I hear these ads on the radio or on Facebook all the time... "Learn to start flipping houses right here in your neighborhood." And a 100 other come ons to get newbie investors to pay money to get some knowledge about wholesaling and flipping. I don't specific data to back this up, but I would have to venture to say the majority of people that go to those events don't do anything with it. The ones that do, do something with it would have figured out the knowledge given by the Guru's one way or the other, because they truly wanted to work at it, and figure it out. I am not saying don't waste your money on the Guru's, because there is huge networking potential at those meetings, massive knowledge on what NOT to do, and maybe other valuable learning at them. Keep in mind, my opinions are my own, and I invest in San Diego, your market may be very different!
I just thought I would share my super simple formula to determine is a flip is a good buy for us and a couple other tactics that I am certain you could get for free, if you don't feel like spending the money with a Guru.
Our quick flipping formula when we need to analyze a deal on the fly (BP Calculator is Better but we can do this in the field):
Start with After Repaired Value (ARV) get very comfortable looking at comparable sales (not just size and location, but finishes, and understand the product the investors are going to put out when you are done forcing that appreciation through renovation (new kitchen, bathrooms, flooring, paint, opening up kitchen to living room, new windows, roof, or whatever the home needs to be sold at a high market value).
Back out selling expenses: for us we are typically paying 4-5% in commissions to sell a home, 1% of the sales price in closing costs (escrow, title, transfer taxes, property taxes we didn't pay during ownership). Simply ARV x .94 in the calculator is the first step.
Back out repairs: this is going to be very tough for newer investors and realtor alike. Frankly, we struggle with this and it is an art that you will improve with over time. A renovation line item spreadsheet (which can be found on BP, will help, but if you plug in garbage, you will get out garbage), so take some time to network and speak to investors that have completed projects, speak to contractors that are doing cosmetic remodels for flippers, listen to the recent BP podcast on finding Rockstar Contractors - tons of amazing tips I got out of there. Once you get good and this skill, you will look at a house and just now its $50,000-$60,000 to complete that project, since you have do it 100 times. But getting to 100 times, is going to take some work, A LOT of research and asking around, googling cost per foot of roofs, concrete in your area, etc. Make friends with a good GC, who you can just quickly ask what does a roof cost on a 1600 sqft house? GC: Oh its about $9/ft in our area, so that's a good starting point. How much is 10 cabinets installed with quartz counter tops? GC: Im getting complete kitchens installed for $7000 with cabinets, tops, and appliances. That is how the conversation will go, and you won't be plugging in garbage numbers any more. Always leave a pad at the end of a reno, because I can assure what, what can go wrong, will go wrong. 10-15% of the total reno should be a good pad, but check with people in your area on this. Calculator formula is now ARV x .94 (less) - $50,000 (estimated renovation)
Back out desired profit: What do you want to make? $1,000,000? Well you can want what you want, but the market will dictate what is reasonable. I am in San Diego and investors are typically underwriting their deals with a desired 10% cash on cash return for fix and flip deals. Some of the bigger investors will go down lower than that and use annualized ROI as their goal wanting to hit 25-40% annualized since the money can be turned 3-4 times per year flipping. KNOW YOUR MARKET! Analyze other successful flips by looking at MLS listings of finished flip homes, what did that investor buy it for? How much reno was it. Use this formula to guess at what they made on the project. Do it 10-20 times and you will see normal, reasonable profit margins. Of course, there are homeruns, but they are not the norm, but amazing when they happen.
Calculator formula is now ARV x .94 (less) - Renovation (less) - Desired Profit (10% of total project cost - acquisition + renovations)
What you are left with after you is a number. That number is a max purchase price for us. We typically are going to offer south of that originally and hope to end up between our original offer, and that max purchase price. If the deal doesn't work for us with these numbers, we move on to the next. We spit out hundreds of offers to get very few deals. Not all will work for us, and thats ok. The more we look at the better we become at analyzing these deals, so when the right project comes along, we are ready and able to take it down.
This formula is good for analyzing several deals quickly and will get you a close idea of expected outcomes. Much more due diligence is done prior to closing a deal: a formal renovation budget, inspections, comps are verified and analyzed, title researched. Please partner up with someone who has walked this road before you, at least a good agent that can guide you. The Guru's are going to tell you some of those things. Just wanted to share our formula.
If you are looking to learn more or link up in San Diego or Southern California. Reach out! I am a CA Licensed Broker with 10 years of fix and flip and real estate investing experience.
