Before you even begin the process of flipping a house, you have to find “the house” first. These steps should be taken into consideration after you have a few different houses in mind. Don’t put all your eggs in one basket. There really is no “simple” formula for flipping houses, but by following the steps below, you will be ahead of your game and ready to start bargaining.
What would the fair market value of the house you want to flip be once it is renovated? To calculate this value, find other houses in the area that match what you have in mind. Add each home’s value up and divide by the total. This will be your average fair market value. Simple enough.
What will the cost be to flip this house and get it to your goal? Your end goal should include calculations of each necessary upgrade, both inside and out. Don’t forget about the exterior as well as in between walls, and underneath the house. After you make a list of the total costs of flipping the house, add 20% to the total, and subtract the entire amount from your original fair market value price in step 1.
How much do you think you can make based upon samples of other people in the same area? What’s really feasible for you? Does your conclusion equal 20% of the fair market value? If so, then you are right on track.
We will make it simple by giving you a tenable example. For instance, if you come up with a fair market value of what the house would be worth after it has been flipped of say $150,000, but you have calculated that it requires at least $50,000 in improvements, we will start here. 20% of $50,000 (carrying costs) equals $10,000. $50,000 plus $10,000 equals $60,000. $60,000 from $ 150,000 is $90,000.
Then take 20% from $90,000 and $18,000 equals your profit. Let’s put it all together now. The fair market value of $150,000 is diminished by 60000 which equals $90,000. $90,000 minus $18,000 equals a total of $72,000. Paying any more than $72,000 would take away from profit.
You have the house picked out. You have averaged out the fair market value, and you know the total cost of improvements. You have also completed the above calculations. Let’s say that you have come up with a potential purchase price of $72,000, which is what we calculated above.
To begin negotiations with the owner/seller, you have to make a detailed list. This list of repairs, improvements, and carrying costs will somewhat mimic a business plan, but it’s a way to show the seller that you mean business and know what you are doing. Overall, it will give you the extra boost in confidence which is a must-have attribute of any flipper.
Your target purchase price is $72,000, but you will want to start your negotiations at half that – $36,000. Don’t forget to talk about or better yet, show the seller the list you have come up with for the modifications. If you do not start low, you may end up way over your target purchase price of $72,000. There goes your profit.
Everyone knows that bidders start low and sellers start high. People flip houses every day and many are extremely successful. With the right tools, extensive knowledge that we provide, and a little courage – you will be too.
Doing everything right from the start will save you lots of money and time. You might even be tempted to buy it at a higher price than you really want to. This will decrease your motivation for flipping the house, and you have wasted precious time because who wants to flip a house that won’t make a profit?