flip analysisThe flip analysis is critical to your success.

Real estate investing means converting your time, talent and your treasure into profits by employing proven strategies.

Investing at its core means buying low and selling high.

When it comes to doing your flip analysis, you want to do the same; find a property with potential, bring the property to its potential, then sell it for as much as possible.

But how do you analyze an investment property to determine if the numbers will in fact work in your favor?

Price Potential

The first consideration is determining the market value for the subject property (the property you are considering buying) by looking at the ARV (After Repair Value).

This is done by examining what similar properties in the area are selling for based upon the renovations that you are going to complete.

That means you need access to the database that holds information on recently sold homes.

If you’re a licensed real estate agent you have access to the local multiple listing service, or MLS. If you’re not a licensed real estate agent then you need to find a good agent to put on your team.

The MLS will list final sales prices of homes in the area where your potential flip resides.

For example, you find a 2,000 square foot home, similar to the subject properties characteristics, recently listed at $100,000, or $50 per square foot.

The home is a two bedroom, two bath structure that obviously needs a little “TLC.”

You immediately notice that homes in the area are also of similar size and construction, letting you know that the property conforms to the neighborhood and will likely be an easy sell.

As you do your flip analysis, you see that homes in the area have sold on average of $80 per square foot in the previous 12 months. A quick analysis indicates you can buy the property for $100,000 and sell it for $160,000 once the property’s condition is brought up to par with other home in the area.

Material Costs

Your next step is to make an on-site visit with a licensed home inspector and the contractor from your team. Seasoned House Flippers will sometimes do this inspection and estimating on their own.

But be careful, this is not the work for the person who has just ventured into the house flipping arena.

When doing a flip analysis for repair costs, you’re initially concerned should be with any major repairs that would make the home an unprofitable flip.

For example, your initial visit indicates one or more of the following are present: a faulty concrete slab, the roof needs to be replaced, and the heating and HVAC need replacement etc.

Properties in such condition need much closer examination to determine how low in price you have to buy that house in order to make a good profit.

Sometimes you will simply just have to walk away from an opportunity because the repair risks are too high.

Yet if your inspection shows that the overall structure is in good shape and only needs some upgrades and minor repair, you need to determine the costs associated with your project in terms of materials and labor in order to submit an appropriate offer that will make this house flipping venture profitable.

After an inspection, you determine that new kitchen appliances and counter tops are in order, one of the baths needs a new tub and shower and the back deck needs replaced. You and your contractor estimate the costs to repair at approximately $8,000 and you throw in another $800 for any “surprises” you may discover during your remodel. You also decide to paint the interior and exterior of the home for another $3,500 for a total material and labor cost of $12,300.

Selling Costs

After the home is remodeled and is ready for the open market, you’ll encounter additional costs associated with selling the home.

To place the home in front of as many potential buyers as possible it’s important to have your property placed in the MLS.

Again, if you’re a licensed agent, you can place the home in the MLS and if you’re not, find an agent to place the listing for you. Occasional discussion will arise regarding whether or not to use a real estate agent to sell your home by those not involved in the real estate investment industry.

Selling a home for as much as possible in the shortest period of time should be handled by a professional real estate agent and is a full time effort and not something that should be handled by the owner, especially if the owner is buying and selling flips several times throughout the year.

It’s important that you spend time analyzing investment properties and let the agent sell the home for you.

Real estate commissions can vary but the important commission rate is the one you negotiate with the agent on your team. If you buy and sell investment real estate on a regular basis, you can expect a lower commission rate from an agent if you allow the agent to market your properties exclusively.

Doing so can provide you with not only the services of a professional agent but at a discount. If you and your agent decide that a 3 percent commission is fair, then your commission costs will be 3 percent of $180,000, or $5,400.

Selling real estate also requires other costs including title insurance, escrow and closing fees and other related selling charges including property insurance while your remodeling work is taking place.

You can estimate another 2 percent in additional selling costs, or $3,600 in this example. This will vary depending on your area, who the seller is, i.e. Owner Occupied vs. Bank Owned.

Net to You

If you’ve brought the property in line with the appearance and condition of other homes in the neighborhood and you’ve determined that $80 per square foot is a fair price, should you list the at $180,000 or perhaps $189,000 is more attractive?

Your agent will provide guidance but remember that most offers will come in below your initial asking price. Another consideration is how long you want to wait to arrive at your ideal sales price. For example, if you’re firm at $189,000 it may take several months in order to sell the home.

The longer you keep the property in your portfolio, the greater the costs that will accrue in terms of interest charges, insurance and maintenance.
If you want to sell the property immediately and move onto the next project, your asking price will be lower.

Yet if you’ve done your flip analysis correctly, and followed these steps, you know that you can comfortably sell the property for $180,000 within 30 days.

So how much is that to you?

Sales Price $180,000
Purchase Price $100,000
Materials/Labor $ 12,300
Carrying Costs $ 1,950
Misc., Insurance Etc. $ 850
Selling Costs $ 9,000

Profit $ 55,900

David Slabon