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Let me use an example using imaginary numbers in an imaginary city but providing easy math.
Let's say I bought a beat-up 2bd/2ba house in the Denver metro area but the place is a wreck. I pay $100K for it. I then invest $50K to bring it up to code and make it pretty.
I'd like to ask for $200K for this pretend house but how in the world would you find a buyer??? If the neighborhood is bad, and the neighbors don't attempt to keep their property up, the money I spent to fix the place may have been better spent elsewhere.
Let me use an example using imaginary numbers in an imaginary city but providing easy math.
Let's say I bought a beat-up 2bd/2ba house in the Denver metro area but the place is a wreck. I pay $100K for it. I then invest $50K to bring it up to code and make it pretty.
I'd like to ask for $200K for this pretend house but how in the world would you find a buyer??? If the neighborhood is bad, and the neighbors don't attempt to keep their property up, the money I spent to fix the place may have been better spent elsewhere.
Well, while there are many things one must know and pracyice in order to make a successful 'flip', one of the most important is picking a property that is viable. Location is very important and is the one aspect that can not be changed for a property.
Successful flippers tend to buy properties in decent or up and coming neighborhoods--the worst house on the best street might be a fair way to put it.
The person looking to do a flip pick houses that might need a lot of work, are priced accordingly (or they negotiate a very good price for what it is) but are in areas that are marketable to those looking for turnkey houses.
For example, one house I saw was 'flipped' a year and a half ago. A group of investors bought the house from an estate--the elderly owner had died. The house was a geogrous Victorian, albeit in the rough. It had not had much work done on it in years. It needed a new roof, new furnace, etc etc...they bought the place for well under market value, at $75,000, which was quite good even for the condition it was in.
They had the place 'redone'--basically had things fixed and replaced as needed, though the house was by no means gutted to its bones. A beautoful new kitchen, new baths, wiring, new roof, repainted outside and inside....all new landscaping. Its a spectacular house now and it sold very soon after it went on the market, for $151,000, which is basically what one would expect for the neighborhood it was in, in that condition. The area is in transition, with many houses being redone.
Down the road farther, a mile away, is the "flats" where one can easily scoop up an old Victorian brick townhouse or colonial of about the same size as the one I described above for about $25K to $60K...however, they rarely get touched as the area is so bad. a lot of them are abandoned, some have fire damage--many vacant lots, etc. No flipper will touch those with a 30-foot pole right now. Location is highly important, even for the flipper.
Let me use an example using imaginary numbers in an imaginary city but providing easy math.
Let's say I bought a beat-up 2bd/2ba house in the Denver metro area but the place is a wreck. I pay $100K for it. I then invest $50K to bring it up to code and make it pretty.
I'd like to ask for $200K for this pretend house but how in the world would you find a buyer??? If the neighborhood is bad, and the neighbors don't attempt to keep their property up, the money I spent to fix the place may have been better spent elsewhere.
You have to know the market. Does the neighborhood support $200K homes? If not, how does it project over the next year, two year, etc?
"Making it pretty" may not be enough for you to command a $200K asking price even if the neighborhood supports it. You will need to look at comps.
Sometimes, investors hold on to it for a while by making it a rental. There are so many different ways to do it. It all depends on location and how much you got in it.
I'd like to ask for $200K for this pretend house but how in the world would you find a buyer???
You simply list it with a realtor. LOL. If people want the house they will buy it, if not you lower the price until it sells.
Crappy houses at rock bottom prices usually have a much better profit margin than a nicer house in a better neighborhood. Just remember to not go overboard on the repairs. No granite countertops, etc. Just basic junk from home depot or lowes is sufficient.
Just because you don't like the neighborhood doesn't mean it wont sell to someone.
You first run the numbers by looking at sold comps. Would acquisition cost, rehab cost, holding cost, marketing cost and closing cost vs sold price yield a profit?
Never forget the #1 rule in real estate............Location, Location, Location.........even for flips.
The goal is to buy a beater in a desirable neighborhood. This is determined before you buy.
You would want to know what the comps are for a houses in the area that are similar to the beater you are wanting to buy. In your example, if you purchased for $100k and it needs $50k worth of work (plus another $25k in fees, inspections, closing costs, appraisals, etc...), you would want the ARV (approximate retail value) closer to $230k - $250k.
Another rule of thumb is that you want to take 70% of the ARV minus repairs. So, again, if the house is worth $250k, and it needs $50k worth of work, your offer would be $175k (70% of ARV) minus the $50k in repairs... so $125k would be a decent investment in this hypothetical property.
Don't be fooled by the HGTV shows. A profitable flip is truly a diamond in the rough. You'll have to look at dozens of dumpy, crappy properties to find one that is worth your time, investment, and hassle factor.
Thanks for all the replies. Good advise to be sure - but I'm not actually thinking of doing it. (Although it would be kind of fun if I had the money)!
I like the HGTV shows. They can give you great ideas, but do not address the issue I would be most concerned about. LOCATION. If I were to go out on the limb and transform a rotten house into an actual home but the neighbors are out shooting guns, selling drugs and throwing beer cans out the windows...??? I'm out.
Someone has to make the first move to restore the neighborhood, but I honestly think I would not be a good candidate for that job.
Thanks for all the replies. Good advise to be sure - but I'm not actually thinking of doing it. (Although it would be kind of fun if I had the money)!
I like the HGTV shows. They can give you great ideas, but do not address the issue I would be most concerned about. LOCATION. If I were to go out on the limb and transform a rotten house into an actual home but the neighbors are out shooting guns, selling drugs and throwing beer cans out the windows...??? I'm out.
Someone has to make the first move to restore the neighborhood, but I honestly think I would not be a good candidate for that job.
and big rewards financially if you do it right.
I work with people who do this for a living. They do it by buying multiples properties cheap on the same block.
Forget the HGTV shows.. it's all a show. It gives you an idea but it's not the same in real life. Those shows are all about sponsors.
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