By Marco Leone, The Equity Finders/HomeSmart
Knowing how to evaluate a deal is key to your fix & flip business, yet very few investors ever master this valuable skill. Newer investors often forget to account for all the potential expenses associated with their flip project. If this happens to you, you could see your profits disappear in a blink of an eye. Be a savvy investor and always know your numbers!
Here are the 4 most important steps to making an informed and intelligent investment decision:
Step 1: Determine the ARV (After Repaired Value)
Before you decide on how much to offer on a property, you should always start with how much the property will sell for after rehabbing it, and then work backwards. Once you know how much a retail buyer is willing to pay for your rehabbed property, you can then back out all your expenses and anticipated profit to determine your maximum offer price.
So, let’s start with the ARV, or after repaired value. To accurately determine the after repaired value or “ARV” of a property, you’ll need to rely on solid data we like to call comparables or “comps.” The best comps will always be the properties closest to your subject property that have already been rehabbed and resold to a retail buyer. Make sure the comps you use are similar in the number of bedrooms & bathrooms, square footage, number of stories, and other important characteristics.
To access data for comparable properties, some investors use free online websites like Zillow or Redfin. Although these websites do provide property data, you’ll have to go through several steps to gather the data, and then extra steps to put the data in a format that can be analyzed. The problem is all of these steps take valuable time. For those of you who have access to the MLS, this can be a great way to generate comps, but you’ll still have to spend some time gathering information and organizing before you can do any analysis. If you really want to simplify your life and spend less time generating comps and more time making offers, I suggest you try our software. Our SmartMap technology allows you to quickly and accurately generate ARV comps for any on or off-market residential property within minutes! Seriously! Check it out at www. SmartMapComps.com and sign up for your free trial.
Step 2: Estimate Repair Costs
Now that you’ve determined the ARV of your property, the next step is to estimate the cost of repairs. As a rough benchmark, $20 per square foot is a guideline you can use for a full “standard” cosmetic rehab. Of course, if you’re rehabbing a higher-end house and using higher quality materials and finishes, then you should adjust the rate closer to $25 or $30 per square foot.
Step 3: Calculate Closing, Carrying and Sale Costs
So, what are some important costs to remember? If you’re using hard money to purchase, what are the points or closing costs involved with the loan? Will you have to make monthly interest payments until the loan is paid off? How long will it take you to rehab the property? How long will it take for the property to sell? Will you be paying commissions to a Real Estate Agent? As you can see, the expenses can add up really quickly, so review all your potential expenses and be realistic about time frames.
Step 4: Determine Your Offer
Now that you’ve determined your potential selling price (ARV), your estimated repair costs, and your closing, carrying and sale costs, it’s time to calculate your offer price. Here’s a simple but effective formula you can use:
Offer Price = (ARV) – (Repair Costs) – (Closing, Carrying and Sale Costs) – (Desired profit)
Now that you know the 4 basic steps to evaluating potential fix and flip properties, along with a simple formula to help you calculate your offers, you’re ready to get started! If you want the smartest ARV comping system on the market, go to www.SmartMapComps.com and sign up for a free 10-day trial.
Or, you can go to www.TheEquityFinders.com/get-started/ to tell us what you’re looking for, so we can help you find the best properties to fix & flip.