Author Topic: How to Decide Whether to Take on a Flip  (Read 4436 times)

freeazabird

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How to Decide Whether to Take on a Flip
« on: May 08, 2014, 05:24:46 PM »
What are some rules you follow when deciding whether to take on a flip? What percentage do you usually estimate in closing costs when you sell?

arebelspy

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Re: How to Decide Whether to Take on a Flip
« Reply #1 on: May 08, 2014, 09:37:02 PM »
Fairly standard flipping rule of thumb is 70% of the ARV (after repair value - i.e. market value once it's all fixed up), minus the repairs.

So if it'll sell for 200k after being repaired and needs 20k of repairs, you'll offer (200k * 0.7)-20k = 120k.

That 30% should cover your transactional costs, holding costs, and profit.

If you're short term financing (hard money), you may want to go a little more conservative and account for that.
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freeazabird

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Re: How to Decide Whether to Take on a Flip
« Reply #2 on: May 08, 2014, 11:34:20 PM »
Thanks!

Jules13

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Re: How to Decide Whether to Take on a Flip
« Reply #3 on: May 09, 2014, 09:07:47 AM »
Quote
If you're short term financing (hard money)

What does that mean..."hard money"? 

Thanks, helpful equation.

arebelspy

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Re: How to Decide Whether to Take on a Flip
« Reply #4 on: May 09, 2014, 10:16:40 AM »
Quote
If you're short term financing (hard money)

What does that mean..."hard money"? 

Thanks, helpful equation.

Short term loan, not from banks.  Typically 10-15% interest rate plus multiple points up front, and a very short term (6 mo to 1 year typical, 3 years max usually).  Credit doesn't matter, it's based on the property.

Google will tell you a lot more, and feel free to post any questions on anything you don't understand.  :)
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DoubleDown

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Re: How to Decide Whether to Take on a Flip
« Reply #5 on: May 09, 2014, 10:26:29 AM »
That 30% should cover your transactional costs, holding costs, and profit.

Just wanted to second Arebelspy's answer, and to point out that this 30% assumes you know what you are doing. Any mistakes along the way will quickly eat into that 30%, and could even turn it negative (meaning you're doing all the work to flip the property while losing money for the privilege). Unforeseen difficulties (unexpected repairs, zoning problems, contractor labor problems, market downturns, on and on) will likely also come into play, even for seasoned flippers. The more knowledgeable and experienced you are, the better you will be at mitigating these difficulties, but no one is immune from them and so there is risk involved.

arebelspy

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Re: How to Decide Whether to Take on a Flip
« Reply #6 on: May 09, 2014, 10:28:26 AM »
That 30% should cover your transactional costs, holding costs, and profit.

Just wanted to second Arebelspy's answer, and to point out that this 30% assumes you know what you are doing. Any mistakes along the way will quickly eat into that 30%, and could even turn it negative (meaning you're doing all the work to flip the property while losing money for the privilege). Unforeseen difficulties (unexpected repairs, zoning problems, contractor labor problems, market downturns, on and on) will likely also come into play, even for seasoned flippers. The more knowledgeable and experienced you are, the better you will be at mitigating these difficulties, but no one is immune from them and so there is risk involved.

Well said.

The "should" I wrote should have said "should (in theory)" - sometimes it won't.  Better to be patient when starting out and find a really good deal to get your feet wet than try and squeeze margins to make something work and regret it if when an issue comes up.
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freeazabird

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Re: How to Decide Whether to Take on a Flip
« Reply #7 on: May 09, 2014, 11:18:39 AM »
Thanks. I am new to this so feel antsy, but think you are correct that it makes sense to wait for a really good deal. I know you provided the 70% rule, but in terms of a REALLY good deal, what would you classify a really good deal as?

arebelspy

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Re: How to Decide Whether to Take on a Flip
« Reply #8 on: May 09, 2014, 11:26:40 AM »
Thanks. I am new to this so feel antsy, but think you are correct that it makes sense to wait for a really good deal. I know you provided the 70% rule, but in terms of a REALLY good deal, what would you classify a really good deal as?

That's tougher to say, and find.  Start watching your market, and you'll really get a feel for where prices should be, and be able to spot the good deals.
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Another Reader

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Re: How to Decide Whether to Take on a Flip
« Reply #9 on: May 09, 2014, 11:31:40 AM »
There is a lot of risk to flipping.  Have you considered networking with local investors in your area?  You might be able to partner with someone with experience or possibly you can "tag along" and learn from them.  Or, if you have cash, you can partner with a hard money lender to loan out the money for a flip and watch the process.  I recommend against starting out in real estate with flipping by yourself unless you are a contractor or have a lot of real estate experience.

freeazabird

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Re: How to Decide Whether to Take on a Flip
« Reply #10 on: May 10, 2014, 11:55:40 AM »
Thanks, I think tagging along for a flip is  great idea.

GrayGhost

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Re: How to Decide Whether to Take on a Flip
« Reply #11 on: May 10, 2014, 08:48:18 PM »
There is a lot of risk to flipping.  Have you considered networking with local investors in your area?  You might be able to partner with someone with experience or possibly you can "tag along" and learn from them.  Or, if you have cash, you can partner with a hard money lender to loan out the money for a flip and watch the process.  I recommend against starting out in real estate with flipping by yourself unless you are a contractor or have a lot of real estate experience.

Thanks for the advice.

We have plenty of contacts in the area and believe me when I say I do my share of market research. We've got a couple of good contractors on call and are studying hard to familiarize ourselves with the foreclosure process in our state.

I guess you can't tell me if we're ready to do a flip, without meeting us in person, but let me ask you this. Are contacts, trusted contractors, and one person who can personally be on-site to manage labor enough of a replacement for experience? Or should we hold off on a flip for a couple of years?

arebelspy

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Re: How to Decide Whether to Take on a Flip
« Reply #12 on: May 10, 2014, 09:03:22 PM »
False dichotomy.

It sounds like you should take the plunge, and then learn from your mistakes.  Later on you may learn to listen to those with more experience than you.  It's taken me awhile, but I'm slowly coming around.  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Another Reader

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Re: How to Decide Whether to Take on a Flip
« Reply #13 on: May 10, 2014, 09:19:10 PM »
IIRC, you own other properties and manage them yourself.  You are familiar with values in the area (not Zillow, but really familiar) and you know how to estimate repairs and replacements from your management experience.  You are a lot closer to doing this successfully than most folks.  The key is understanding that a lot of your money is made when you buy, so you must follow the rules.

I was lucky on my first try.  We got the property below market.  We did not have to replace the kitchen cabinets which was huge.  I was not using expensive hard money.  Any mistakes and overruns were forgiven by a rapidly rising market. 

Overall, I made money flipping, but I broke even or lost money on a couple when the market turned.  I decided that flipping is a full time high stress job with a lot of risk attached and that I was better off making money on rentals. 

In your shoes, I would probably do a reno with a dual exit strategy.  Make sure it will cash flow as a rental if you can't sell it for enough of a profit.  Keep the resale market target, but don't over improve for the rental market.  If you can sell it for a tidy profit, consider that a bonus.