When it comes to flipping a house it is not a ‘trust your gut’ situation.
House flipping is a short-term investment, not a passion project. In order to make the most of your investment, you need to properly analyze the property so that you can make the smartest financial decisions.
When analyzing a property you need to make sure that you are accounting for all the possibilities of that transaction. The two most important factors to consider are the cost of repairs and the After Repair Value, or ARV.
Making a good projection for repairs can be challenging because there isn’t a standard price for painting or a standard price for putting on a new roof or installing an HVAC system.
One helpful way to gauge potential repairs and your own spend is to be familiar with the home price point as well as the home location. Are you going to put in a brand new kitchen and baths with granite or quartz countertops? Spruce up the landscaping? It all depends on whether or not you’ll get returns on those renovations, and being familiar with the surrounding area can help set expectations.
The After Repair Value (ARV)
The second thing to consider is After Repair Value. Establishing a realistic ARV is key when deciding whether or not to flip a house, as well as setting a budget for repairs. If a home requires high repair costs and little to no returns on ARV, you know to keep looking.
So how do you figure out an ARV? There are programs available such as PropStream that investors use that pull MLS and public record data. The result is an automated value, but it also can give you specific sales so that you can determine your own ARV or work with a realtor. Zillow is also an option. Combining multiple evaluations from different software and realtor estimates will help you create a more accurate ARV.
Knowing the repair costs and ARV will help you build a plan for repairs and renovations. Truly understanding just how much to spend — and how much things will cost — comes with repetition and experience. But having a projected ARV and a cost estimate helps you plan out your repairs and prevent over-or under-improving the property.
Now, one of the things that a lot of investors or newer investors do is undervalue their homes because they're looking at comparables in a neighborhood. If every single comparable in a neighborhood hasn't been updated, their sell price doesn’t necessarily reflect your potential ARV — your newly updated property will likely be worth more than older surrounding homes.
But on the other hand, it is important to consider the price point that a neighborhood would support. Just because you’ve made valuable repairs and renovations to a home doesn’t mean potential buyers in that area want to pay for them or are even able to pay for them. Keep that in mind when analyzing the deal.
Creating A Repair Budget
After you’ve established an ARV, creating a repair budget is much more open-ended. My advice would be to always be conservative in your estimated repairs, it’s better to cushion your budget for unexpected costs than getting caught off guard with a surprise repair that comes directly out of your bottom line.
A lot of people will also build in contingencies to their repair budgets, especially for houses built in the fifties or sixties. A five or 10 percent contingency will help protect your bottom line in the event of a surprise repair.
Also, keep in mind that your repairs — and budget — aren’t limited to the home’s construction.
Don't Forget About Curb Appeal
Landscaping, curb appeal, and tree work can be big factors in selling a home. Trees can cause insurance issues, especially in older properties. A tree hanging over the home can be a red flag for buyers, and tree removal can cost anywhere from $2000 to $3000. And as beautiful as your home renovations are, most people won’t be able to look past an ugly yard. You may not always have to make big changes, but be sure to include landscaping in your repair budget.
The final factor to consider in your repair budget is holding costs. Holding costs are the expenses of owning a house, like insurance, utilities turned on for workers, cleanup costs, taxes, etc. Include some cushion in your budget here as well in the event that your flip takes longer than planned or your home sits on the market longer than projected.
A Better Budget Ensures Returns on Every Flip
All of these factors may seem like a lot to keep track of, but when flipping houses, if you analyze it correctly and carefully you should never be losing money on a deal. Do your homework on a property and look through it thoroughly, and work with someone familiar with the local market and flipping process that can help you create a realistic repairs budget.
Having a realtor or someone that understands the market is very important. I am a realtor as well as an investor, which is really helpful when it comes to understanding the market and an ARV. I’m here to help guide investors in deciding what level of improvements should be done to a home, setting realistic limits to maximize returns.