Your opinion on this house flipping strategy?

Question

I have a friend that works with a wholesaler. His strategy is simply this: If the market price for surrounding houses on Zillow is 100K or greater than his cost, he will buy it for cash. He usually puts 25-50k into the property and then flips it. The 100K gives him cushion if there are any surprises. He doesn't visit the property, do home inspections or anything like that. He does about 4 of these a year. The theory is that you might have one go bad, but so what if you made money on the other 3.

What are your thoughts?

Matt Devincenzo · Answer

Again 100K and sight unseen aren't a 'strategy', they are buyer criteria. A strategy is a plan of action or policy e.g. my plan to make money in RE is to flip houses. Criteria is the standard by which you judge or decide on pursuing further action. Nothing wrong with his buy criteria, especially if he's demonstrated he can make money at those numbers, but knowing the difference is important in establishing your own strategy, goals and criteria for investing.

William Harvey · Answer

@John McKee I think the strategy is better at scale than doing 4 flips per year. If you do 40 flips using this strategy, you have “the law of large numbers” on your side. If a few go bad, it’s okay because the good ones outweigh the bad and it’s a net success. But if you only do a few properties annually, it’s way riskier. Opendoor (who buys thousands of properties annually….possibly tens of thousands) could do something like this, but my house flipping company (5-10 flips per year) couldn’t.

Brad Jacobson · Answer

The rule of thumb I've always followed for a flip is to have a minimum spread of $100k between purchase and ARV.  Nothing wrong with that!  Of course, bigger discounts equal bigger margins but a $100k baseline is fine in most markets.

The most important part is being certain of those numbers.  We always lie to ourselves about ARV when we're trying to make a deal happen.  As long as your numbers are honest, that's a fine game plan.

Paul Pratt · Answer

High risk, possible high reward. Not inspecting a home is never the play. On paper that sounds great, but it's very possible an inspection will catch some serious issues. And the next person who buys from you will obviously get an inspection and have a ton of red flags. I ALWAYS recommend doing some sort of due diligence. A shiny new remodeled house is great, until a bad inspection report comes back.

Pandu Chimata · Answer

100K difference makes sense based on his experience if he can able to flip the house under 40K with some exceptions.

I personally never buy any house unless I see the area/neighborhood - what are around the house, etc.

John McKee · Answer

I would call it more of a site unseen Flip strategy using wholesalers and the criteria being the 100K difference.

Kevin Ivey · Answer

I usually don't run my numbers on anything with less than 100K spread.

Then I swag my numbers based on carrying cost, time on market (which has extended by a month or two) I also use HML to ensure I have enough cash and can move on new deals if I find them.

It's a good starting point but I bet he has more criteria age of house, market, etc that isn't communicated.

Tyler Fontaine · Answer

If he has the systems in place with a team to do this then it could work. Getting multiple base hits is better than chasing homeruns exclusively. Get some wins, maybe take a loss but it all works out in the end.

In my experience you have to have some experience with REI, managing contractors, budgets, etc if you are going to go this route as many obstacles can occur through this process.

John McKee · Answer

It's the 100K strategy with site unseen. @Matt Devincenzo good point on the larger property ROI, but he does deal with properties in the 300-500K range.  Seems to be a sweet spot for all cash deals.

Matt Devincenzo · Answer

I'm not sure I understand the difference in 'strategy'...he's literally just flipping homes. His criteria for a flip is simply that there needs to be a minimum of 100K for rehab and profit. It's not a strategy, its just his buy criteria. Also a lot of this depends on market, in a 500K ARV area he's making 10% profit on his money per flip. In a $2M ARV area he's making 2.5% on his money.

Your opinion on this house flipping strategy?

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