BiggerPockets

Tips To Evaluating A Profitable Fix And Flip

There is more to determining a successful fix and flip than what you see on TV. Performing the repairs is only a small part of the project. It does you no good to perform the work if you're not going to make a profit on the transaction. Understanding the financial projections of the fix and flip is the most important part of this strategy.

Therefore, in order to determine whether or not a fix and flip will be profitable, the following is the detailed equation for success: 95% ARV - acquisition costs - repair costs - holding costs - payoff costs - marketing cost - profit.

Why use 95% of ARV? 2 main reasons. First, the area may appreciate during the time of the fix and flip, and if it does, my profit margins are not affected. Second, I plan on doing minimal repairs and selling for lower end of the comps. Speed in resale is very important to my business model. The ARVis important not only for determining profit, but also for obtaining 3rd party financing. As a rule of thumb, lenders will only lend on 65-70% of ARV. For example, if your property has an ARV of $100k, you will receive from a 3rd party vendor a max of $70k. Is $70k enough to perform a fix and flip? The answer to that question lays in the costs projections.

As an additional note, when determining the ARV, it is beneficial to seek the experience and advice of a Realtor who has had success in the neighborhood in which you are looking to perform the transaction. They will know more about the benefits of the neighborhood, whether it is appreciating in value or not, the quality of the homes for sale, the days on market, the quality of the school system, the crime rate, etc... Establishing an accurate ARV and understanding of that particular market will help predict how much you will be able to sell the repaired property.

In order to determine whether or not a fix and flip will be profitable, the following is the detailed equation for success: 95% ARV - acquisition costs - repair costs - holding costs - payoff costs - marketing cost - profit.
Acquisition costs focus on what price you are acquiring the property for and any other costs to acquisition (such as private money loans). Repair costs are where you project the total investments needed to get into sellable condition. Holding costs is where you project the costs of holding onto a property, such as lender payments, taxes, utilities (don't forget deposits), landscaping, etc… As a rule of thumb, I like to project 6 months for the flip and sell it quicker. Payoff costs are where you look into having to pay for inspections, title costs, closing costs, potential Realtor costs, etc… Always assume and project for the worst, such as paying all seller costs. Marketing costs are the costs of flyers, banners, staging, etc…

Finally, the most important part is the profits. As a rule of thumb, a successful fix and flip should double what the repairs costs are. So if you invest $5k into a house, then you should be able to turn a $10k profit. The following is a fictional, simplified example to illustrate the decision making process:

 ARV: $125k
 Acquisition: $75,000
 Repair Costs: $7,500
 Holding Costs: $7,000
 Payoff Costs: $10,000
 Marketing Costs: $500
 Total Costs: $100,000

My repair costs are $7,500. My required profit is double the repair costs, or $15,000. The difference between the ARV and the Total Costs ($125k - $100k) = $25,000. Since $25,000 is greater than $15,000, I would proceed with the fix and flip.

Comments

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  Daniel Marca — over 1 year ago

  Very informative, thanks!

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  Colbert Saint-Laurent — 8 months ago

  Great Stuff! especially the part on doubling your repair costs.

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  Will Barnard — 8 months ago

  "Great Stuff! especially the part on doubling your repair costs."I would disagree. Out of all the information provided, the figure of double repair costs for minimum profit is the least valid. Profit margins should always be based on a cash on cash return and have little to do with rehab costs. If you have two homes both with $100k exit values, one with $5k in rehab and the other with $15k in rehab, your profit maargins should not have a difference of $20k between them! ($5k X 2 = $10k / $15k X 2 = $30k / $30k - $10k = $20k)

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  Tim Thomas — 5 months ago

  Will, can you be more specific about your "cash on cash" formula? What exactly do you mean?

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  Tim Thomas — 5 months ago

  Will, can you be more specific about your "cash on cash" formula? What exactly do you mean?

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  Tim Thomas — 5 months ago

  Will, can you be more specific about your "cash on cash" formula? What exactly do you mean?

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  Tim Thomas — 5 months ago

  Will, can you be more specific about your "cash on cash" formula? What exactly do you mean?