speaker-0: you really have to identify that early on in when you're buying low and establishing your scope is what are the market conditions like really dial in not just standard days on market, but what houses are selling, what's unique about them, you of course, what price point are they selling at? But when you're scoping out what's what's important to the buyers, the demographic in this area, that's also going to help you identify that scope. in that budget allocation, because you can over-design a house or make it aesthetically look one way and like we just talked about, not have any function or form. And it could just sit there and sit there and sit there. Welcome to Return on Design, the podcast where beauty meets strategy and interiors become assets that perform. I'm your host, Rachel Niederhofer, designer, investor. and builder of high impact spaces that deliver real results. Alongside my husband, I run both a design firm and a real estate investment company where I live at the intersection of creativity and ROI every day. Each week, I'll be unpacking what most people overlook, how strategic design decisions can grow your investment, elevate your lifestyle, and unlock the full potential of your property. You'll get real tools proven strategies and unfiltered conversations with industry experts who are doing it right. So if you're ready to invest with purpose and leverage design as a powerful tool, this podcast is for you. So flipping a house might look easy. You know, everybody wants to do it these days. They think, ⁓ just buy low, renovate really fast and sell for the highest price. But it's a little more complex than that. And there's actual things that can move the needle and things that can totally compromise your profits.

speaker-1: Yeah, so today let's talk about the hidden cost of flipping and the cost that most people don't see that can either make or break your deal.

speaker-0: Yes, of course, through the lens of return on design and how strategy allocation and execution can actually, you know, directly affect that bottom line. So welcome back to the show. Let's jump on in. I want to focus first on scope. So so many people come in and they look at a property just kind of first glance and everybody assumes, ⁓ that's just cosmetic. It's just cosmetic, which may or may not be true, but by not thoroughly evaluating everything about the property, really getting down to that diagnosing layer that I always start with is where you can miss major scope and that can trickle.

speaker-1: Yeah, I think a lot of times often the cosmetics open up other issues that you got to deal with and you got to be aware of that.

speaker-0: Like if I go into a property and I'm only looking at the colors, the tile, the trends, and I'm not evaluating the function, the flow, the architectural elements, just from a design perspective alone, like I'm missing it. I'm missing out on an aspect of the scope that could actually affect how quickly I can sell that property. Not even to mention what's behind the wall.

speaker-1: Yeah, because you get into it and it's like, ⁓ go have to upgrade now electrical or HVAC or plumbing. Well, what issues did I just get into here? And even fixing some of these issues that you found just on your initial walkthrough.

speaker-0: Yeah. You know, and as investors, you come in and you can kind of do a quick mathematical of what's the debt ratio that I can invest in this property to get it up to the market value. That's like a baseline, right? And we've sort of glossed over that initial walkthrough scope. So now let's say we've got the property under contract. We did our first walkthrough and we have an idea of maybe $60,000. But how you allocate that money is just as strategic to that profit margin. as it is to make sure you fully scoped out the project. So one thing I do as an investor, and even if we're design clients, the same thought process of, ⁓ I've fully assessed the condition of the property. I know what the market demographics are demanding and I have $60,000 that I can invest in total. Well, if I'm wanting to get really fancy on trends or really fancy on designs, 60,000 may not be enough money. And so I kind of go down this order of operation of what are my mechanical problems and what are my more cosmetic problems. And that can help identify where that budget allocation.

speaker-1: Yeah, because not fixing the structural pieces, the form and function like you talked about. mean, all you're doing is slapping lipstick on a pig at that point. It's still a pig. You still have the problem. It just looks prettier.

speaker-0: So let's break down this whole mechanical process that we like to go through. What I mean by mechanical failures is like things that do not work. Like if your roof is a problem, if your windows are compromised or need to be updated, things that are actually not functioning the way they are intended to function.

speaker-1: the kitchen, bathrooms.

speaker-0: Yeah, which also we include architectural features in that because unfortunately a lot of people do renovate homes and they do it poorly. And we've come across properties that we flipped where maybe an addition was added and they didn't address some architectural structural issues that now is affecting that form, flow and function. And that's the mechanical error that we have to allocate. resources to that in order to make sure we're maximizing our profit.

speaker-1: Yeah, those things, those issues can get expensive real quick.

speaker-0: So mechanical problems come first and then you step down layer by layer into the more pretty aesthetics that are going to kind of get the first attention, I guess. Like your tile finishes and know.

speaker-1: Yeah, but as you talked about with the cost allocations too, it's like making sure you are putting that money where it's actually going to move the needle and not just, you know, maybe move it. Cause not every dollar spent is a dollar gained in the same manner, you know.

speaker-0: Yeah. And if you are just trying to recreate like a trendy look and you're not diving into to your point, like what's the actual cost of that from a material and a labor perspective? And is that going to equate to the value return that I'm looking for?

speaker-1: Yeah. And what I mean by that too is like, or an example of what I was thinking was like, ⁓ you know, I spent $5,000 updating some flooring to make it cohesive and make it uniform and elevate the space versus did I spend $5,000 on a backsplash that might move the needle. looks pretty, but it's not the most.

speaker-0: or even $5,000 on the open concept, knocking down walls that don't need to be knocked down to try to create the illusion of, you know, maybe some grand drawer floor plan that it just doesn't even fit that market neighborhood price point. And that's, I think people do appreciate, you know, a unified floor more than the massive. open floor plan all the time. I bring that up because we see that a lot with renovations, like people who are flipping houses that are literally just trying to kind of recreate what they've seen versus actually design each house for what it should be.

speaker-1: Yeah, sometimes you can walk into the space and tell it was that open concept was extremely forced.

speaker-0: Yes, it doesn't flow. again goes back to those architectural flaws where, you know, I want to let's give another example for our listeners. we did a flip on a property where somebody had extended the porch as part of the house. So they basically added square footage to the original floor.

speaker-1: They enclosed the back porch and made it a part of the living space.

speaker-0: ⁓ They did not correct some structural issues. So the original bay window that was off the kitchen was left and it looked ridiculous. It affected, you know, not just the aesthetics, but everything about the space. So that's like a mechanical failure that somebody came in and tried to force something on the floor plan without actually addressing and designing the space correctly. And we had to fix that. That's something you have to fix if you're going to just gloss over that, like it's not that big of a deal and people would rather have new countertops, stainless steel appliances and a nice backsplash. Like you're gonna compromise your profit margin because that's not true. If people can't envision how they live in that space, if it feels, you know, like, well, I don't know how I put furniture in this room or that part just doesn't make sense to me. Like that will literally keep somebody from buying a property.

speaker-1: And also in that same that same home, they had blown out one wall to be able to open up into that square footage they added. But it created this weird like you couldn't define what what was what and how you lay it out. So we actually want to go back in and putting a wall back in and creating and creating an intentional division between spaces so you could actually see that, ⁓ this is a clear area and this is a clear area and I can see how I can use them now.

speaker-0: Yeah, I And going back to the scope piece, if you're coming in and you're just looking at, the floors are dated and I need to paint, and you're not looking at this space doesn't make any sense. And if I can make it as pretty as I want, but it's probably going to sit on the market longer because it doesn't make sense for the ordinary person. Yeah. That's definitely part of that scope you got to address, which actually brings up a valuable point of the holding costs. How long is that property going to sit on the market? Don't assume that to your point, if I put lipstick on this pig, it's just going to sell like hotcakes. Yeah. Not necessarily true.

speaker-1: No, and, you know, taking into account, yeah, those holding costs. How long do I have to hold it to get it corrected? What's it going to cost me to correct it? And then how long is it going to sit on the market to sell? You know, those those costs often get overlooked very quickly. like, oh, I'm going to it's going to take me three months to, you know, renovate and do the work here. But I'm not I'm not accounting that. You know, the market's a little slow right now and most houses are probably sitting on the market for another two to three months or longer at times.

speaker-0: you really have to identify that early on in when you're buying low and establishing your scope is what are the market conditions like really dial in not just standard days on market, but what houses are selling? What's unique about them? You know, of course, what price point are they selling at? But when you're scoping out what's what's important to the buyers, the demographic in this area, that's also going to help you identify that scope. in that budget allocation, because you can over design a house or make it aesthetically look one way and like we just talked about, not have any function or form and it could just sit there and sit there and sit there.

speaker-1: And every week that you have it is eating into your ghost.

speaker-0: And not just holding costs of, you know, loan payment, but you've got taxes, insurance, utilities.

speaker-1: Yard maintenance is, yeah, mean, you know, the whole normal costs of actually owning a home because you actually own it. Staging costs if you're staging the home. Yeah. All those costs add up and they add up quickly.

speaker-0: I really want to hone in for the listeners. Something we see a lot that I think is that return on design perspective that investors should really embrace this thought process is who am I actually flipping this house for? mean, if you're, if you're a flipper, can call it a flip, but I'm always designing a space. So even if we're flipping it, I'm still designing it for an end buyer in mind. And if you're not thinking of, you know, your ideal client, then you're also compromising your potential budget. So what do I mean by that? Let's say we're in a neighborhood where it's primarily young families and maybe yard space is important to them or extra room for playing or whatever. If I don't know the demographic of that, I'm not going to design the space for that ideal buy. If I'm designing it for a bachelor and this is more of a small young family neighborhood, I'm again missing the boat. So you can't really like flip in a vacuum or design in a vacuum for that matter. You've got to know like who's buying in this area, what's attracting them to this area. And then that's how I'm going to design the space. If they have little kids, probably need to make sure I have a bathtub in the house. Not everything needs to have a walk in shower, you know, little things like that that can affect that margin, especially backyard. I mean, we looked at a property the other day in a great little neighborhood, but it had this really bizarre elevation in the backyard that would be a deal breaker for a young family where the porch just dropped off. I think there was like five steps down to this little.

speaker-1: Yeah, that one you had about five or six steps that dropped down off of the porch down to a pool deck, which was nice. But then after that it dropped off again. And then, you know, there was all sorts of level changes through that, that yard that made it very kind of off-putting.

speaker-0: Which made that not a deal for us because we were looking at the scope required to meet the target buyer. It was too much risk to hedge and it could have prolonged that holding time if we didn't correct it to find the perfect buyer. Because it was a big house. think it had like four, at least four or five bedrooms. Yeah, it was. And you've got that many bedrooms in this specific neighborhood. It's really made for a family until you have these bizarre elevation changes that could prohibit somebody from buying it. You've got to assess that in that initial scope. Let's also talk about the cost of actually selling the property. A lot of investors think like, I don't want to list it on the MLS or I don't want to work with a realtor. It's going to eat into my margin, which is fine. Maybe. I think it depends on the market maybe that you're in. And some people are successful at that, but there's other markets where you need to be working with an agent or your house isn't really going to get that many views. Yeah. And you're also leveraging that risk of if I decide not to work with an agent and pay whatever percentage, which by the way, you can negotiate. If you're doing a lot of transactions, you can negotiate a better, a better rate. And by holding that money, is that also going to revert?

speaker-1: Yeah, I think a lot of that you have to really, you have to really know your market and where you're at. Because I think that works kind of as you were hitting on geographically a little bit. Some areas it may work a little better that, you know, I list it myself and I don't have the realtor, but there are also areas where realtors don't want to show that for sale by owner and an off and some of those off market and they don't want to work with you. And so you have to calculate your hedging a risk there of if I list it myself. Are other realtors going to show it? Are they going to be willing to work with me on getting their commission that they would normally get? And is that going to cost me to sit on the market longer to get rid of, to flip and sell this house versus using my realtor, getting it marketed, getting it out, getting it done, done quick. Which one's actually costing me more money?

speaker-0: Yeah. And even if you were to use like a listing agents where you're going to put it on the MLS for a small fee, that buyer is still going to have an agent that wants to get paid. Yep. Which you're probably going to pay. So what did you really save? You know, one month of holding costs and fees that maybe took you longer to hold the property. scenario will point directly to eating up your profit margin. If your margin is in selling it in six months and it took you nine months to sell it, there you go. You potentially just blew your profit, which is exactly why you need to have a strategy because there's holding costs, but there's also a financial cost that's going to impact if you don't have a strategy from the get go, an exit strategy, a defined scope, everything required, you know, to

speaker-1: in your time.

speaker-0: Yeah, it's going to point to what you should actually be paying for the property because if you overpay from the beginning, it doesn't matter what you do the rest of the way, you're still not going to make the profit. these are just a few things that can actually be hidden costs when you're getting into a flip that you really need to think about and evaluate more holistically and how you can maximize that investment, that return and get that property sold. quick and in a hurry to make your flip actually successful. So yes, in theory, buy low, renovate quickly and sell for the highest price you can get. But there's a little more depth to it. And hopefully this conversation has challenged our listeners to think about it from a different perspective.

speaker-1: Yeah, because you've got to, I mean, yes, buy low, flip it fast, sell it high. But to your point, there's the strategy involved with it. And understand there is a cost to having no strategy. Because, you know, having no plan is planning to fail every time. Yeah. You've got to you've got to go in knowing what you're going to do, how you're going to address it, but also know the costs of additional pieces that come up and have your have your risks hedged in it.

speaker-0: So if you like this type of conversation and you feel like you're learning something, make sure you're subscribed to our show so that you can get all the latest episodes. We're talking about design and investing and strategy application of the two coming together so that you can succeed. Check us out on our website audaciousdesigns.design and make sure you follow us on our socials. Real return on design. Thanks for listening.

speaker-1: We appreciate it and we'll see you guys next time.