Flipping houses is big business these days. Many people are trying to get into the business, but may or may not have a sound business model to work with.
One of the biggest stumbling blocks people have when getting started flipping houses is figuring out how to evaluate the property. There are a number of factors that go into this, and some of these factors we cannot address as they can be property specific, but what we can do is to give a general overview on a simple evaluation process when flipping houses.
At the root of flipping houses is your profit potential. This is the money you will make once the property has been rehabbed and sold. The biggest mistake I see new investors making is that they don’t give enough room for this profit margin. These margins cannot be incredibly thin, as if you have overruns, if you have to mark the property down to sell, have a longer holding period than anticipated, etc. you could end up working for no profit.
The rule of thumb I use is that you need to purchase the property for no more than 60-65% of what you intend to sell it for. If you are able to buy all cash, these could be a bit higher, but if you are using rehab loans, you must stay at or below this mark.
When looking at these ratios, it is important that you take into account the work to be done. If you are buying at 60-65% of the value, and are using private money for your loan, your rehab costs need to be evaluated as well. Your rehab cost plus your purchase price needs to be less than 70% of the after repair value on the home.
So, if you are buying a home for 60% of the after repair value, your cost of rehab can be a little higher than if you are paying 65%.
When calculating the after repair value, be sure you use closed sales from like properties. You don’t want to convince yourself that your deal is good, rather, be conservative and try to convince yourself the deal is not good. Being overly optimistic on your after repair value is a great way to set yourself up to lose.
If you are serious about flipping houses for a profit, do your homework. Surround yourself with quality professionals – an agent who knows how to work with bank owned properties, a quality contractor you can trust, and a solid finance person.
Check back in, we will continue posting more details to help you be successful when flipping houses!