House Flip: How I Analyze a Possible Deal

[Brian Pulaski]

Bear with me, I am new to this style of post. I like offering up suggestions, opinions, information, etc on other threads, however I have never started a post simply to share information. As with any/all information you see online, this is my system and what works for me. My post will discuss how I do things. I will do my best to stick with simply telling you what and how I do it. This is only a guide that could help someone else in a similar position as me.

Through this post and subsequent topics I will go through a property that I flipped. The house is actually on the market now with quite a “story” regarding how it was sold and the buyer breached/is breaching. I will save that for another thread. So let’s go!

How I Analyze a Potential Flip Property

Step 1: Spreadsheet

The first thing I did before I ever flipped a house was to create my spreadsheet. This spreadsheet is my house flipping budget bible. Every deal starts on the spreadsheet and ends on the spreadsheet. We flip for money, right? The spreadsheet is what tells me whether a deal is a deal, before, during and after. I also use it as a way to track every receipt, it has an ARV section, I have a cabinet budget tab, scope of work sheets… I love Excel!!

I continue to adjust and modify this spreadsheet, but it has remained fairly consistent over the past 3 years. In total there are about 150 line items on mine. These items are broken off into 16 Categories. Within each category I have individual items that get a dollar figure attached to it. These dollars are added up and create the total “costs” for the house. Below are my Categories.

• 1. Buying and Selling
• 2. Misc. Costs
• 3. Demo & MEP
• 4. Kitchen
• 5. Bathroom
• 6. Master Bathroom
• 7. Half Bath/Laundry
• 8. Interior Doors
• 9. Trim
• 10. Paint
• 11. Exterior Doors
• 12. Flooring
• 13. Windows
• 14. Exterior
• 15. Misc. Interior Work
• 16. Exterior/Site

Once you have these categories you now have the basis and the "meat" for analyzing your deal. Within the spreadsheet there will be a profit section and an ARV portion. These all get input, and at the very end it spits out a purchase price, or maximum purchase price that is. You can't flip a house without making an offer!

Step 2: Using the spreadsheet

Now that you have the basic spreadsheet layout, what do all these lines items mean and how do you use them. Let’s have a look. Below is a breakdown of the categories and my numbers, with my reasoning.

• 1.) Buying and Selling Costs: Within this category I have every dollar value that will be included in the buying costs and closing costs of the house. Examples which total up the buying costs would be Attorney Fee, Title Insurance, Transfer Tax, Title Attendance, School Tax, County Tax, and Misc (I ALWAYS have a Misc. item for every category). Selling costs would be Realtor Fees, Transfer Tax, School Tax, County Tax, Attorney Fees, Give Backs and Misc.
• For the example house I am currently selling, my Buying Costs were budgeted at $10,652.60. My selling costs were budgeted at $13,196.75, for a total of $23,849.35.
• 2.) Misc Costs: This category is made up of holding type costs. Mine consists of Carry costs (utilities), Insurance, Permit/Fees, School Tax, County Tax (those that may not have been due at closing), Contingency and of course… misc. YUP I have a Misc. line item, in my Misc. Category!!!
• For the example house I have a total of $6,000.00 within this category.
• 3.)Demo & MEP: For those not in the “biz”, MEP means, Mechanical, Electrical and Plumbing. In this category I have dumpster/dump costs, Plumbing, Electrical, Furnace/Boiler, Ductwork/Baseboards, Central Air, Water Heater, Electrical Materials, Plumbing Materials and Misc. This category is where I begin to highlight items that are 100% subcontractor items. If I am planning on hiring a sub, I make the line yellow however I budget this myself. I have a bit of experience which allows me to comfortably carry what an item should cost. I am not fool proof and have/do go over budget. In this house I did for a few items. You’ll see at a later date!
• For the example, I carried $3,000.00 for Electrical, $5,000.00 for Furnace, $1,500.00 for each, plumbing and the Water Heater. Added to a couple other costs my category total was $11,900.00.
• 4.) Kitchen: This category is where I cover all of what I consider kitchen costs. Other than granite, electrical and rough plumbing this is work I usually perform myself, so it is all material costs. The items include cabinets, countertops, faucet/connections, backsplash, setting material for BS, Handles, Fridge, Range, Microhood, Dishwasher and Misc.
• For the example house I had a category budget of $7,300.00.
• 5.) Bathroom: This category is for the main bathroom. Some houses have 2, 3, more… I have only ever done up to a 2.5 bath house, but for this line I assume the main full bath. The category contains Vanity/mirror/Vanity top, Faucet/connections/trap, Bathtub, Diverter, Cement Board, Shower Tile, Accent Tile, Flooring, Tile Setting and Waterproofing, Fan/light, Vanity Light, Toilet/connections and Misc.
• My example house I carried $1,135.00… WAIT, just over $1,000 for a bathroom remodel. Who, What, HOW? Well this bathroom was actually... nice. I replaced the vanity, I removed the tiled walls but left it around the tub, which remained, added sheetrock, a nice border tile, new vanity, kept the toilet and had a clean nice bath for… $516.97. Yup, way under budget. Now that is a bit skewed as the sheetrock, trim and doors were carried elsewhere as was the paint. At the end of the day the bath had been remodeled a few years back and what was installed was clean enough for the ARV.
• 6.) Master Bath: This is a line item I end up not having a lot, as with this house. I simply zero it out and hide the cells.
• 7.) Half Bath: This is basically the same as the bathroom category except reduced down to vanity, faucet, flooring/tile, setting material, toilet/connections, light fixtures and Misc.
• On my example house I also carried a new line item for this category. PLUMBER WORK. The existing half bath was lovingly referred to as the “murder bathroom”, You had to walk down a pitch black hallway, off the mechanical space, and the bathroom was elevated up about 8-10” (giving it maybe 6’-6” headroom) measured maybe 4' x 4' and the walls were made of laminate panels. This room needed to be moved and the plumber work was a way to carry some kind of cost for this. I carried $2000.00 for that and the entire Half Bath Category was $2,675.00
• 8.) Interior Doors: Pretty self explanatory, I have interior doors, hardware and Misc.
• For my house I carried $800.00.
• 9.) Trim: Again, really no explanation needed. Base, casing, shoe molding, crown, chair rail and Misc.
• For my house I carried $950.00.
• 10.) Paint: You guessed it… this category holds the painting costs. Primer, paint, trim paint, ceiling paint, basement paint, brush/rollers/trays, Caulk/Sealant and Misc.
• Or my example house this came in at $1,100.00.
• 11.) Exterior Doors: In this category I carry… exterior doors? Yup, front door, rear door, sliders, garage doors, Door hardware and Misc.
• For my house this work amounted to a single garage door, no opener, the front and rear doors were in good shape and only needed hardware. Total this amounted to $850.00.
• 12.) Flooring: Flooring for any room that isn’t a bathroom can be found here. Kitchen, Living, Stairs, Hardwood Refinish and Misc.
• For my house it had hardwoods throughout the main floor, decent tile in the finished sections of the basement and one sunken living space needed new flooring. I needed a refinish of maybe 800 SF, tie in of new hardwood of about 120 SF, 300 SF of new flooring in a sunken Living room ( I went engineered) and then refinish of the wood stairs. All in this category was $5,000.00.
• 13.) Windows: Windows… just windows.
• For my house the windows were in good shape and no plan was to replace anything… however I found the one large bay window, after taking ownership was not serviceable. Scrap that cost savings. I carried $200.00 as just in case, but of course blew that budget up replacing the largest window in the house.
• 14.) Exterior: This means house exterior. Not sure why I have it labelled the same as the later exterior, but oh well. This is gutters, roof, siding, shutters, foundation and misc.
• For my house the roof was a roll of the dice. We had 6” of snow down and it was 0 degrees out. I had no way to determine the age of the roof, other than looking in the attic and seeing what appeared to be newer felt paper and bright shiny nails poking through. After the snow melted (under contract but not closed) I drove by and sure enough, newer roof (maybe 3-5 years old). Between the gutters, some foundation repair, shutters and siding paint I carried $2,050.00.
• 15.) Misc. Interior Work: This is a catch all for the interior items not carried elsewhere. Lumber, Railings, Sheetrock Material, Sheetrock Labor, Insulation and Misc.
• In this scope I planned for a good amount of sheetrock work, adding new railings and some insulation. I actually did really well buying out a sheetrock sub. He was not speedy, but was there every day and did the job for significantly less than others. I went into it unsure, but he was a rock star! I carried $5,300.00 for this category.
• 16.) Exterior/Site: Yeah, exterior, again… not sure why I worded it like this, but I did… and never changed it.. and don't plan to change it after posting this. So this final category takes care of the site work. Tree removal, shrubs/plants, deck/patio, seed/fertilizer, mulch, driveway replace/seal and misc.
• The snow caught me again… I had no idea what was hiding under it and unlike the roof… meh. The yard was a train wreck. Filled with stones and debris from some project where they had to dig up 2/3 of the entire property. I was only ever told by a neighbor that there was “some kind of underground drainage put in”, however no searching of permits, city documents or anything else proved that. It did explain why the house had a lot of damage to the siding corners and window trims and a later water issue could have been part of it… Whoever did the that drainage work should fire their operator. I counted 6 different strikes from the machine on various areas of the house! This category I carried $1,650.00.

Make sense? Good!! I’m sure it’s a lot to read and understand. In writing this sounds daunting. In Excel this isn’t all that bad. You just go line by line and toss a number at it that works. I have seen some very simplistic versions, whittled down to the main items, however this system works well for me. If you sharpened your pencil and did the math, I had $46,910.00 worth of holding and renovation costs.

My spreadsheet also contains a very important line item… Profit. What we are all here for… I would make this an additional step, but really there is no need. It's one number, how greedy do you want to be? Plug it in!! For me, this line item shrunk over the 8 months it took to land a deal in NY. It was $30k, dropped to $25k and then sure enough… dropped to $20,000. This came from losing out on tons of offers. I would never recommend this to anyone, especially a beginner. I have a track record of making significantly more than my projected profit, so I rolled the dice.

So there we have it, step 1 & 2 and we have a spreadsheet with the rehab, holding costs, closing costs and profit all filled out. We're nearly there. Whats the last thing we need to do before we buy the house, flip it in a 30 minute HGTV show and roll around in the wads of cash? Right... what is it worth after we fix it all up?

Step 3: ARV

What does ARV stand for? After Repair Value (ARV). This is the house value once it is shining like a diamond. I will say this was actually something I had to learn with moving to NY. Back in CT, I "knew" neighborhoods and had an idea of the ARV just because. I never lost money because of having no system for this, but I definitely lost out on houses by missing a solid ARV. Yes, I have gone back through my spreadsheets and looked at houses I made offers on and lost. I plugged in the other flippers sale price and sure enough... CRAP. There was not a single one of dozens that I wouldn't have made a good deal on, had I offered more.

New state, new Brian. I needed to figure out a way to set and ARV, on a spreadsheet. I decided to approach ARV determination the same as an appraiser would. I basically scour recent sales and once again created another tab on my spreadsheet. This spreadsheet has my house on the left as the Subject property. The columns on the right are the comparable sales. Each line item is used to adjust my houses value up/down. My value adjustments are:

• 1. Area/SF
• 2. Quality (A is remodeled like new, B is a clean older house with some updates, C is a dated house but not bad, D is dated and needs work, E isn’t even worth caring about… D actually isn’t even worth noting)
• 3. Age
• 4. Style
• 5. Bedrooms
• 6. Bathrooms
• 7. Fireplaces
• 8. A/C
• 9. Basement Finished SF
• 10. Garage Quantity
• 11. Deck/Porch SF
• 12. Patio SF
• 13. Shed
• 14. Pool
• 15. Acreage

The column under my subject house lists its specs. Under each comp I have two columns, their specs on the left, and the adjustment $ amount on the right. Let’s do one house sample below. The comp is a flipped 3/1.5 on the same street that sold for $199k roughly 4 months prior. Same vintage, style, etc…

• 1. Area/SF: My House (1176). Comp (936). Adjustment $7,200 in my favor!
• 2. Quality: Both homes are A quality. $0 Adjustment
• 3. Age: Both homes the same age within 1 year. $0
• 4. Style: Both homes the same style… I rarely adjust for style anyway. $0
• 5. Bedrooms: Both homes have 3. $0.
• 6. Bathrooms: My house ended up with 2 full baths, while the comp had 1.5. Adjustment $1,500 in my favor!
• 7. Fireplace: Neither have any $0.
• 8. A/C: I added a minisplit into the main living spaces (kitchen, living and dining). I calculated just $1,000 in my favor on this.
• 9. Basement Finished SF: My house has 315, the comp has 260 SF. This was negligible for an adjustment. $0.
• 10. Garage: Both homes had attached 1 car garages in the basement. $0.
• 11. Deck/Porch: My home had 240 SF, the comp had 168 SF. Again negligible in my mind and $0 awarded to either tea… house.
• 12. Patio: Neither had one $0.
• 13. Shed: Nope $0.
• 14. Pool: Nope $0.
• 15. Acres: 0.22 for mine, 0.19 for theirs. Not worth adjusting, $0.

All in my adjustments drove the comps selling price from $199k to $208,700. The other comparable homes were all within the neighborhood and I adjusted all up and down as they compared. I used 6 and they adjusted to the following. ($265,650, $226,650, $218,670, $218,060, 208,700 & $181,229) When averaged out it tells me $219,826.50 should be my ARV. PERFECT now I know exactly to the penny what the house will sell for. And they say flipping it hard, pshhh, HGTV here I come. OK, well I have an idea of where the house could sell, and more important I have a number that I can plug into the almighty spreadsheet.

Step 4: Plug in the Numbers and Make an Offer.

Now our spreadsheet is more or less filled up with quality dollars and cents. The buying/selling costs, rehab costs, Profit and the ARV are all filled in. At the very top of my spreadsheet is a cell which uses fuzzy math to spit out my "offer" (ARV minus all the other stuff = max offer). On this particular property, it says $130,351.38. Well the house was listed for $120,000 and being a HUD house where they simply take offers daily once they open it to investors, I offered $120,000. The truth was I could have gone higher, but my offer was also weighed on how much liquid cash I had in the bank to play with. I was comfortable at $120k and ran with it. If they did a best and highest (HUD doesn't from what I gather) then I had room. Lucky for me I got it for $120K and there was no best and final. HUD also only required a $1000 EMD, which is peanuts in the world of REI. Lot's of times I am offering 10% EMD on my purchases, with no contingency other than clear title, yikes!

In future episodes I will go through my process of closing, setting up, rehabbing and then selling the subject house. I am hesitant as the house hasn’t sold yet and I hate counting my eggs before they hatch. Maybe I can post the closing and renovation fun and hold off on the selling side... We will see.

This might win for the longest post on the message forum. I imagine tons won’t read it due to the length. For those that do, leave some feedback. Ask any questions, offer any criticism, give me and other readers any advice. It all helps at the end of the day.