How Government Red Tape is Stopping Investors and Flippers From Rehabbing Older Homes

In This Article

Growing old is never much fun—unless it’s a house, in which case, for BRRRR investors and flippers, it has traditionally been both a lot of fun and a great source of revenue.

The good news is that America has an abundance of older homes. The bad news is that permitting red tape in many states is adding weeks to renovation projects and cutting profits.

Older Homes Equal Greater Repair Costs

Given that the median age of owner-occupied homes was 42 years old in 2024, up from 31 years old in 2005, according to the National Association of Home Builders (NAHB), the Harvard Joint Center for Housing Studies puts the median age at 44—there is a potential gold mine in turning tired into inspired.

However, according to an analysis by the Common Sense Institute (CSI), which reviewed 2.8 million building permits in Arizona, securing a permit adds about 23 days to the completion timeline of a residential construction project. As flippers know, time is money, especially when you are paying carrying costs in the form of interest, taxes, and insurance for every day the project is not sold or refinanced.

“Delays and Administrative Uncertainty”

Complicating matters is that the longer a home remains unrepaired, the worse it gets and the more expensive the renovation becomes. Cosmetic rehabs that can be quickly flipped with less risk of going over budget are less likely when roofs, wiring, HVAC systems, and other systems need upgrading, requiring multiple permits.

“These costs arise not only through direct regulatory compliance expenditures, but also through delays, administrative uncertainty, and fragmented approval processes across multiple jurisdictions,” wrote researchers Glenn Farley and Chris Young in the Common Sense Institute study cited by Realtor.com.

Their work shows that even routine projects such as HVAC replacements, which require permits in more than 90% of Arizona jurisdictions, can see timelines vary from about six days to more than 23 days just to secure approval. Permit fees range from roughly $126 to almost $300, depending on locality.

Permitting Red Tape Adds Insult to Injury for Flippers and BRRRR Investors

Amidst a national housing shortage, flippers and BRRRR investors could be forgiven for thinking that municipalities would fast-track permits to get more inventory on the market. However, despite sky-high overall prices, interest rates, and gas prices, as well as a contractor shortage, that hasn’t been the case.

Many municipalities have extended the renovation timeline by adding frustrating red tape, adding insult to injury, and making flipping ever more difficult, as borne out by investors’ complaints in the BiggerPockets forums.

Reworking the MAO Formula

It also adds another hiccup to the tried-and-true maximum allowable offer (MAO) formula (ARV minus the cost of repairs multiplied by 70%) used by most flippers to calculate what they should offer on a renovation project.

James Dainard, cohost of the BiggerPockets On the Market Podcast, said on a recent podcast:

“We’ve redefined what a deal is right now. We’re seeing more volatility in the market. Because we’re going to be selling at a slower time, we want a wider margin, and because we’ve increased our margin expectations, it is harder to find a deal.”

Dainard added that although he had increased his margin of profitability to factor in the additional costs, that rarely pans out. “We’re shooting for 40 (% as opposed to the standard 30% in the MAO formula), but we’re hitting about 20.”

Where Red Tape Hits Hardest

Permitting, like many aspects of real estate, is rarely an even playing field. Permit expeditors, who act as a go-between for contractors and local municipalities, often charge anywhere from $1,500 to $5,000 to expedite the process. However, these services are usually used by larger commercial companies with deeper pockets than smaller mom-and-pop BRRRR investors and flippers.

Many U.S. cities have become a permitting bureaucratic morass, bogged down with discretionary reviews, backlogs, and project-by-project negotiations that add both time and complexity to even relatively modest renovations, according to the Foundation for Research on Equal Opportunity (FREOPP). Applying strict code enforcement, usually used in larger commercial buildings, can add 30% to the costs of smaller multifamily units of three units or more, according to FREOPP.

What States Are Trying to Do About It

In California, state-level reforms such as AB 1308 and AB 253 aim to fast-track the permitting process when it takes over 30 days by requiring cities to post their residential permit fee schedules online and to provide estimated plan-check time frames once an application is deemed complete.

According to the Red Tape Efficiency report from regulatory intelligence firm Labrynth, published in Construction Dive, the best state for permitting efficiency is Tennessee. The ranking is based on the time it takes for states to process building permits and zoning changes, with information collated from building departments, zoning boards, and state environmental agencies. It factors in both large projects, such as data centers, and smaller residential projects.

These are the top 10 states for permitting efficiency, according to the index:

Tennessee
Florida
Texas
Indiana
Arizona
North Carolina
Georgia
Virginia
Michigan
New Hampshire

Conversely, here are the bottom 10:

Rhode Island
Maine
Vermont
Maryland
Massachusetts
Connecticut
New York
New Jersey
California
Hawaii

Final Thoughts

This is one of the most difficult times to undertake a flip or BRRRR project due to the elevated costs previously mentioned, which are hampered by geopolitical uncertainty. For that reason, many investors are sitting the market out—which is why it is also potentially one of the best times to buy flips and BRRRR deals.

However, underwriting needs to be meticulous and conservative, including the permitting process. Don’t try to make the numbers work just because you want them to. Try to eliminate as much uncertainty as possible.

That means not borrowing or leveraging too much. It also means having your contractors locked down with bids from subcontractors on the table and putting your permit applications in early. Now is not the time to leave anything to chance.

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