

Salti, Jewel,

Agree, we surely are not in an inexpensive hood. We are homeowners, yet since we are good at working with numbers, we perform thorough calculation, price check and negotiation for labor and material when we work on any project. We only had less than $200.00 cost overrun, and 1 week schedule delay due to contractor's family emergency for our bathrooms remodel.

I assume the realtor discount would only apply to listing realtor, it is likely he has to pay the buyer's realtor. I assume he has to pay crews a living wages and material at least at cost.

At this point, I believe he would either cut corners, or his projected selling price is too low to make ROI worthwhile. Yet since I am only a homeowner, I wonder if there is anything I have missed.

Because if that flipper provided a member of his crew's labor to the OP there would be a markup on that labor for the flipper when costed to the OP?

As for labor, the flipper might be doing a lot of the work himself, and he may be hiring 'under the table' from the Home Depot parking lot. Yes, he may well be paying a lot less for labor than the homeowner.

'I want to understand if we should undertake the kitchen remodeling, ...'

But it will cost you more to do it than it is costing the flipper.

Actually I took it to mean that the flipper was physically doing a lot of the work. But maybe you guys have it right: the flipper has a few tricks up his sleeve.

I assume the realtor discount would only apply to listing realtor, it
is likely he has to pay the buyer's realtor.

He may be his own realtor, or be married to one. Also, if you are buying and selling multiple properties a year, the regular commissions and stuff don't need to apply.

At this point, I believe he would either cut corners, or his projected selling price is too low to make ROI worthwhile. Yet since I
am only a homeowner, I wonder if there is anything I have missed.

Most people do one or two remodels in their lifetimes. Some "flippers" (let's call them serial upgraders) do that many in a month, most do at least 4-6 a year, because it's a full-time profession for them. They either go broke or learn how to make it happen.

They know what is possible, who is best to work with, what to look for in a house that makes it turn quickly, and what to walk away from.

They have a short list of subs and suppliers they work with, they pay them promptly because if you get a reputation for being a slow pay, you can't get your jobs done quickly and that's the whole point of "flipping".

They know the optimal sequence for getting stuff done, and how to handle lead times and deliveries.

They don't have to worry about blending their likes and dislikes with future resale value because it's all about the resale.

They know where to put the bling and where to use the plain Jane materials and still have a house that that house's expected market will like. It's called "controlling costs" without sacrificing quality.

Based on what DH and I have garnered from some clients in our business, there seems to be a fair amount of under table transactions in construction/remodel.

Workers formally employed by construction/remodel firms take work on the side and prefer to be paid in cash, while working in the evenings and/or on weekends. Materials are procured from overstocks and returns at suppliers' warehouses and lumberyards, as well as from various leftovers (don't ask where they're from!). Hiring on the street for menial jobs like shoveling dirt - illegal immigrants, homeless, etc.

There's a "grey" economy out there. Cost savings can be as high as 70%. Think $3K for a worker doing a remodel project on the side and paid all cash vs. 12K for the same job done "officially" by a firm. Yes, it was a true story we heard.

Professional flippers and some small-time builders maintain their own networks of sources of cheap labor and material. Some realtors are also flippers. The contractors who work for homeowners are more "legal" because of liability issues, but they are also much, much more expensive. They have to pay all those fees - licensing, payroll, insurance, etc.- along with higher wages.

A few years ago we encountered a small landscaping biz owner who hired homeless for some jobs like digging ditches or spreading gravel. $50 cash per person for a day's job. No payroll, no insurance, no worker's compensation. DH considered hiring the guy for some yard work, but I objected because I didn't want shady types working at our place. If we were to buy a new house, I'd stay away from "flipper" properties for sure. I'd rather buy a fixer!

'If we were to buy a new house, I'd stay away from "flipper" properties for sure. I'd rather buy a fixer!'

I'd rather buy almost anything than a flipper.

Unless the flipping was done by someone who takes pride in their work, and is honest and fair.

ETA: AND knows what they are doing.

I've seen million dollar homes with cheap vinyl windows and "flat pack" kitchens.

My back of the envelope calculation:

Windows - 15k

1/2 bath - 3k

Bath 1 - 12k

Bath 2 - 6k

3000 square deep of various flooring - 18k

Kitchen - 35k

Appliances 7k

Yard - 5k

So about 100k. Other costs - realtor, loan costs, etc. 25k.

50k profit. I agree there is a lot of risk here for the margin. Do it 4 times a year...maybe you do pretty well. If, like in 2007 the music stops and you don't have a chair, declare bankruptcy and move on.

No, the flipper does not do any work himself. Neither he or his spouse is a realtor. These two were first things I checked.

Many THANKS to all of you for your valuable inputs, they definitely opened my silly homeowner's eyes to see the "things that I have missed" and many possibilities.

Lazy_gardens gave very convincing explanations/approaches of how to improve ROI that are worthwhile to copy. I am not so sure about the other cost saving strategies, such as using grey economy, cheap or "returned" material, scratches and dents appliances, skipped the required insurance, license, and paper work...etc.

At this point, I plan to wait and see the flipper's house before deciding on the kitchen remodeling.

Please keep great inputs coming in, they are so very informative and helpful.

Azmom:

Unless you are a seasoned remodeller or very experienced DIYer (as in knowing all the relevant codes and being able to do all the work from scratch by yourself) who can supervise the work down to the smallest detail, I strongly advise against going into "grey" market.

Flippers and the likes assume a much greater risk by using "under-the-table" labor, but they also maintain lists of people who can do a decent work. They also know how to handle those people so they wouldn't cause trouble. Sometimes there are types who are good handymen but can't hold a permanent job due to problems like substance addiction. That landscaper told us that he sometimes ferried his hires in his truck between job sites to make sure they would stay sober until they were finished for the day. He also mentioned that he had some steady clients who were house flippers. No wonder - he was cheap!

You are much better off playing it safe with licensed and bonded contractors and backing everything up with proper paperwork. Yes, you have to pay extra for that. It's like buying a car from a dealer with warranty and such vs. buying a car from a private party on CL without any guarantees whatsoever.

You are comparing apples to oranges. His success or failure has nothing to do with the ROI of your kitchen redo.

He bought a home heavily discounted because it needed a LOT of work. You have a home that sounds like it only needs an updated kitchen. Consider getting about 80% or so of your costs back in your resale.

I don't understand what the flipper's business has to do with your decision making.

lana,

Thank you for the advice. You are so right, I don't think we are 'qualified' to go into grey market as we abide rules and regulations; we believe paying fair wages for work performed, and we insist to have insurance to protect ourselves and workers. We also avoid shady, questionable characters and deals. I am the type frequently offer meals and refreshment to workers when we have projects, I know I would lose shirt if I get into flipping business.

Ncre,

I was hoping to hear from you, thank you for the inputs.

Our lot is twice of flipper's and much nicer, but it may not make too much difference. The two houses have similar floor plan other than his has 2 1/2 baths, and one of our 3 bathrooms is in the guest room. I think there may be indirect relationship between flipper's success with my decision making as his house will put a cap or raise the ceiling on the neighborhood price. Please correct me if this thought process is wrong.

I would like to get at least 100% return from kitchen remodeling if we sell the house soon. It is a good thing to understand now that we could not squeeze cost as he could.

If you want 100% return from a kitchen remodel, don't do it. That kind of return on a kitchen is unrealistic for most homeowners. The numbers I see for a return on a major kitchen remodel range from about 65% to 80%. There are a lot of factors that go into the return--market, location, interest rates, etc. This range of return percentages reflects some of those factors.

Look at the cost vs. value report for your region and project. This report tends to be pretty good as a baseline. http://www.remodeling.hw.net/cost-vs-value/2016/

I think I understand your rationale better now. Because RE markets are so local, I would do as advised by others further up... bring in three agents and ask them to comp out your home in the AS IS condition and then ask them to also comp it out with a new kitchen. They may be able to give you a ball park difference between the two scenarios w/o doing a full blown Market Valuation.

Average homeowner cannot get the discounts for materials and labor that a commercial contractor gets. My husband is in commercial contracting. When we redid our kitchen, it cost us $28,000. Priced out for a retail buyer, the cost would have been $70,000. Everything that went into the kitchen from top of the line materials to labor was discounted, some as much as 70 percent.

Again, Thank you all for the great inputs.

rrah,

Appreciate for the link. It surely provides a sober reality check.

Ncr,

You are so right, in a nutshell I am looking for projected sold price for both scenarios. I will check with three agents for comps.

pkgk,

70% discount? Wow! I did not expect material markup could be this high. Thank you for the good info.

Let us know what you find out, please.

Flips are all about looks, not quality. I can do "the same" white shaker kitchen with white quartz counters for 15K for a flipper, or 100K for a high end customer. Superficially, they will resemble each other.

If you are someone who sees the details? You won't be fooled. You'll see the cheap epoxy drawer glides on the full overlay stock limited size cabinets versus the high quality Blum glides on the inset full custom cabinets. You'll know that the Quartz is Chinese not American, the pulls zinc and not stainless, and the faucet $100 instead of $1000.

Every single choice that a flipper makes is based on cold logic and a master design plan. There is zero agonizing over the right choice. The right choice is the cheap or overstock or scratch or dent or reused choice.

Homeowners could learn a thing or two from that cold logical approach, but let their emotions interfere with the process. There are a lot of choices that can work well together. Be prepared to move on to the next good choice if it will save you money. It isn't about perfection and the connection to personalization.

GreenDesign,

Thank you for the enlightenment and confirmation of " Flips are all about looks, not quality".

We do have eyes for quality and style, but being more Science/logic than Art/emotion, we also have difficulty to cross the line paying for diminish return. It does takes a lot of work to find the optimal point balancing quality, personal preference and cost.

I truly appreciate your wisdom of "Homeowners could learn a thing or two from that cold logical approach" and "There are a lot of choices that can work well together. Be prepared to move on to the next good choice if it will save you money". I will forever keep these in mind when working on the upcoming projects.

Ncr,

I cannot wait to see the flipper's finished house. Will report back.

In theory, buyers getting into this neighborhood should have good sense for quality, may be this tendency would open the window of opportunity to get above 100% ROI? or may be this is just a wishful thinking, we will see....

I strongly disagree, some flips are about quality not only looks as many buyers do know the difference. I see many flips done with high quality finishes knowing the flipper does agonize over the right choice to appeal to the buyer. I was considering doing a slow flip and visited many open houses to see my competition.

Right now I'm building two spec homes and spend a lot of time agonizing over the right product for quality appeal, my buyer will know if I try to go cheap. I will not do cheap cabinets, appliances or quartz/tile work., Many flippers and spec builders do quality, Its about emotional appeal, cheap doesn't give emotional appeal. .

I agree... no experienced flipper is going to ruin a sale by putting in pressboard kitchen cabinets as stated above, in a $750,000 home. Buyers are fairly savvy, especially at this price point.