Which startegy is best for a flip?

Question

I am a newbie investor and I have a question in regards to flipping... Since I am starting out, is it better to focus on properties that have a lower purchase price in lower potential neighborhoods ($40,000 purchase-$85,000 Max ARV)or higher purchase prices in higher potential neighborhoods ($150,000 purchase- $275,000 Max ARV) when using hard money to fund flips?

Brian Levredge · Answer

You should mine your local MLS to get the data you need to make that decision.  Ideally, you want to be at the price point that attracts the most buyers.  The higher your price, the smaller your pool of buyers.  You can break things out by price and the associated DOM at different price levels.

If you are just getting started, I would really try to avoid using a HML for your first deal.  Not only is it expensive but you could also be in a bind if the house doesn't sell quickly enough.

Account Closed · Answer

Your agent can pull comps to see what "price range" is selling the most in that city.  this will give you a better feel as to what price point and where to buy.  In my area, I sale homes from $60-$150k  which works great for me.  Being on the east coast I'm sure you have a higher price point on the low end.  Study the past and current market and go with that.

Brad Alexander · Answer

I appreciate all of the feedback and insight. Its amazing that I can recieve such great knowledge from experienced investors. I am all for a free education :D .

Philip Bourdon · Answer

Jim Stardust:

I would think every house is very different. Perhaps on the average a $150K house takes 30-50k, but lesser value homes may require close to that. Why would those wanting homes with lesser value just accept an investor's cheaply done cosmetic changes? As I read guys like J Scott, almost every kitchen and bath need to be replaced. As long as the purchase price was good, spending a bit more for an attractive house means less DOM.

Will Barnard · Answer

For starting out, I agree with the consensus that you should target the market that attracts the largest buyers pool and also error on the side of the lower values.

While holding time is a huge factor, going up in values does not necessarily increase holding times, the extent of the rehab does. When dealing with larger priced rehab projects, your timeframe to complete such jobs is obviously longer so in such cases, you want larger spreads to accomodate.

Once you have one or two under your belt, and if the buyers pool is not adversley affected, I think there is nothing wrong with going with higher valued properties. In fact, I prefer it. A rehab flip on a $300k exit for me and a rehab flip on a $1M exit is not that much of a difference here in CA, yet the end result is a much larger paycheck and that is what moves me.

Jake Kucheck · Answer

Brad,

Bryce Harper and a rehab appearance by Strasburg will do that.  Your bank might want to look into being a title sponsor of the Plaza area... that used to be Hagerstown Trust when I was there.

As for turn times... I build 6 months into my models but I'll be damned if it ever takes that long.  Should be more like 3-4.

Chris L. · Answer

Brad,
My number one criteria is to pick a house, location, and price point that will provide the quickest exit and that is using my own funds.  I think that would be even more important if you were using borrowed funds to execute a flip.
Make sure you are teamed up with a realtor that really knows the market and where houses are moving quickly along with the appropriate pricing.
Good luck
Chris

Jim Stardust · Answer

How much of your own money will you be using?  What's your rehab budget?  A $150K will take $30-$50K to turn it into a $275K house, while a smaller house, you can get away with some cosmetic changes and few thousands out of pocket.

If you're starting out, you should look at your risk tolerance and see what you're comfortable with!?  Higher end houses tend to sit on the market longer and buyers are more demanding, can you afford a big mistake or to wait few more months with a larger sum of hard money?  On the flip side, with lower end housing you may find issues with people qualifying for loans, especially these days, so that could put on a damper on your plans as well.

Brad Alexander · Answer

Brian,

Thanks for the advice. You brought up a good point about the smaller number of buyers with a higher price.

Jake,

The Suns are more popular now then ever! On your deals what turn time do you usually aim for? My HML will give me a ballon payment after 6 mths.

Jake Kucheck · Answer

Great to see someone on here from Hagerstown!  Way back when, I did an internship with the Suns when I was in college.  Worlds apart from Southern CA, but I had a blast and it was good to see a part of the country with some real history.

On to your question- it depends on your available capital.  If you need an HML, I'm guessing you don't have a lot of available capital.  So, I would err on the side of not owing gobs of interest if things go south.  If the spreads are equal (% wise), I'd take the lower priced property to minimize downside risk if I didn't know what I was doing.  Heck, I have plenty of available capital and I DO know what I'm doing, but I take the lower priced property in this situation most of the time anyway, because, as Brian mentioned, your turn times will be faster.

One thing to remember about flipping is that your turn time is just as important, if not more so, than your margins.

Which startegy is best for a flip?

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