House Flipping Performance & Risk Measuring Indices

Rehabbing & House Flipping
7yFollow

House Flipping Performance & Risk Measuring Indices

Michael L.
Rental Property Investor · Delray Beach, FL · Member since 2019 · 2 posts · 0 votes

Greetings friends, I’ve got a question related to measuring risk and reward of house-flipping, beyond the basics.

Particularly, I’ve developed an application for my wife’s flipping business that uses historic indices to determine risk level on the asset. More than just “how much profit will I make”, the indices give insight as to how one asset compares to the group of prospect assets based on top performing historic assets (similar to the way equity markets are measured; how much better or worse does a category perform against the moving average of the S&P 500).

By example, a given “fix/flip” asset is compared against a set of 6 performance indices, and if any of the asset’s index metrics fall above or below a given index, a score is assigned (up to a maximum of 6 points, which is good/strong).

One of the indices is ‘List Price to TAV’ (LP-TAV Index) value, for instance. The asset would need to outperform this one index (an average that has been derived from many previous successful flips in a given market). If it outperforms, the assets score increases by a unit of “1”. That is, if the LP-TAV Index for historic assets in the portfolio is 10%, and the prospect asset being considered is 15%, the asset risk policy assigns a “1” for LT-TAV, which is a positive factor for that particular risk. It means the prospect asset is outperforming the LT-TAV Index of last performing assets.

My question is, what are some good indices and their public sources I could consider in order to (1) make my existing indices rich with market relevant data and (2) validate that indices I’m using are productive for measuring risk profile?

Beyond Profit analysis, my current Risk indices are:

1. Price Per Square Foot Index (1 or 0)

2. List Price to TAV Price Index (1 or 0)

3. Buy Price to List Price Index (1 or 0)

4. Gross Margin Index % (1 or 0)

5. Net Profit Index $ (1 or 0)

6. Net Profit Index % (1 or 0)

0Reply
31 views

3 Replies

Jump to latestLatest
  • Eddie Egelston
    Residential Real Estate Broker · Crystal Lake, IL · Member since 2012 · 124 posts · 94 votes
    7y

    My dude, you're making this way more complicated than it is.

    Gathering the data to input into these indices would take more time than finding great deals.

    I won't poo-poo all of them, but for example index #2, list price to Tax Assessed Value, with all due respect who gives a crap? Why TF would you care what some random-*** assessor appraised the property for, and then compare that to the random-*** price it's listed for? There's zero value in that.

    This line of thinking is for Zillow Offers or some gigantic company that has to deploy billions of dollars and gather data to improve going forward. You guys are Mom and Pop.

    0Reply
  • Michael L.
    OP
    Rental Property Investor · Delray Beach, FL · Member since 2019 · 2 posts · 0 votes
    7y

    @Eddie Egelston thanks for following up on this. Had me laughing with the style 🙂.

    Think you’re probably right about the sophistication vs. size of operation. And I’m looking at ways to determine which asset would be best to take a position on when competing asset choices exist.

    Things like gross margin, net profit are helpful, but don’t tell the complete risk profile story alone. By example, I’ve tracked 13 recent Flip investments where margins were similar but noticed variations in other attributes of data (like TAV). The outcome of some of these investments varied by DOM and target sale price. I noticed that those that sat on market in less time and had sold for the target price also had favorable performance against indices mentioned.

    Maybe TAV is meaningless in certain context, though some buyers could look at TAV from a tax advantage/disadvantage perspective, respectively.

    But TAV aside, what are some of the key indicators you would recommend measuring in a scenario where you would choose one or two assets over several?

    0Reply
  • Eddie Egelston
    Residential Real Estate Broker · Crystal Lake, IL · Member since 2012 · 124 posts · 94 votes
    7y

    @Michael L. the reason I replied to your thread is that you and I do think alike; in the past I had created a list of "intangibles" that I would score two or more properties on, as a tie breaker of which to offer on first.

    My list, in no particular order is: market time, age of big ticket items i.e. roof & windows & hvac, neighborhood, schools, view, curb appeal, potential, floorplan, owner's benefits (size of master suite, common areas), and "gut feeling".

    I never actually used the list. I have those things running through my head anyway; to try to quantify it all seemed too subjective to me.

    I have been a part of 7 flips to date; as a broker and /or owner. I have walked through a lot of REO's that me or my clients did not buy, but other investors did buy and flip. In looking back on all of those, and comparing my notes at the time versus what happened to the houses after someone else bought them, the most obvious theme I observed was that the worst thing you can do is under-improve.

    I observed many houses resell for more than I ever imagined. Those houses were flipped by people that went "all in" and really "created" something above and beyond the typical flip. The properties I observed that did not sell for as much as I anticipated all had one thing in common. The flipper went too cheap in remodeling. They took the lowest bid on labor and it showed. Or they chose not to remodel a bathroom that was "good enough". Or they did not make some of the simpler repairs after gut remodeling everything else.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free