Fix and Flip Fundamentals
January 3, 2022
So you love real estate and want to fix and flip properties like you hear about and see on tv and make a boat load of cash, right? They make it look oh so easy on all those shows, don’t they? The same script almost every time. Buy a house, some sort of surprise mess that they don’t know if they are going to lose their shorts, figure out a solution, and then make a big return. Well, as a guy who has been on one of those shows, and someone who has bought, and sold north of 18,000 properties, it’s a little bit more complex than that.
If you are still reading this, it’s more than likely you are interested in investing in properties, fixing them up, and looking to make a quick buck. While that is possible, and I’ve been doing it for over 20 years, it’s not as easy as HGTV and others make it look. There are some important fundamentals that you need to implement before ever making an offer and opening up your wallet. One of these fundamentals is knowing the true value of the home. Too many people depend on others to give them the value instead of really diving into the information at your fingertips and being certain of the value. Never trust an agent or wholesaler for the value of a home they are representing, as most of the time, their goal is to sell the home and make money for themselves. I learned this lesson very early on and won’t buy a home unless I am completely confident on the ultimate sales price when it’s all done and fixed up. Another fundamental is learning the basics of construction and fix-up costs. Too many times, investors underestimate the cost of repairs and get smoked in the rehab expenses. It’s important to know the basics on flooring, paint, and other cosmetic repairs as a lot of Arizona’s inventory is fairly newer and will need these three things in order to get the higher price to make a profit. Get with a reliable contractor and walk through some of his jobs. Ask about the price per square foot on tile, and paint. Ask how much they charge to install new lights, plumbing fixtures, ceiling fans, etc. If at all possible, and you have an inspection period, do an inspection and at the same time have your contractor bid the deal for you so you can make sure you are still making the profit you intended. Another fundamental is financing of the property. Most people that will sell their home at a discounted sales price, are often looking for an easy transaction and will sacrifice equity for a hassle free, guaranteed sale. That most likely means terms like cash offer and as-is as well as no warranties, and no closing costs. Now with the price of homes what they are today, it’s hard to pay all cash for the deal. It’s important to have a hard money lender that you have a relationship with and know that when you find a deal, you have the funds to make the deal happen. I recommend interviewing many of them and go with the one you are most comfortable with and can perform very fast. These loans are usually high interest and short term, most are 6-month loans. Make sure you can buy, fix, and flip the home in that time or less and make sure you add that interest to your expenses when calculating your sales price.
I will now dive into how to calculate your final buy price. I buy all my homes on a simple mathematical equation that I’ve used for over 20 years, and it all starts with the ARV or after repaired value. I take the ARV and multiply it by 94%. I do this because there is about 5-6% in hard costs when doing a sale. It covers closing costs, commissions and utilities. I’m an agent so I save the listing side of the commission. If you are not an agent, I would suggest adding another 2%. I then subtract out the estimated fix up costs. That gets me to my break even. I then subtract the amount I want to make for a profit to come up with my ultimate buy price number. For example, if a home has an ARV of $400,000 and needs $30,000 in fix up repairs, and I want to make about 5%, my buy price would be $326,000.
Fixing and flipping is the best way I know of to make money and I owe my whole career to mastering it. Too many people get into flipping too early without really knowing the numbers. The numbers will make or break a deal and will make or break your flipping career. Master the numbers and fundamentals, and build your fortune! Best of luck.