The Five Most Important Aspects Of Any House Flip
Posted by JD Esajian // January 17, 2017
Real estate house flipping is as hot as ever. A majority of new real estate investors enter the business with rehabs and flips as their primary focus. One of the main reasons for this is that anyone can do it. You don’t need a degree or eight years of education to close your first deal. Heck, you don’t necessarily even need your own funds. As popular as rehabs are success is far from guaranteed. There is still plenty that can go wrong on every deal. Prior to taking on your first rehab deal there are a few core areas that every rehab investor must know. These are the areas that will directly determine the strength of the deal and whether or not you will have success. Here are the five most important aspects of any house flip.
- Offer Price. The purchase price is the starting point of any real estate transaction. The lower you get the purchase price for the higher the potential upside. It is not a stretch to say that every dollar you go above your bottom line can have an impact on the transaction. Many new investors fail to recognize that the goal is not to simply get the offer accepted but to get it accepted at your price. At the end of the day you are looking to make a profit and not just complete a project. Once you go over the number you think is fair you will be forced to compensate in other areas. This could have an impact on the work quality which can affect the end sales price. As difficult as it may be you need to know when to walk away the minute the deal loses its luster. The purchase price starts the transaction and has a ripple down effect on everything else you do during the project.
- Cost Of Repairs. The cost of repairs and the after repair value often go hand in hand. Let’s start with the cost of repairs. One of the ways to make money in house flipping is by adding value though improvements. That being said not all improvements will give you the right bang for your buck. You need to do the right work for the market. This doesn’t mean your rehab needs to look like all the others in the area but you need to consider your target buyers. You and your contractor need to walk the property and come up with a realistic set of improvements. In your work estimates you need to attach a price for the work, materials and labor associated. The total number you come up with will have an impact on the price you offer and hopefully the after repair value. Once your offer is accepted it is imperative that you and your team do everything in their power to stay under the number you budgeted.
- After Repair Value (ARV). The key to any successful rehab is estimating what impact your improvements will have on the property value. There is always a small leap of faith associated with doing any improvements. Even if you know the comparable sales and listings inside and out there is nothing guaranteeing your property will sell for what you expect. All you can do is study the market and find comparables that buyers will look at and not the ones that improve the value in your favor. If you really wanted to you can probably find listings that are in line with the value you need to make the deal work. However if you need everything to break right or if there was only one similar transaction you could be in for a surprise when you are ready to sell. It is not enough to take a wild stab as to the ARV. You need to be confident that the work you do will produce the number you expect even before you make an offer.
- Budget. The amount of money you allocate for repairs is not just an arbitrary number you can be flexible with. Your bottom line very much depends on your ability to stay under budget. Where many rehabbers go wrong is not staying on top of every expense associated with the project. Seemingly minor items such as carrying costs, insurance and some materials may not make much of a dent individually but when added up they have a big impact. If you took the time formulating a budget you are doing yourself a disservice if you don’t follow it. Going over budget causes you to compensate in other areas. Sometimes this can work out in your favor but in most cases it will cause a reduction in your expected profits.
- List At Right Price. Every rehabber thinks that their property is the best one on the market. They have put hours of blood, sweat and tears into the property and think the market will feel their pain. The reality is that buyers don’t know, or care, what you went through to finish the property. All they look at is the finished product and how it stacks up with what else in currently available. If you have an inflated opinion of the property you will be tempted to list too high. Instead of squeezing every dollar out of the property this can actually have a negative impact. On the flip side listing at the right price will produce immediate interest that can help find multiple offers. The longer your home stays on the market unsold the more desperate you become and lower your price will be.
A successful house flip takes a series of positive events to work. Regardless if you are new to the business or not these are the five most important areas.