Making money with a “fix and flip” property is a great way to make money in real estate. However, it isn’t about repairing drywall and planting flowers. It’s all about how you do the numbers.
People often buy and sell a fixer-upper without a definite plan. They buy a house, fix it up, then add $10,000 or $20,000 onto their costs. They then put the house up for sale at this price.
Have you ever bought a house according to what the seller has into it? Of course not. You look at similar houses to determine the value. If you have $110,000 into a fix-and-flip project, and similar homes are selling for $105,000, how much will you get? It has nothing to do with what you’ve spent, does it?
The Fix and Flip Formula
- Determine the after-repair value of the house you’re looking at. Get an appraiser’s help, or look at what similar houses have actually sold for (not asking prices). The price it’s likely to sell for is going to be your starting point.
- Calculate costs: closing fees, loan fees, document prep, homeowner’s insurance, title policy, repair costs, interest on loans, property taxes, sales commission, fees, title policy, etc. You want projected costs of all four categories: buying, improving, carrying, and selling. Subtract all costs from the expected sales price.
- Subtract a profit that makes it worth the effort. Now you have the highest price you can pay. You have to walk away if you can’t get it for this price or less. You’ll offer thousands less, of course, to give yourself negotiating room.
Fix and Flip Example
You’ve found a fixer-upper, and determined you can get $98,000 for it when it’s done. Buying costs will be $2,000. Repair estimates add up to $8,000. Carrying costs will be $2,500. Sales commission and other closing costs will be around $8,000. You figure in $1,500 for the “unexpected.” For your effort, you want a $10,000 profit.
When you subtract all of that from your expected sales price, you have $66,000. That’s the most you’ll pay if you want a safe real estate investment. Offer $61,000, and walk way if you and the seller can’t settle on something under $66,000.
You always start with the eventual sales price and work your way back. This is the right way to safely do a fix and flip.