Ready to flip this house? Not so fast. The decision to make an investment in residential real estate can be an exciting one, but without the proper due diligence and an experienced Agent in your corner, it can be a big mistake.
Obviously, the goal of “flipping” a property is to make a profit. That profit is realized by reselling the home on the open market for more than the cost of acquiring, holding, updating and marketing combined. In order to be successful, all your projections need to be accurate (or at least close). For purposes of this article, we will assume your financing source is already in place. You will most likely be using your own cash, a private investor’s cash, or some sort of bank financing for your purchase and repairs.
The first step in the process involves identifying and learning the market segment in which you’re interested in working. This is where your Park Place Homes Realtor comes in handy. With some effort and advice from your Agent, you can learn to identify the submarkets in Midland most advantageous to cultivating a quick sale at near full market value for the home you decide to “flip.” There are several solid Midland submarkets in which most local investors focus.
Once you feel comfortable with your understanding of the market, the next step is to identify a target subject property. Usually, the only properties with enough potential equity to profitably “flip” are foreclosure listings. (Note: this is not ALWAYS the case. Short sales, estates and sometimes homes for sale by owner are potentially viable). Your Park Place Homes Realtor has access to all the main foreclosure listing websites as well as the local multiple listing service, and he or she can search daily for newly listed properties.
Now that you have identified a potential “subject property” the next move is to schedule a showing or two to begin your repair plan budgeting. It’s crucial that you have a close approximation of what repairs and improvements are required to increase the value of the property enough to create a gross profit margin. Park Place Homes has a “Home Improvements Partner” brochure with dozens of reputable contractors we recommend. Most of them will meet you at the home and provide written estimates for the repairs at no charge to you. Cultivating relationships with these contractors is very important. Use an excel spreadsheet to tally all your anticipated costs and then add about 20%, because no project EVER comes in under budget.
After the repair plan is completed, you will also need to account for the costs of acquisition and resale of the property. Acquisition costs include but are not limited to: purchase price, title company closing fee and recording fees, owner’s title insurance (if you’re purchasing a HUD home, HUD does not provide this for you), a tax proration credit/charge, homeowner’s insurance, and any loan costs/fees from your financing source. Costs of sale include but are not limited to: realtor fees, transfer taxes, owner’s title insurance, tax proration credit/charge, and any loan payoff costs from your financing source. If you can develop a relationship with a title company, they will often create a mock settlement statement for your sale and be able to estimate down to the penny what your closing costs of sale will be. Also estimate your holding period costs for: homeowner’s insurance, water, electric/gas costs, and any loan payments you may have for the duration of your holding period. A general rule of thumb would be to approximate loan holding costs at around 1.00 of the total project budget per month.
At this point in the process, you have enough information to calculate all the costs of the project. Now you must decide how much to bid on the property to obtain it. Never count on re-selling the property for maximum value when calculating your purchase price. Use the lower end of your estimated resale value and subtract the following: your estimated repair budget, acquisition, holding, and resale costs, and most importantly your desired profit margin.
Here’s an example: 123 Main Street, Midland MI
Estimated Resale Value: $80,000 - $95,000
Resale Value Used for Pro Forma: $80,000
Estimated Repair Budget: $15,000
Estimated Acquisition Costs: $750
Estimated Holding Costs: $3000
Estimated Resale Costs: $7,200
Desired Profit Margin: $10,000
Maximum Purchase Price: $44,050
Note: This is a highly simplified example, and all figures need to be verified prior to any offers being written. The harder you work on your due diligence up front, the better the chances are that your results are successful.
Now you ARE ready to flip this house! It’s YOUR Move!