This week on my blog, I am sharing some of my personal real estate investment experience with my readers so that they can better evaluate potential deals before laying their hard-earning money on the line. I previously talked about evaluating land before flipping, so today I’ll talk about houses.
I love flipping houses, but I don’t personally have the skills or the time to fix them up myself. That’s why I like buying distressed houses and flipping them to rehabbers. But in order to make sure that a potential house deal is worth my while, I ask myself two simple yet important questions: 1) How much will it cost to repair the house, and 2) How much is the house worth? Let me walk you a little bit through my thinking process, and if you are intrigued by this blog post then by all means check out my Flip it Fast Formula which goes into TONS more detail.
1) How much will it cost to repair the house?
My goal is to give the current owner of the house a fair deal while making sure to build in as much profit for myself as I can. To do this I need to accurately determine the repair costs. Although nothing can replace actually walking through a structure to get an idea of its condition, a general estimate for repair costs can be based on a home’s square footage, (the FIFF has some great software to help you estimate repair costs). A phone call to a contractor can also give you an idea of the costs for repairs like a new roof, carpeting, kitchen, etc.
2) How much is the house worth?
To find out the potential value of a home (and how much you can likely sell it for), you will need to find out its market value. This can be done by searching for accurate comparables on sites like Zillow.com or Trulia.com or by establishing good relations with a real estate agent in the area.
Once you have the market value of the home, use this formula:
Market Value – Rehabber’s profits – Repairs Costs – Your profit = Offer to owner
So if the house is worth $150,000 but owes $27,000 in taxes, here how the deal would look:
$150,000 (Market Value)
– $30,000 (Rehabber’s profits)
– $30,000 (Repairs)
– $10,000 (Your Profits)
= $80,000 (Offer to owner -> $27,000 taxes plus $53,000)
So at the end of the day:
- The rehabber would pocket $30,000 for the deal
- You would pocket $10,000 for the deal
- The owner would pocket $53,000
Get the information and crunch the numbers to see if you have a good deal. And make sure that “flipping fever” doesn’t push you into a bad deal!