The Fixer Upper Formula
Fix And Flip Course
People get into all sorts of trouble when they ignore the
basic idea in the following fixer upper formula. The idea is
to start at the end - the eventual sales price - and work your
way backwards to an offer. This may seem obvious to some of you,
but it is surprising how many investors stumble into a property
with just a vague idea of how they'll make a profit on it.
Even worse, some seem to think that after buying and fixing
up a house, they can just add some arbitrary amount of profit
to what they have into the project to set the price: "I
have $120,000 invested, and I want $20,000 profit, so the price
is $140,000!" Houses are worth what buyers will pay, of
course. If it is worth $100,000 and you have $120,000 into it,
you lose! Don't get caught thinking value is something you decide.
Obvious, but it needs to be said.
A Fixer Upper Formula
Here is the right way to safely invest in fixer-uppers.
1. Determine the after-repair value (ARV).
Don't look at asking prices of similar homes - look at the
actual sales prices. (Asking prices of nearby homes are somewhat
relevant when it's time to sell, since these others are your
competition.) Have a real estate agent help you, or even show
you how to to do a basic market analysis using comparable sales.
(For more on this, see the page What's
A House Worth?)
For an unbiased and more accurate idea, you can hire an appraiser.
To play it safe, you could estimate the value yourself first,
then make your offer with the contingency that the appraisal
has to come in where you think it will. Of course, this might
get your offer rejected if you are trying to buy for $150,000
and you insist that the value must be $170,000. So it may be
best to learn how to put a value on a house on your own. It is
the most essential part of real estate flipping, after all.
2. Determine what all the costs will be.
Estimate as closely as possible what the expenses will be
in the following five categories.
- Your buying costs - These include inspections, appraisals,
closing fees, title insurance policies, document preparation,
filing fees, etc. You can usually know these fairly precisely
before making an offer.
- Your holding costs - Also called carrying costs, these are
all the expenses that continue as long as you own the property.
They include interest on loans, property taxes, insurance, utilities,
etc. Estimated for a worst-case scenario, like holding the property
for six months even though you think it will be done and gone
in three months.
- Your improvement and repair costs - Until you are experienced
in estimating contract work, get bids. Guess when you first write
the offer, but only if you leave a way out, such as making the
offer "subject to inspections and buyers approval of the
results of those inspections." Get the bids by the deadline
for the contingency.
- Your selling costs - These include commissions, advertising,
closing fees, document preparation, title policies, filing fees,
transfer taxes, costs you pay for the buyer, etc. They are generally
easy to estimate to within 10% or so.
- Unexpected costs - This is optional, but if every project
runs over budget, you might want to include a couple thousand
here. Payday Loans
are an option if things run too far over budget.
3. Decide on your profit.
If you do this before you buy, you get to decide what kind
of profit makes it all worth your effort. Fixer uppers (and real
estate in general) is full of unknowns, and you'll have some
work to do just finding a deal, so I wouldn't do any fix and
flip for less than $10,000, but that's up to you.
4. Subtract your costs and profit from the estimated sales
price.
This may be the most important step in this fixer upper formula.
After subtracting every last expense - and your profit -from
the projected sales price, you have the highest price you can
pay for the house.
5. Make an offer.
You now know how much you can offer and still make the profit
you want. Start with an offer that is lower than this, and negotiate.
But walk away if you can't get it for your maximum allowable
price.
An Example Of The Fixer Upper Formula In Action
Suppose you find a house that needs a little work. You determine
you can get $139,000 for it when it is ready. Your buying costs
will be $1,500. Your holding costs will be $3,500. Repair estimates
add up to $7,000. A real estate brokers commission will cost
you $8,300, and the other costs of selling will be around $1,000.
You want $14,000 for your effort (your profit).
Subtracting all of that from your expected sales price leaves
$103,700. This is the most you can pay, if you want a safe real
estate investment. You offer $100,000, and walk away if you and
the seller can't settle on something under $103,700.
To simplify the fixer upper formula:
Projected sales price minus all costs and profit equals your
highest offer.
That's simple, right?
(And it will keep you out of trouble.)
Steve
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Tips For Flipping A House | The Fixer
Upper Formula |
