You are excited to start your house flip, you’ve got your mastermind team at the ready, and you’ve investigated the local housing market with data-driven research. Now it’s time to go close a deal and flip a property for a profit. So how do we make the best decision for selecting the perfect home to flip?
SKILL LEVEL
Home selection depends on a number of factors, including your skill level and experience. For the first few flips, it is best to choose a simple project with minimal rehab required. Start with a project that has a solid structure, a modern layout, and only needs some minor fixes: a new layer of paint, a fresh carpet or new floor installed, and some modern sink and shower hardware installed. The profit margins won’t be as high as a flip needing a full kitchen and bathroom remodel, or more advanced flips requiring plumbing, electrical, or structural remodeling, but unless you have solid experience under your belt, it’s wise to acclimate to the general flipping process with easier cosmetic projects that aren’t going to turn into a money pit of complexity.
INSPECTION
Before making an offer, hire an inspector to ensure that the house isn’t hiding any subsurface problems such as lead-based paint, toxic mold, hidden pests, septic problems, flood danger, and other issues that will lead to longer project lead times and higher rehab costs. Also, check on the title for any liens or legal issues associated with the home.
NEIGHBORHOOD LOCATION
Remember the real estate mantra: location, location, location! Neighborhood selection is key for your resale. You have to put yourself in the mind of the home buyer because this is where they will be living. What do they value in a home? Higher value homes will have access to amenities such as good schools, parks, restaurants, public transportation, malls, and hospitals. A great option is to find the one home in a nice neighborhood that needs some work and bring it up to the same value as its neighbors.
PROFITABILITY
Once you know your budget based on the financing you can acquire, evaluate the overall costs of the project. This will include the purchase price of the home, the rehab costs, carrying costs, marketing and selling costs, and any unexpected costs. Then calculate the property’s after repair value (ARV) and subtract your overall project costs to estimate your profits. Many investors like to use the 70 percent rule to estimate how much you should pay for your fixer-upper. The 70% rule says that to purchase a home, an investor should pay 70 percent of the ARV of a property minus the cost of repairs. So if a home’s ARV is $200,000 and it needs $30,000 in repairs, then an investor should pay $200,000 x 70% = $140,000 – $30,000 = $110,000.
Focus on your goals and be resourceful. Go get ‘em, tiger.
