Is this line of thinking correct in house-flipping?

3 Replies

I'm really trying to get into the house-flipping business. I'm not sure I can at the moment as I only have about 50k cash (soon to be ~130k, but I don't want to be gambling away inheritance). I'm just playing with the numbers on a property I see listed. I'm not actually interested in this one due to the area, but I'm just trying to practice playing with the numbers to see if my line of thinking is correct.

Home is foreclosed. Bank is asking $65,000 for it. I'm having a hard time finding comps (Anyone have any suggestions on a reliable way to do that?), but I did find two nearby/similar sized homes (within 300 sq ft of the one I'm looking at) selling for low 90s. They're all older (same-ish age as the foreclosed home I'm looking at) with dated appliances/woodwork/etc., but they're clean.

The foreclosed home is in similar shape to the low 90s ones, but it's dirty/neglected. Assuming it doesn't need any major work (I would get any home I purchased inspected, of course), it needs at the very least to be completely repainted, the exterior needs to be freshened up with new paint, and it could use new appliances in the kitchen. I would probably also lay laminate 'hardwood' throughout the house as well.

It's a 1,400 sq ft home. I'm estimating that with my labor, plus some cheaper labor (friend who is a contractor/painter), it would probably cost $15,000 to do this. Since I'm totally just guessing based off of instinct that is totally wrong, let's bump that up to $25,000 for safety. --> This is one part I'm struggling with - how do you accurately, but with safety margins, assess the amount of money a rehab will need?

So, since comps with older appliances/dated interiors were going for ~$92,000, I assume I can safely predict maybe getting ~$95-97,000 for a home with a freshly painted interior/flooring and updated appliances? $95,000 - $25,000 for the rehab = $70,000. Anything I can get the home below $70,000 is profit, minus, of course, listing/realtor fees and closing costs.  6% of $95,000 is $5,700. Perhaps another $3,000 in closing costs. Allow me to round up and just say $10,000 for the whole shebang. So, anything now under $60,000 purchase price is profit for me.

So, with that in mind, throw the bank an offer of $40,000 for the home. Maybe they balk at it, maybe they counter with $45,000 and I accept. Is it reasonable to predict I could make a solid $15,000 profit (minus taxes) on this home in this scenario?

Please, brutal honesty. Where am I being completely unrealistic, naive, and inexperienced? I'm very handy, generally pretty sharp with numbers, and have access to a wide plethora of contractors who are very reliable/reasonably priced, so I would really like to give my hand at renovating/selling homes. Any advice is much appreciated.

Thanks

@Jeremy Hale   brutally honest? OK, stop dreaming. Basing value on listed properties is just tying your dreams to theirs. They have not sold at that price. That is asking price.

Think about it, if this house is on the MLS, do you think it would still be available if it is a good buy?

Your repair costs are not any more accurate, based on what you said. It is great that you want to jump in and do something. But there are two opposite trends that I have seen. The first is what everyone here calls "paralysis by analysis" which is to become overly involved with details and making sure you know everything, so in the end you do nothing. And the equally fatal opposite is jumping in without knowing how deep the water might be. You have more cash to get started than most. Learn how to use it wisely and you will be well on your way.

Make contacts, listen to the podcasts here, learn, gain knowledge, then jump in. I would highly recommend J. Scott's ebook The Book on Flipping Houses , it is a great resource.

Good luck!

Completely agreed with @Walt Payne ...

You say several things in your post that lead me to believe you haven't even started the learning process.  Instead of jumping in before you're ready, spend some time (a lot of time perhaps) learning the basics.  Luckily, you've found the right place to do that.

Here's where you might want to start:

- Learn about how to analyze flip deals (perhaps type "flip formula" or "flip analysis" into the search box here)

- Learn how to estimate ARV (perhaps type "estimate ARV" into the search box)

- Learn how to estimate rehab costs (perhaps type "estimating rehab" into the search box)

- Learn about fixed costs (perhaps type "fixed costs" into the search box

Once you understand those basics, you can start doing basic analysis of properties.  At that point, you can start to read about selecting markets, putting together scopes of work, how to find deals, how to find contractors, how to deal with financing, etc.

There's a lot to learn, but if you're motivated, a few weeks/months here at BiggerPockets should give you the basics...

Thanks fellas. I needed that answer - I knew my approach was off because it was *too easy*, but I wasn't sure how. I just bought that book, I'll give it a good read before I come up with anymore questions on this.

Thanks

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here