In the past few months, flipping has started to become a trend and a lot of hopefuls are lining up to give it a try. Before the mortgage breakdown, property flipping was one of the ways to gain stable financial status in the real estate business. To put it simply, you would buy a house, fix it up and sell it for more than what you paid for – hopefully getting some sort of revenue out of it.
Todd Teta, the chief product officer at ATTOM Data Solutions, states that in the first three months of this year, there has been an increase in flips in the Detroit area. This may be due to the fact that “flippers” have been mainly attracted to the city’s low property prices in the market.
You may have a general idea of what house flipping is especially with the number of reality TV shows who popularized it. There are a few factors that you should look into before diving into flipping since it isn’t as easy as it seems. Our team of experts here at Strategy Properties are here to help you out, especially if you’re in the market to flip your first property.
Everyone tends to over-inflate
You may have given some thought about the house that you just purchased and made some tweaks here and there. Most of the time, people tend to sell the finished product, i.e. the newly renovated house, at an insanely high price. You essentially end up placing the house on the market at a much longer time frame which will cause its value to eventually depreciate.
A key factor that you need to consider would be the After Repair Value (ARV). The ARV is basically a rough estimate of the house once it’s renovated. This is the purchase price of the house before the renovation and the repair cost combined.
In order to use this to its full extent, a general rule-of-thumb would be the “70% ARV rule”. To put it simply, the formula for this is as follows:
Bid Price = (ARV x 70%) – repair costs
Let’s say the ARV is around $150,000 and the estimated repair costs would be at $25,000. We determine the estimated maximum price that an investor should pay by using the formula:
($150,000 x 0.7) – $25,000 = $80,000
$80,000 will then be the amount at which an investor would set the cap. The purpose of this is to ensure the investor would have room for his profits by cutting off that 30%. Many investors run the risk of losing a lot of money by exceeding 70% of the ARV rule.
Comparables, or “comps” is a term loosely describing a home in a certain area showing the same properties – size, condition, and features. This is one of the key features that most TV shows don’t tell you. You should never fix the house you’re planning to flip in a lavish manner but rather fix it up according to what the comps indicate. You can’t just add a swimming pool or a terrace in the house you’re flipping especially in a neighborhood that doesn’t have those amenities. Adding a fancy sunroom or spending $20,000 to remodel the kitchen doesn’t boost the price of your home.
To put this into perspective, let’s say if most of the properties in the area predominantly has 3 bedrooms, you should consider looking into that as well. Limiting yourself to 2 bedrooms would obviously be subpar, likewise when overcompensating with a total of 4 bedrooms wouldn’t work in your favor either. This would result in you having a hard time justifying your asking price to potential buyers.
The right knowledge with your comps will help you avoid overpaying for deals. You wouldn’t want to get stuck with properties you worked hard on just to let them stagnate in the market.
Everything is fast-paced
This isn’t like most reality shows where everything gets done in a few minutes. Flipping in real estate is an art. You need to do a lot of research especially when it comes to getting building permit approval which, in some cases, will take weeks. Always set up reasonable and realistic timelines. Everything might look simple but in reality it’s not. However, this doesn’t mean that it can’t be done. The best way to ensure success in this industry is partnering up with the right people. Our professionals at Strategy Properties are always ready to work hand-in-hand with you when it comes to your real estate needs. Contact us now and let’s get things started!