You you are buying a property for a real estate flip you always need to know your ARV - after repaired value.
When you are in a cold market and it takes longer to sell a property you obviously must buy cheaper.
The opposite may happen if you are in a hot market. I have seen investors pay more than the standard 70% formula because there were too many investors going after the property. This happens because appreciation rates are on the rise / prices are going higher and people are demanding to live there.
Yes this may happen. You can certainly pay more as long as you have all of your costs and details figured out. Currently the East & West coasts are known as cold markets right now and the Mid West is doing well.
You can make money in either market both hot and cold. You just have to know how to buy and know your numbers.
You should do some research to find the appreciation rates for your area. CNN used to have some good information years ago but that has seemed to went away. Here is a nice link with some information.
http://money.cnn.com/popups/2006/fortune/invguide_realestate/index.html
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Here is another strategy you can use for your house flipping business to help you get a fast sell.
As you begin to work on your property I would list an ad in the paper and other places like that talking about your property the bedrooms, baths the location and the amenities it has.
Take the calls and add these people to your buyers list. Even if you don’t have a house for sale or your house just sold i would keep the ads going as long as people are calling. You can easily say I am sorry that house just sold but can I get some more information about you and what you are looking for.
By doing this you will easily be building a list of people who are ready to buy. Granted they may find another house in time so just keep your ad cycling and a new group of buyers will come around always.
The faster you can flip your homes the faster you can get them sold.
So always always always anytime someone calls to ask about a property you have for sale take down information on them and keep that database building.
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My previous post talked about the real estate formula for buying properties.
It is a widely used formula that takes into consideration all of the work and processes and costs that go into flipping a house.
The formula really can be used anywhere in the country.
It may need to be changed sometimes. It may need to be changed if you live in a very slow / cold market where selling flipped real estate isn’t that easy and it will take a while.
When you evaluate your market and the holding time for selling a property you may need to buy at a bigger discount. Instead of buying .70 cents on the dollar you may need to buy .55 - .65 cents on the dollar. This will allow you to price the home lower on the market so that it can be sold while not losing any money.
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When you are buying properties you need to have a formula for buying.
A standard formula that investors around the country use is something like this.
ARV X 70% - Repairs = MOST YOU CAN PAY
Lets break it down…
The ARV = After Repair Value. This is what the home is worth when it will be all fixed up and ready to be sold. You should always price your homes a little bit lower than the other homes on the market to help you get a quick sale.
X 70% = This will leave you room for error and also your big paycheck when the property is sold. You want to get paid right?
- Repairs = Subtract out all of your estimated repairs.
Most You Can Pay = This is where you make your first offer. This is the most you should pay for the property.
This will insure that you have properly budgeting repairs, profit and errors.
Depending on your flipping ability you may need to factor in some extra things like extra holding costs = taxes, insurance and utilities depending upon how long it will take you depending upon your skill ability.
So when you hear people say buy homes .70 cents on the dollar you know what they mean. Of course if you can get homes cheaper then you’re in better shape.
This isn’t a special formula but its what works. You can adjust accordingly if you feel the need.
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When you go to sell your house you want to do all you can within reason to get it sold right away. Another way to get it sold by using the bird dog method i blogged about recently is - staging your house.
Usually when you are done with your flip the house is empty and the walls are bare - there is no furniture in the house. It has been said that staging a home and putting furniture in it will sell better than an empty house.
It allows the potential buyer to get a really good view and feel about the house. You can look in your local yellow pages for a company that specializes in this. If you have money in the budget than I certainly reccommend trying to staging the home.
The staging company will bring in their own furniture you pay the fee and when he house sells they take the furniture back in many cases. Certain cases the furniture can be sold along with the home.
But the general idea here is to give the home some personality and feel to it instead of just an empty home.
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Some people out there call them weasel clauses. But in all actuality escape clauses in a purchase contract can save you in the end. When you are buying your property and signing the contract or putting in your offer you should always include escape clauses.
If you are submitting a contract with a realtor they will make you use their contract but you still can add escape clauses which you should.
Escape clauses are exactly what they seem. They allow you to get out of a deal even if a contract is signed. There are many standard / template contracts out there that may leave you unprotected. Take a look at your agreements and see if you are protected.
Why use them? In the event that there is a very big unforseen problem and the other party won’t re negotiate. If you don’t have escape clauses then you will be in big trouble.
How many clauses? That is up to you. You don’t need to over do it on your real estate agreement so that the other party sees 10 clauses that will give them a feeling you’re backing out already.
There are 2 widely used clauses.
And / Or Assigns - This will give you the option to transfer your right to purchase to someone else. This will allow you to wholesale your property if for some reason you can’t close on the real estate. A sudden problem in your life or business or the just out of the blue unexpected. The property is a great deal but before closing you realize you’re unable to close. Why completely back out of the deal. Wholesale it for a quick profit and let someone else complete the real estate flip.
Inspection Clause - I use this clause when I submit sight unseen offers. Have it worded so that the offer is subject to review, inspection and written approval of your associates or partners. The other party never has to meet your associates / partners. So this is another way to get out of a deal if you really need to.
Without escape clauses you are leaving yourself very vulnerable.
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Inspecting your property thoroughly before purchase is crucial. We are all human and sometimes we forget to look at a part of the house close enough. Or we forget to take note of a problem entirely.
It’s human nature. But not seeing a problem before you buy will kill your deal and your profit. I have come across many property inspection checklists in the past but none of them seem to be as complete as this one….
You can print out each page as there are multiple parts to the checklist.
Don’t forget to read each page and look at the bottom of each page to make sure you click the link for the next page… It’s small and looks like this Next Page (Exterior Checklist) so don’t miss the next pages.
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As a real estate flipper you should realize that you make your money when your buy. You simply realize your profit when you sell. If you fail to buy the right property at the right price then you will be for a rough ride the entire time and your property may not sell.
For me the best possible real estate deals have been 3 bedroom 2 bath in the middle class parts of town.
Sure there are plenty of investors that look to make money off of low income houses and also on pretty high end homes.
But for me I look at the 3 bedroom 2 bath homes as the sweet spot. Trying to sell a 2 bedroom home is very tough unless you have the ability to turn a room in the house into another bedroom. But even then the rooms will probably be too small. I also believe that the average family needs 3 bedrooms.
Looking at homes in an inventory perspective and supply and demand it looks like this…
There are a lot of low income homes but these homes are not desirable and no one really wants to live there.
Middle class homes has a nice supply of homes and people want to live there. People are moving up and down in society and will be living in these homes. Some are moving up in society from low income and others are moving back to these areas from their high end homes due to job downsizing or other related reasons. People also want to live in these areas. So in summary there is enough of them to go around and enough people to buy them.
Finally high end housing has a lot of money to be made but these types of homes can sit on the market for a while. The amount of homes is very few and there are very few people able to afford these type of homes.
So if you are looking to do your first flip or are looking to set yourself up on the right foot look to 3/2 homes in the middle class part of town.
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The last important part of the real estate flipping business is the actual flipping part - selling your home as fast as possible.
When you purchased your property you should of made sure that you bought at a deep discount. When you are selling your property, depending upon your market, it’s wise to price your property 10% or more below the similar properties on the market.
This should help to get a faster sale. Honestly it is better to take a little bit less on the deal then sit on the property for months and let their insurance, utilities and taxes accumulate. Trust me they add up faster than you think.
Over time I will give you plenty of tricks and secrets that will let you sell the property fast. The first tip I can give you is this one….
Maybe you are using bird dogs to find properties - people who you pay a few hundred bucks if they tell you about a deal and you close on it.
Use a similar strategy when selling your property. Look to the surrounding neighbors of your house that will be for sale. Tell them that you will pay them a bird dog fee if they can help sell your property. If someone buys your house because your bird dog told them about it then give them a nice fee.
It can’t hurt you at all - it can only help. You are only paying the fee if they house gets sold and that is the whole goal. So if it costs you $500 more in a referral fee than its more than worth it.
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Once you believe that you have found your deal, before you pull the trigger and buy it make sure that you properly estimate the repairs.
If you are just starting out you may want to bring in contractors to get an idea of what it will cost for everything. As time goes on you will begin to realize what the cost is yourself but at first you should get someone who knows.
Most contractors that I have worked with at first would only do a free estimate if i owned the house otherwise they would charge about $150 - $300 for a estimate. But how are you supposed to know the repairs if you cant get the estimate and you need that estimate to see if its a good deal. Tough situation indeed. Well if the estimate doesn’t costs much like $150 you should go ahead and get it done so that you can see if its a good deal for you.
Also realize that you should never accept the contractors first amount that they say it will cost. Realize that you always need to negotiate things down as low as possible. How low can you go? Most contractors over charge you even after working with you a few times. Its just part of the business. But realize that you need to bring it down a lot.
You may realize that with your flips if you are using a contractor and using private money unless you bought a dream deal you may not be making the big money you want at first. This is fine, just get the deal done take your profit, build your portfolio and find your next deal.
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