Going a little deeper into Flipping. In Real Estate Investing 101, Part I, we cover buying a home to resell for a short-term profit. In this lesson, we’re going to dive a little deeper into flipping, running a scenario, and examine ways to maximize profit, while minimizing risk and making it happen fast.

Find a suitable property

Obviously, the first ingredient in a profitable flip is ownership. Despite what one may see on television, it takes a while to find good candidates. The various types of properties that may be good candidates to invest in are foreclosures or REO (bank owned properties), homes in need of repair, older homes in need of updating, and ugly properties that are otherwise in disrepair. good condition. Cost is obviously important, but condition is also very important. Remember, not only will there be an expense for the repair, but there will also be a cost to transport the property while the repairs are being made. For example, if Property A needs $20k in rehab, it can be completed in 8 weeks and will cost $2k/month. to take it may be more attractive at $176k than Property B which needs $50k in rehab will require 16 weeks at $1500/mo. and is priced at $150k. This assumes that both of you could get the same price at the end of your renewal.

Homes can be in almost any price range. Condos can be purchased for as little as $40k, but there are sometimes opportunities with home prices of $1 million or more. In fact, more expensive houses have some advantages in some markets. Let’s look at some price levels:

Less than $100k – Pro– Inexpensive, easier to carry if it doesn’t sell as fast, possibly a bigger market to sell after completion. Fraud– Lots of competition pushing prices up, requires strict cost control to be profitable, lots of competition in the market.

$200k to $400k – Pro– Lower competitors raise prices, often a slightly larger pool of properties to choose from, usually higher margins. Fraud– Requires more capital, adequate level of accessories and more important finishes.

Over $700k – Pro– Often more generous margins, less competition, fewer buyers to do the work themselves, more fun to do (home theaters, high-end kitchens, etc.). Fraud– Bring your checkbook, higher level of capital needed, wrong finishes and fixtures will kill chances of a sale, tastes can be fickle.

Of course, you may have noticed that I left generous spaces. These are guidelines and in different markets actual prices will need to be adjusted.

Putting the numbers together

I have an Excel spreadsheet that I will use to examine the transaction. It is available here. While not elegant, it covers the information we need to calculate the cost of change and figure out what needs to happen to make a profit. There’s nothing worse than getting into the flip and finding out you forgot something important and you’re not going to make any money.. Unlike a TV show, it’s not very often that you can simply raise your price to get your money back from the deal.

When completing the spreadsheet, the light gray areas are for users to enter information. The light green areas have calculated values. Remember, the more accurate the input information is, the more accurate your profit analysis will be.

The hardest and most important part is getting the cost estimates right for renovations. The natural inclination is for these to be underestimated. Many first-time pinballers plan to do all or most of the work themselves. This is not a great long-term strategy, but it does have its advantages. The main advantage is that the flipper increases the profit margin. The great danger, however, is that pinball machines often underestimate their own work. Using paint as an example, painting the interior of a large house might require 20 gallons of paint. A professional painter can bid on this job for $4,000. The cost of the painting would be approximately $600. A job like this can require 60 person/hours. Entering $600 for the cost of repainting the house does not assign any value to the time involved in labor. Therefore, even if the person who changes ownership plans to do the work, they should divide the work for these tasks. More than one person has spent hundreds of hours renovating a property only to find out that their $/hour was excruciatingly low.

building a team

A good pinball needs a good team. This is even more important if one plans to have more than one or two active properties at any given time. But, these are the people one needs to have available:

Real estate agent– A good agent will know what’s on the market and should be able to quickly determine what a good ARV (After Repair Value) will be for a given property. This agent will also know how to price the property to maximize the return. That doesn’t always mean price cap, those closing costs can add up, and if one’s capital is tied up, one can’t move on to the next project.

Inspector– Spending a few hundred dollars on a good inspection is money well spent. Losing a faulty HVAC system or roof problem could cost thousands of dollars. Knowing that a particular coating or electrical system has proven unreliable can also be very valuable. If one can find an inspector who will provide good cost estimates of the repairs and updates that need to be done, one may be able to reduce the number of contractors that need to be consulted before purchasing a property.

contractors– These contacts can make or break a cartwheel. If the work is good, fast, and priced right, it’s worth paying to have it done. Saving a few hundred dollars and spending a few thousand on transportation costs while waiting for a contractor who is late is not a good deal. Saving a few thousand and then having to spend money to fix what wasn’t done right isn’t a good deal either…especially when you have to hold the property much longer to get it all done.

Project coordinator– If there are more than a couple of projects going on, it is vital to have one person to help keep everything going. Even the best contractors will have people who need someone to make sure they get there on time and get the job done right. Even the best pinball game needs a second opinion and someone to run errands or get the right supplies.

Mortgage or commercial loan broker– Transportation costs are another decisive expense. Having the capital to complete the project is a requirement. It is also required to be able to finance projects continuously. Most mortgage lenders (not brokers) don’t want to lend money to flippers with no down payment. They make money by carrying the loan or by charging upfront fees. Since the goal is NOT to transport the property, they must charge the fees in advance. A good source of loans can DRAMATICALLY reduce your costs.

sales strategies

To reduce maintenance costs, as well as recover capital for the next project, it is important to sell the property quickly. However, giving it away reduces the profit margin. There are a few things that can be done to help achieve these conflicting goals.

Hire a good agent. They are part of the team. A good agent will help get the proper exposure for the property, as well as make recommendations that will make the home more marketable. They will also have access to the people who are on your team who will make the sale go more smoothly.

Stage the property. A vacant home makes it difficult for buyers to move in mentally. A few well-arranged rooms will really increase value in buyers’ minds, so it’s usually worth the cost. This is especially true for high-end homes, but it can be the thing that tips the scales for ANY property.

Price it appropriately. Many experienced pinball machines will price a property 3-5% below market to make it sell faster. This reduces “opportunity costs” and also reduces risk. Opportunity costs are the deals you can’t make because your capital is tied up elsewhere. There is no risk after the sale of the property.

Research. Plan. Prepared. Remember the old adage that it takes money to make money. This is also true in selling real estate. However, it is vital that the money is properly directed, well managed and strictly controlled. This doesn’t mean you shouldn’t spend, just that you should spend on the right things, and taking shortcuts may not be the best idea.