How does the price of a home increase after being flipped?

Question

So I'm interested in how house flippers make their profit. From my perspective, they put a down payment on a house, get a hard money loan to pay the rest, use the remaining for the repairs, when it's finished the price of the home goes up, you sell the house and pay off the loan and whatever is left over is yours.

But I'm confused who determines the price of the home after it's been flipped and how it's determined. Could anyone give me some insight? Thanks.

Aaron McGinnis · Answer

The technical term is arbitrage. Investors look for imbalance in the housing market so they can procure inventory below market rates. Distressed sellers who have a greater need to sell the house immediately instead of waiting for a market offer are the classic example, but there are obviously other situations that create this imbalance.

Simple illustration -

Bob has a house that he inherited from his grandmother. The house is owned free and clear and worth $100,000 in the free market at equilibrium. The average DOM is 30 days and 30 days to close with a conventional buyer.

Bob has a gambling problem, and Guido is going to break every bone in Bob's body if he doesn't cough up $50,000 by Monday. (You could also say he had $50,000 worth of medical bills, or a burning desire for a new BMW, or whatever. I like to use Guido.)
(In this example, it's Tuesday)

Mike sends Bob a yellow letter saying that Mike buys houses. Bob needs cash right now, and Mike will give Bob $50,000 for the house and close on Friday so Mike can pay off Guido by Monday.

Bob would like to get $100,000, but time forces his hand and he ends up selling to Mike.

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So there you go. Basically, the best deals come out of situations where human suffering is at maximum and someone is in a desperate haze to get out of some terrible situation, which makes them unable to take advantage of the regular market.

Chanté Owens · Answer

@Margie Marcum Obviously there are a vast number of people on this site who are much more qualified to answer this question, and hopefully they will!

Essentially when you are purchasing a property to flip; you are (presumably) purchasing that property at a discount, so that after your repairs (known as ARV - After Repair Value); the property will appraise for more than your: cost to purchase the property + cost to rehab the property.

In numerical terms, say in an area, the median home is selling for $550k and you can get a property for $280k + $125k in rehab and holding costs (insurance, escrow funds, agent commissions, etc), that will = $405k that you've paid out of pocket. After the rehab, if you can sell the property for a now appraised value of say, $525k, then you've made $120k profit after all of your rehab & holding costs.

The valuation of what the property is "worth" is based on the comps of the area and "what the market will bear." There are always risk, but that's why it's important to get the property for a deeply discounted price, so you can make money even after you rehab the property.

David Oldenburg · Answer

Account Closed  Hi, flippers usually sell to traditional buyers (not investors) after they have done their work.  They are trying to get the highest price possible, so the buyers are traditional people looking for a home, and they are needing to get an FHA or Conventional loan.  It is the "appraiser" who determines the value.  In my area of California, Sacramento, the appraiser will look at homes that are close in proximity, and similar in size and amenities, to determine the current value of the home.

The "flipper" must either be really good at estimating future value, or they need to have someone who can do that part of it for them.  I spend a lot of time looking at comparable properties, market trends, demand, sales volume, etc..., before I invest in anything.

Steve Kordish · Answer

Ill take a stab at it... Bob buys a new laptop from Best Buy for $1000  for school, ( a fair price) He gets home and uses it for a week but decides he's not cut out for school) , Bob decides he doesn't need the laptop any more. He put it on Craig's List for $500 'cause he really needs quick money to get his X-box out of the pawn shop in order to pay for his new rims for his Hoopdie Mobile. Along comes Bill , who sees the laptop on CL (that's only one week old) for sale at half price. What a deal for Bill, right? Bill buys it for $500. (actually negotiates it down to $400) and re-formats it back to factory state. Bill finds he has a friend who needs a laptop for school and is heading to Best Buy to buy one for $1000. Bill says "hold on dude, I got one for $700,  interested?".  Bills friend says "yes!" Bill sells it to his friend for $700.... Bill made $300 and Bill's friend saved $300 and all are happy.  Flipping!

Adam Bartomeo · Answer

I don't know if anyone really answered your question. Who determines the price? Well it is the market that determines the prices. This is to say, the buyers that are buying properties determine what your property is worth.

There is a property near me that is 4500 sq', 7/5/3, on 2 lots with a pool. It is easily a $1,00,000 home. It is currently at $269,000 and has not sold for months. The buyers have determined that this property is in the wrong neighborhood for $1,000,000 and they wouldn't even buy it at $269,000.

The key to pricing a property is knowing the neighborhood that it resides in. You need only mimic what is typical in the neighborhood, may be a little more. Then price it for just a little less then what buyers think its worth and you will sell the property quickly at a good price. But, you have to know the neighborhood better then the people that live in it.

How does the price of a home increase after being flipped?

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