Most people, get "flip fever" from HGTV or a real estate "Guru", buy a dilapidated property, upgrade it to their personal taste and discover that they can't sell the property for want they need to even break even. Flipping is an excellent way to lose a lot of money, if a strategic approach is not taken.
The key to making money by flipping is to find the right property at the right price in the right area with low risk problems, accurately determine all the costs you will incur to make the home sellable to a typical buyer for this type of home.
The best way to know if you can make money by flipping a property is to start at the probable sales price and work backwards. Do not guess what the rehabbed property "might" sell for; look at recent sales of similar properties and base your probable sale price on the best facts available.
For example, after due diligence, you are confident that homes in good condition, in XXX area with a specific floor plan are selling for $250,000 within 30 days. Remember that there is little that you can do to make a property sell for more than the market value of similar properties.
Suppose you locate a dilapidated property in that area with the right floor plan, the renovation risk is reasonable and your trusted contractor give you a total market ready price of $50,000 including a cushion for unexpected costs
The first thing to do is to ignore the asking price. You don't care what they want, you need to determine the maximum you can pay for the property. If you can't get the property on your price and terms, look for another property. Never go over your maximum price. This is the difference between making money and losing money.
To determine what the maximum purchase price, add up all the costs you will incur from the moment you close until you see the buyer's money in your bank account. Below is a very simplistic set of costs. Usually you will be working with a detailed spread sheet.
- Cost to purchase the property (closing and loan costs): $5,000.
- Cost to get the property ready to sell: $50,000.
- Profit: $20,000 (If you can't make significant money, why take the risk?).
- Cost to sell the property: A reasonable guess is 8% of the probable sales price: .08 x $250,000 = $20,000.
- Carrying costs : Multiply the sum of the months it will take to repair the property and to complete the sale to the new owner by the monthly debt service. Assume this is $10,000
Total costs: $105,000.
Calculating the Maximum Purchase Price
To determine the maximum purchase price, subtract all the costs from the probable sales price:
$250,000 - $105,000 = $145,000
The MAXIMUM you can pay for this property is $145,000. If you can get the property for $145,000 (or less) and your costs and hold time were reasonably accurate, you should make a profit. . You can lose a lot of money flipping if you deviate from the plan.