(This is the third of a multi-part series about real estate flipping. My  introductory post covered the basics.)

A quick review, flip investors typically try to make at least 20 percent profit. Underestimating quiet costs and over-improving the property often chew big slices of the profit pie. Later I’ll delve deeper into specific types of improvements to consider, those with good bang for the buck, but here I devote to your initial mindset as you begin researching the neighborhood or immediate area (i.e. within one mile) around the subject property to gauge how much you should spend improving your flip. (An appraiser or real estate agent with a proven track record of understanding investment property can be valuable analyzing comparable home data and features before construction spending begins.)

You will eventually sell at market value, which will be influenced most by pure supply-and-demand conditions of the local market (affected by household income, employment) and the desirability of the location of the subject property (the flip home). But as you’re planning the improvements for your flip, you must know the neighborhood, specifically the individual homes and how the flip could benefit or suffer from either Progression or Regression. In other words, you don’t want to become the biggest/nicest house on the block, you don’t want to over-improve the flip. And it might not be such a bad thing to be the smallest/modest house on the block.

Your goal looking for flip candidates is to buy a dump at a deep discount so you can spruce up and really make it shine in comparison to the rest of the neighborhood. Knowing the typical lay-out and features of other homes helps you establish a measuring stick to prevent you from going too far upgrading. Think of yourself as Goldilocks, preferably erring on the modest side of the neighborhood. I’ll use a kitchen refurbishment as the example but first let’s define Progression and Regression so you’ll have a basis for figuring out the improvements that will be “just right”.

Progression/Regression in real estate are among over a dozen principles fundamental to property valuation and market analysis (e.g. highest and best use, conformity, obsolescence, etc). In a given neighborhood, Progression/Regression addresses how a property is affected by the QUALITY of the neighboring properties. You’ve likely heard that you never want to be the biggest house on the block because the smaller homes “pull down” the value of your home; the smaller homes would be regressive in this instance. If you own the smallest house, then the larger homes boost the value of your house and you benefit from progression.

Knowing kitchens can be one of the most expensive upgrades and get out of hand in a hurry, let’s look at the kitchen of your flip compared to other homes in the neighborhood. What’s typical? Do the other houses have stainless steel appliances, ceramic tile and granite counter tops? Will your improvement plans for the flip go overboard, or the opposite, make it an ugly duckling compared to the others? How much is too much? These things you must know before trucks deliver building materials. Each dollar you spend beyond what’s typical for the neighborhood is a sliver out of your profit pie.

Remember you must plan every improvement for your flip both inside and outside (e.g. exterior lighting, landscaping). I’ll write in detail about each of these in future posts but, looking at the property as a whole, what is the sweet spot in comparison to the other homes, especially on the same street? In general, you’ll aim to make the home “just nice enough” by including some more upgraded items in certain key rooms and spending more modestly elsewhere around the property. Sometimes just elbow grease will do the trick. It’s a balance between your financial allocation for improvements and features unique to the flip property as it relates to the other homes. What’s a must-have versus a nice-to-have? Where can you save money by making the must-have “just nice enough” without going too cheap?

How do you learn what’s “normal” for the neighborhood? (Partnering with an agent/appraiser can leverage your time.) Scout the competition so to speak, visit open houses, review listing data sheets or home flyers, look at real estate ads, meet the neighbors and simply ask what they like about their homes. You can glean a lot of “local knowledge” simply by walking the street, getting to know and observing the neighbors. Chances are they’ll want to help because what you do to the flip home will affect their property value. Just be honest and share that you’re a real estate investor and want to improve the flip house so it blends into the neighborhood. If the subject property was a dump, particularly a damaged foreclosure, the neighbors will be happy to help you cure the eye sore.

Your mission is to determine Goldilocks for your property so that your flip can benefit from progression. What features would make it appealing to a buyer and maximize your profit without going overboard spending or showing off? I’ll repeat this bang-for-buck theme throughout this series as I take you room by room inside as well as outside around the property. How much should you spend or do so the other homes pull up the value of your flip? Stay tuned.