Flip This House: Finding your deal


The third section of my recommend-blog post entitled “Flip This House” explains how to find the house you are interested in renovating.

There are many houses on the market right now, including short-sales, distressed homes, foreclosures, etc. The question I get asked most is, how do I find the right deal for me?

I am going to go over some things you may want to consider, before you purchase your “flip” house. As a real estate investor, your REALTOR should be able to give you the most accurate advice that makes both logical and financial sense. Hopefully I will raise awareness in your deals, to some things many people will look over.

As I said earlier in one of my previous blog posts, I would recommend finding a house that is less than 10 miles away from your own. My reasoning behind this is that you will be traveling to this house many times (sometimes multiple per day). With gas prices the way they are right now, you do not want all your profit sucked away in gas expenses – as well as time.

Once you have established a few different areas you would like to invest in, inform your REALTOR you are considering an investment property in those areas. Here are some questions you should be asking your REALTOR:

  • How many months of inventory are on the market?
  • What are the average Days on Market for the area?
  • What are the average sales price compared to average list price?
  • Is the area in a flood plane?
  • Is there high crime in the area I am interested in?
  • How are the schools in the area?

You should get a good idea of where you want to put your money, and where you do not want to put your money. The more inventory on the market, the longer your house will sit vacant to sell (unless you price aggressively). The sales price / list price will show you what percent the houses are selling for vs. listed for. For example, an area that is selling at 95% list price is better than an area selling for 81% list price. This could save you thousands!

Once you have found the area you will be investing in, let your REALTOR know your intentions, up front. Some REALTORS love working with investors (I do!), others – do not. If your REALTOR does not work with investors, find one who does.

You should now be considering what type of houses you want to target in the area. Before you purchase a house, the most important thing to consider is how well the house will sell, after it has been repaired. Houses with strange floor plans (walk through bathrooms to get into bedrooms, etc) do not sell fast. Houses with master bedrooms upstairs (in Texas) sell slower than houses with them downstairs. The key idea here is: know what sells fast. If you don’t know, ask your REALTOR.

Typically, I believe you can’t lose with a 1-story, 3 bedrooms, and 2 baths. Those are the easiest houses to sell (in my market!). You should be able to provide your REALTOR with what you are looking for, such as: 3 bedrooms, 2 baths, in X neighborhood, priced below $50,000. Your REALTOR can find that information fast, and will be able to start working on which one to pick. If you want cheap houses right now, have them only send you houses that are foreclosures or corporate listings.

The key idea here is get specific. Get specific as possible. If I did a general search for active 3/2/2’s in Houston I would come up with thousands. If I did a general search for 3/2/2’s under $50,000 in Winchester Country – I would come up with 3.

Note: from my experience, short sale houses dead end deals. Typically, the bank must approve short sales, and this process can drag out over 6 months. If you want to make a deal happen fast, stay away from short sales! Some investors only invest in short sales, but I would recommend you do not start there due to time constraints.

Let your REALTOR know which ones you want to view, and have them run a CMA on the subject property. A CMA (Comparable Market Analysis) will show what you can expect to sell your house for, or After Repair Value (ARV).

The first step is figuring out your ARV. If your ARV is not high enough to make the repairs, pay the commissions, the fees, holding costs, etc – and you do not profit, what’s the point? Don’t worry – that’s why you’re reading my blog! I’ll explain all of this.

After you have determined the ARV, and have comparable, you will see a nice spread between purchase price and ARV. Here is a sample deal I’m doing now:

ARV (After Repair Value): $139,000
Less Purchase Price: $65,000
————————————–
Total: $74,000

That’s a nice profit! Well – that’s not all profit. We have to take more money out before we can get to our goal, Net Profit. But its a start – a good one at that. If you start to see double digit thousands in your totals from this equation, then you’re on the right track.

On my next blog post, I will discuss a truly important skill you must develop – cost estimation.

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About redannyday
Danny Day is a local Houstonian who has worked in many different areas of real estate. He blogs about real estate investing, trends, and data that relate to micro and macro markets in the United States, and Houston.

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