By definition, a 'house flip' denotes buying a property at a certain price & then reselling, or 'flipping' it to a retail buyer at a premium price (profit)... So, just how do you do that exactly?
Well, this may seem a little strange to some, but you actually make money in real estate when you BUY a property. That's right, the key to 'flipping' properties is not selling as much as it is BUYING. If you don't quite understand this concept, please keep reading...
Have you ever heard the saying, "You should want to buy the worst house on the best street"..? Well, this statement reigns true in the world of 'flipping'. In order to calculate leveraged risk on a property acquisition for profit, you must be able to identify a property that can be acquired at a discounted price of .50 to.60 cents on the dollar (or less=more profit), then you have to assume (actually calculate) rehab costs.... The rehabilitation costs of the property should not exceed .10 to .15 cents on the dollar... Therefore, you should only consider cosmetic to advanced cosmetic rehabilitations, & be weary of any structural or mechanical issues. ------> This is how you 'force' equity back into real estate. By using this formula correctly, you should reasonably expect to make a gross profit of .25 to .30 cents on the dollar, or 25-30% on a 'flip' sale.
^ This is the formula I use.
Here's the secret.... You can pretty much guarantee a certain return (profit) by doing thorough research & due diligence. Therefore, RESEARCH & DUE DILIGENCE are crucially important to a real estate investor. I'm talking about doing a full-fledged CMA (Comparative Market Analysis), running the demographics, looking at neighborhood trends, researching nearby schools/facilities/businesses, the full gamut.
But, by far the most important piece of real estate research, as it pertains to 'flipping', is the CMA. You must know the recent nearby sales prices of similar properties (must have similar floor plan, be no more than 1-2 miles away from subject property, & a sale that happened less than 3 months ago).... This will mostly determine what you can expect to sale (flip) your property for. <---- (VERY IMPORTANT)
So, to wrap this brief tutorial up, if after doing all my research & due diligence, I find a property that is discounted (distressed) by 40-50% because of an unfortunate situation that's not adversely effecting the nearby property values, I can expect to 'force' equity back into the home by making certain improvements to the property. But REMEMBER, this can only be determined through in-depth research & due diligence of the subject property, & most importantly the surrounding areas' recent similar sales.
* As a side note --- In the future I will attach a link or file that will go to an excel spreadsheet breakdown of one of our 'flips'. This should give you an in-depth look at what I mean by 'cosmetic' rehab, and the actual tasks that 'force' equity back into properties.
Until next time ~ Take care, & happy house hunting!
Feel free to leave any thoughts/questions/comments, & I will try to respond in a timely manner.
Rocky Moore
Member/Operating Manager
ROMO Group, LLC
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