Digging a little deeper into Flipping. At Real Estate Investing 101, Part I, we cover buying a home to resell for a short-term profit. In this lesson, we’re going to dig a little deeper into flipping, running a scenario, and examining ways to maximize profits, while minimizing risk and making it happen fast.
Find a suitable property
Obviously, the first ingredient in a profitable flip is ownership. Despite what one may see on television, it takes a while to find good candidates. The various types of properties that may be good candidates for investment are foreclosures or REOs (bank-owned properties), homes that need repairs, older homes that need updating, and ugly properties that are otherwise in jeopardy. good condition. Cost is obviously important, but condition is also very important. Remember, not only will there be an expense for the repair, but there will also be a cost to transport the property while the repairs are being made. For example, if Property A needs $20k in rehab, it can be completed in 8 weeks and will cost $2k/month. to carry it may be more attractive at $176k than Property B, which needs $50k in rehab, will require 16 weeks at $1500/mo. and is priced at $150k. This assumes that both could get the same price at the end of their renewal.
Homes can be in almost any price range. Condos can be purchased for as little as $40k, but there are sometimes opportunities with home prices of $1 million or more. In fact, the most expensive houses have some advantages in some markets. Let’s look at some pricing tiers:
Less than $100k – Pro– Cheap, easier to carry if it doesn’t sell out as quickly, possibly a bigger market to sell to after completion. Fraud– Lots of competition pushing prices up, requires strict cost control to be profitable, lots of competition in the market.
$200k to $400k – Pro– Lower competitors raise prices, often a slightly larger pool of properties to choose from, usually higher margins. Fraud– Requires more capital, adequate level of accessories and more important finishes.
Over $700k – Pro– Often more generous margins, little competition, fewer do-it-yourself buyers, more fun to do (home theaters, high-end kitchens, etc.). Fraud– Bring your checkbook, a higher level of capital is needed, the wrong finishes and fixtures will eliminate the chances of a sale, tastes can be fickle.
Of course, you may have noticed that I left generous spaces. These are guidelines and in different markets the actual prices will need to be adjusted.
Putting the numbers together
I have an excel spreadsheet that I will use to review the transaction. It is available here. While not elegant, it does cover the information we need to calculate the cost of the change and figure out what needs to happen to make a profit. There’s nothing worse than getting into the flip and finding out you forgot something important and you’re not going to make any money.. Unlike a TV show, it’s not very often that you can simply raise your price to get your money back from the deal.
When filling out the spreadsheet, the light gray areas are for users to enter information. Light green areas have calculated values. Remember, the more accurate your input information is, the more accurate your earnings analysis will be.
The hardest and most important part is getting the correct cost estimates for renovations. The natural inclination is for these to be underestimated. Many first-time flippers plan to do all or most of the work themselves. This is not a great long-term strategy, but it has its advantages. The main advantage is that the flipper increases the profit margin. However, the big danger is that pinball machines often underestimate their own work. Using paint as an example, painting the interior of a large house may require 20 gallons of paint. A professional painter can bid this job for $4,000. The cost of the painting would be approximately $600. A job like this may require 60 person/hours. Entering $600 for the cost of repainting the house does not assign any value to the time involved in labor. Therefore, even if the person changing ownership plans to do the work, they should divide up the work for these tasks. More than one person has spent hundreds of hours renovating a property only to find their $/hour was terribly low.
Assembling a team
Good pinball needs good equipment. This is even more important if one plans to have more than one or two active properties at any given time. But, these are the people one needs to have available:
Real estate agent– A good agent will know what’s on the market and should be able to quickly determine what a good ARV (After Repair Value) will be for a given property. This agent will also know how to price the property to maximize the return. That doesn’t always mean maximum price, those closing costs can add up, and if one’s capital is tied up, one can’t move on to the next project.
Inspector– Spending a few hundred dollars on a good inspection is money well spent. Losing a faulty HVAC system or roof problem could cost thousands of dollars. Knowing that a particular lining or electrical system has proven to be unreliable can also be invaluable. If you can find an inspector who will give you good cost estimates for the repairs and upgrades that need to be done, you may be able to reduce the number of contractors you need to consult before buying a property.
Contractors– These contacts can make or break a flip. If the work is good, fast, and priced right, it’s worth paying to have it done. Saving a few hundred dollars and spending a few thousand on transportation costs while waiting for a contractor who is late is not a good deal. Saving a few thousand and then having to spend money to fix what went wrong isn’t a good deal either…especially when you have to hold onto the property much longer to get it all done.
Project coordinator– If there are more than a couple of projects going on, it is vital to have one person to help keep everything going. Even the best contractors will have people who need someone to make sure they show up on time and get the job done right. Even the best pinball needs a second opinion and someone to run errands or get the right supplies.
Mortgage or commercial loan broker– Transport costs are another decisive expense. Having the capital to complete the project is a requirement. It is also required to be able to finance projects continuously. Most mortgage lenders (not brokers) don’t want to lend money to no-load flippers. They make money by carrying the loan or charging fees in advance. Since the goal is NOT to transport the property, they must charge fees in advance. A good loan source can DRAMATICALLY lower your costs.
sales strategies
To reduce maintenance costs, as well as recover capital for the next project, it is important to sell the property quickly. However, giving it away reduces the profit margin. There are some things that can be done to help achieve these conflicting goals.
Hire a good agent. They are part of the team. A good agent will help get the proper exposure for the property, as well as make recommendations that will make the home more marketable. They will also have access to the people on your team that will make the sale go more smoothly.
Stage the property. A vacant house makes it difficult for buyers to mentally move. A few well-arranged rooms will really increase the value in buyers’ minds, so it’s usually worth the cost. This is especially true for high-end homes, but it can be the thing that tips the scales for ANY property.
Price it appropriately. Many experienced pinball machines will price a property 3% to 5% below market so it will sell faster. This reduces “opportunity costs” and also reduces risk. Opportunity costs are deals you can’t make because your capital is tied up elsewhere. There is no risk after the sale of the property.
Research. Plan. Prepared. Remember the old adage that it takes money to make money. This is also true in the sale of real estate. However, it is vital that the money is properly directed, well managed and strictly controlled. This doesn’t mean you shouldn’t spend, it means you should spend on the right things, and cutting corners may not be the best idea.