5 questions about finding a flip home... someone please assist.

[Steve Edwards]

I want to find my first property to flip. since Im new, I want it to be a cheaper property so I minimize the risk and learn in the process.

1. I have been looking at hud homes and comparing the sales histories. Sometimes a see a sale that will drastically increase in price (ie 50k,2005--- 55k, 2007--- 125k, 2009--- 50k, 2011...) and other times there will be a progression (50k, 2007-- 60k, 2009---73k, 2011-- 110k, 2012--- 125k,2013--- 60k, 2014--- 40k, 2015). I don't know how to interpret this. What does this usually mean? Why the drastic changes? Should I be concerned?

2. What do you think about very cheap homes that are typically either in the ghetto (15-20k)? I imagine its not worth it, but just wanted others' thoughts.

3. There are homes that are in safe neighborhoods (green areas on Trulia) yet seem to either have a history of being sold underpriced or have a frequent selling history, often at a loss. How do I interpret this?

4. This will be my first property. I cannot buy in my city cuz its too expensive (NYC, so Im venturing into foreign territory). A lot of stories start off with "well I knew someone...". But since I dont have any experience with home repair and I dont know how to study a foreign market aside from looking through the Trulias and Zillows online, how else can I make sure I dont get something for a loss?  

5. Is there a way to get a HUD home assessed before putting in a bid? HUD used to have as is values but i dont see that anymore.

Thanks a ton for any questions you can help with!

[Troy Sheets]

Very cheap homes are more dangerous, IMHO. Let's say your ARV is $120k, you're buying at $40k and putting $40k in and, after all expenses, you're going to make $12k. Now what happens when, after demo starts, you find the house is riddled with termites or there's a foundation issue? Your entire profit could be eaten up with one big issue and then, just to break even, you can't make ANY other mistakes. Mistakes like underestimating the rest of the repairs or overestimating ARV, which are really easy to do when you're newer to rehabbing.

Now let's say you bought a more expensive house to flip. You paid $80k, your rehab budget is $80k and your ARV is $240k. You want to make that same 10% on ARV which is $24k. You've got the same likelihood of finding foundation issues or termites but now you've got a $24k cushion to play with rather than a $12k cushion. Make sense? I'm not saying you can't make money on a $120k ARV house but you'd have to get it nearly for free and even then, rehabbing a $120k house costs around the same per sq/ft as a $240k house. For your first flip you want cookie cutter, vanilla, middle of the road.

As to your other questions about making sense of price trends, that's way over my head! Find a standard house in the area you're looking to flip in, something with lots of solid comps for the same layout house, in an area with plenty of solid comps to rely on, and mirror what the higher comps have done. If they took out the wall between the kitchen and dining room, you do the same. If they've got a deck out back, you need a deck. 

You need to start with the ARV in mind, then the rehab budget, to then land at your MAO. Good luck!