When you watch a 30-minute episode of any popular house-flipping show, don’t come away thinking you’ll pocket tens of thousands in profits for 30 minutes of effort – you won’t. There’s a little more to do between the time you buy a distressed house and when it’s ready for a prime time sale.
There are three critically important criteria for how to rehab or flip a house:
- Investing in the right house in the right neighborhood.
- Making the right repairs and renovations.
- Getting in and out of the deal quickly.
How to Rehab or Flip a House Begins in the Right Neighborhood
Because you want to maximize your profit, the right neighborhood for rehabbing and flipping is upper middle income. These are neighborhoods for second and third-time buyers. Places where buyers that are more prosperous are buying up.
Top income neighborhoods aren’t attractive because these people want to customize their own homes. They aren’t going to be very receptive to remodeling choices you’ve already made. Neighborhoods for first-time buyers aren’t a good choice either because these buyers are too price sensitive.
Once in the neighborhood, it’s time to determine the after repair value (ARV). You’re actually dealing with two different processes that blend together. First is the combined total of the purchase price plus the cost of repairs (don’t forget holding costs). This is the minimum of what you’ll have invested in the house after repairs. Your profit goal for how to rehab or flip a house is to be around 70% of the ARV.
Several ARV Options to Value a Rehab or Flip
You almost certainly have the skills to do your own MLS research and double-check it on websites like Zillow. But if this is your first project or you screwed up the ARV on your last project, you want to dig deeper.
Start with your wholesaler. A good wholesaler will have done some or most of the research for you. This is a starting point but it’s just that – a starting point. If the wholesaler has been sitting on the deal for a few months, his/her information is out of date. And of course, this person has a bias to skew the numbers in his favor. Also, he might not have the current pulse on contractor and material costs. It’s a beginning but not the final answer for how to rehab or flip a house.
The market analysis is valuable. If there are real estate agents involved with the deal, there will be a comparative market analysis (CMA). If you ask for a suggested listing price on the house you intend investing in, be sure the agent understands you will be making repairs. Be as specific about the repairs as you can including the quality of the materials to be be used.
Pay for a broker price opinion (BPO). This will be similar to the CMA but the broker should be independent from the transaction. The CMA will probably come from an agent involved with the sale of the property. Since the broker won’t make anything from the sales transaction, you have to pay a nominal fee for the BPO. BPOs are done either as an exterior or interior assessment. You want an interior BPO. Just as with the CMA, be sure the broker doing the BPO is fully aware of what repairs and improvements you are planning to make. Brokers doing BPOs are often among the most experienced in the field. His or her opinion of the ARV should be one of the most trusted conclusions you receive.
Pay for a before and after appraisal. Again, you want the “as-is” and “as-repaired” values. This will almost certainly be the most expensive estimate you have prepared. If you are already comfortable with the numbers you’ve received from others, you may decide to skip this one. Also, keep in mind that if you’ll be borrowing bank money or the end buyer borrows bank money, separate and additional appraisals will be required by each bank involved.
Somewhere in this mix, you might have an inspector involved. Inspectors aren’t generally qualified to give a comparable analysis. However, they are great resources as a second set of eyes to be sure you haven’t overlooked anything else needing repairs.
Ultimately, you need to take all of these into account to arrive at your own proforma conclusion. A final step for how to rehab or flip a house is sharing your conclusion and the background numbers with a mentor, rehabbers that are more experienced, real estate agents, members of your investment club, and others whose opinion you trust on the subject. Still, it’s your money and profit on the line in the end.
How to Rehab or Flip a House Becomes Most Profitable When You Make Mom Happy
You want to strongly consider what the mother in the family finds important when deciding how to rehab or flip a house. Sure, dad wants a workshop in the garage. However, the most important renovations are made to the kitchen, bathrooms, and master bedroom. Those are traditionally the domains of the woman of the home. When you make her happy, you’ll get your full asking price.
As you consider the remodel, here are some of the upper middle class features many moms want:
- A mud room on a back or side entrance for the family’s muddy shoes and sports equipment.
- A laundry room is an essential element that is often more important than an extra bedroom. Placing this next to the mud room is even better.
- There is never enough storage for a growing family.
- In the kitchen, mom always wants the very best. She wants the latest appliances, faucets and sinks, countertops, floors and cabinetry and yet for the kitchen to be functional for the entire family to enjoy.
- A spa in the master bath will seal the deal.
Highly experienced rehabbers often pick a niche. For some, it’s houses with a mold problem. Others specialize in foundation repairs or fire damage. These can be great niches that few other rehabbers venture into – for good reason. These can be highly profitable when you have the expertise to pull them off. Or you could lose your shirt. For those just learning how to rehab or flip a house, it’s best to stick with the proven formula of buying at the right price, in the right neighborhood, and rehabbing to make mom happy.
Real estate investing is all about finding creative solutions that work for you and others. What you need to do now is TAKE ACTION!
By Wendy Patton
For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.
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