Fixing and Flipping: Determining Target Price Point
The G.I. Joe Jet. Man, did I want that toy. I remember my friend Robby and I drooling over it at the department store the summer of 1984. Together we owned every other figurine and vehicle in the collection – from the Ninja to the Jeep. Unfortunately, we never acquired the Jet. At $20 the target price point was too high. By the time we had enough cash to buy it we had moved on to a more expensive hobby – BMX racing bikes.
The cash in your bank account will most likely dictate your target price point for acquiring houses to fix and flip. Of course, if you’re willing to borrow money to finance some or all of your deal then you can afford to purchase more expensive properties.
I personally know investors flipping $30,000 houses in Kalamazoo, Michigan to million dollar custom homes in Sedona, Arizona and everything in between. Much like target neighborhood, your target price point has a lot to do with comfort. You may have the cash to do multi-million dollar deals. But, the idea of forking out that much money for one property may be more frightening than a colonoscopy.
I buy homes in the $150,000 – $300,000 distressed price range that will sell in the $215,000 – $420,000 after-repair value (ARV) range. Here’s why:
- There’s tremendous competition in Phoenix for homes priced under $150,000. First time homebuyers, second-home buyers and buy and hold investors are all competing for houses at this price point. Together they drive prices up and reduce potential profit margins for fix and flip investors like me.
- There are fewer retail buyers for homes priced over $420,000. As the list price of a house goes up, the number of qualified buyers goes down. Also, the more money a homebuyer has to borrow from a bank to buy my house the more difficult the loan will be to get. I’d rather sell to a larger pool of qualified buyers so I stick to homes that are easier to afford and are more financeable.
- Believe it or not, I’ve found that homes in my target price range require fewer repairs and improvements than those that sell for under $150,000 and over $420,000.
Some would call this the “lowest hanging fruit” approach to acquiring real estate. I determine my target price point by finding out the answers to these questions:
- In what price range will I find the greatest amount of motivated sellers?
- In what price range will I find the greatest amount of distressed properties I can buy at a steep discount?
- In what price range will I find the least amount of investors competing to buy these distressed properties?
- In what price range is there an abundance of retail buyers for my fully renovated fix and flip property?
- In what price range can I sell my fix and flip property for the highest possible price in the shortest possible time?
Remember, this is not an exact science. I’ve routinely made $15,000 – $40,000 in profit flipping houses from $52,000 to $420,000. I’ve also lost $20,000 – $60,000 flipping homes priced from $67,000 to over $540,000.
Regardless of your target price point, keep in mind that while the dollars are different the principles remain the same. You make your money when you buy, not when you sell.