Wikipedia
defines flipping as "the practice of buying an asset and quickly
reselling it for profit. The term is often applied to the practice of buying
real estate at below market value, making improvements to it, and reselling
it for a higher price (generally near market value), thus making a profit."
In the real estate investor circles this is normally referred
to as rehabbing or retailing. The term "flipping" has been made
popular by recent onslaught of tv series such as Flip
this House and Property
Ladder. To most experienced investors, "flipping" refers to
reassigning a contract or "flipping the paper". In any case, we'll
refer to the act of fixing up and selling a property as "rehabbing."
Here are few real-life tips for investors interested in rehabbing
in the DFW market:
1. Buy Cheap, Cheap, Cheap...
The most common mistake for first-time flippers pay too much for the property.
If you purchase a property from the retail market (MLS) and rehab then sell
it retail, you'll almost certainly lose money. Retail (Realtors and MLS) properties
are generally discounted by the exact amount of the rehab, which leaves no
room for profit. You must purchase your property on the wholesale
market or directly from a motivated seller to have enough margin for profit.
Generally, you should be purchasing properties at 60%-70% of
the ARV (after repair value) minus repairs to profit on a rehab. Here
is an example purchase price calculation:
| |
After Repair Value (what you'll sell it for on mls) |
$100,000
|
|
| |
Repairs |
$10,000
|
|
| |
ARV minus Repairs |
$90,000
|
|
| |
Purchase Price (70% LTV) |
$63,000
|
|
You can then reverse those calculations to determine the profit potential.
| |
Purchase Price |
$63,000
|
|
| |
Repairs |
$10,000
|
|
| |
Total Investment |
$73,000
|
|
| |
Sales Price |
$100,000
|
|
| |
Potential Profit |
$27,000
|
|
2. Estimate Expenses
Obviously, estimating the repairs for a rehab is very important
to the net profit. The only way to learn to estimate rehab costs accurately
is through experience. We suggest starting with an easy "paint and carpet"
rehab as these are easy to estimate. You won't make a killing but your risk
will be much lower. Also, don't forget to estimate the closing costs, carrying
costs, insurance and sales expenses.
3. Finance the Deal
There are several options for financing
a rehab, each with advantages and disadvantages.
4. Find Cheap Labor
Of course the cheapest labor you'll find is yourself. If you do the work
then the profit potential is much greater but you can obviously only rehab
one property at a time. Also consider that it'll take longer to complete your
rehab so your carrying costs will be higher.
If you use contractors start by getting a ton of bids. This is a great opportunity
to learn what needs to be done as they'll all have a different perspective.
When you find good contractors ask if they know a good ... foundation guy,
roofer, carpet guy etc.. It'll take some time but eventually you can find
good, cheap contractors.
5. Don't Get Greedy
Many times, novice rehabbers increase the asking price of their property
as they get more emotionally attached. Before you know it, they've blown their
budget with high-end enhancements and overpriced the property. Your goal is
to make a decent profit by being the first house to sell. Don't let it sit
for 6 months because you are asking too much since you installed granite countertops
in a $100k house.
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