This is part 3 of the investment series I’ve been blogging about. The previous 2 installments were about pure rental investment and fix and hold. This part is about fix and flip.

Fix and flip is where an investor/contractor buys a home that needs dramatic improvements. The hope is to make all the improvements to make it “Model Ready” and then sell it for a profit. This is not a bad business but I see more people get burned by this than those who are successful. So what separates success from failure? It’s knowing the numbers!!

Knowing your numbers is the key to success in a fix and flip, the main number that needs to be considered is what will the market allow for a sales price. By this I mean, that the market will only allow a certain price on any home. Many investors fail to realize this and make a price based on what they invested in it. Many people think they can create a value and a market and that is simply not true. The second biggest mistake is underestimating the repairs, the carry time, loan costs and exit expenses. Many inexperienced investors team up with inexperienced agents and don’t consider all the costs. There are several costs as I’ll outline that need to be considered. Here is an example: 

Let’s assume from our previous 2 blogs that you find a fix & flip for $130,000. The first number that needs to be considered is what will the market let the home sell for. The scenario I will outline happened earlier this year for one of our investors. The market said the high price was $210,000-$220,000 and $195,000-$200,000 for a fast sale. We used $200,000 as our end number. ALWAYS use the end number and WORK BACKWARDS:

                        Future Sales Price                                $200,000

                        Repairs                                                  $23,000

                        Exit Commissions                                   $12,000

                        Carry Payments and Insurance                 $2,100

                        Entry Closing Costs                                 $2,600

                        Exit Buyer Closing Costs                          $6,000

                        Exit Seller Closing Costs                          $2,000

                        Misc                                                        $2,000

                        NET                                                    $150,300

                        ORIGINAL SALES PRICE                $130,000

                        NET PROFIT                                        $20,000

Our investor in this scenario actually made $24,000 for 2 ½ months work. We did not use the miscellaneous expense and repairs and carry time were slightly less. This investor made 10%. This is a reasonable expectation.

In summary, know your numbers particularly the end sales price. Work backwards and work with an experienced agent. One other thing is if you are using a contractor, get a price commitment very early and hold them accountable. Please call me with your questions @ 719-593-2963

Thanks

Brian