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Mistakes that house flippers make: Paying too much

This often occurs when there is a problem with the numbers. The basic formula in flipping a house (aka rehab = rehabilitation of an existing house) consists of three parts:

  1. Resale Price
  2. Costs
  3. Profit

Let's see where the numbers can go wrong.

Resale Price:

Often a would be investor sets an unrealistic price on the subject property's resale. Your starting point should be at Market Value. Determine this by means of accurate CMA's (Comparative Market Analysis). The CMA gives you an idea what buyers are paying for properties like yours. Don't price yourself out of the market. Remember too, that you don't always get a dollar for dollar return on the improvements your make, nor do buyers care how much you put into the place or what you need to make on it; so do your homework. Work backward from the market price because the Resale Price has to include the next 2 parts; namely, Costs and Profit.

Costs:

Your costs include the following:
  • Materials and repairs (the obvious and the unexpected)
  • taxes
  • insurance
  • permits
  • carrying costs
  • utilities
  • closing costs
  • HOA fees
  • brokerate fee
  • credit card payments if used.... etc.

Additionally there is the cost of selling the place:
  • Real estate agent commission
  • Advertising
  • seller's closing costs
  • warranties (if offered)

All these must be included in your figures.

Additionally, when you do your CMA, note the average time the homes are on the market as you'll probably need to carry the costs for that amount of time. Add the average turn around time for a mortgage to close (it can vary from company to company). Failure to address these items can eat up Profit or worse.

Profit:

Pay yourself well. The average time for a project can be 3 to 8 months depending on how extensive the work is. It can be a simple cosmetic ("dab and scab") affair or major structural work. At any rate, adjust your profit accordingly. For example a 15K profit for 3 months work isn't bad; but 15K for 8 months isn't so good. We're in this business because we're tired of making that kind of money for our efforts.

So then, by working back fron our Market Value resale figure, and factoring the costs and profit, we should be able to determine our maximum offer for the property. Any higher affects cost and profit and that's where the mistakes occur.



Generated 8:01:08 on Apr 20, 2018