Buy a property at a low enough price, and you can almost always make a profit on the flip. But pay too much, and the flip will be doomed from the start.
So how do you buy right?
How much should you pay for a house you plan to flip?
Experts suggest you pay 70% of the after-improved value of the home minus repair costs.
Here’s an example.
| Home price | $200,000 |
| 70% rule | $140,000 |
| Repairs needed | -$30,000 |
| Maximum offer | $110,000 |
Does it seem difficult to purchase a house at almost half price? This is why home flipping isn’t as easy as it first appears. In hot markets, it’s hard to get any discount at all on a home, let alone a 50% discount.
But if you find the right home and negotiate, it’s possible.
Get help analyzing your deal. Submit your scenario.Know the market
The best way to get a real deal on a property to flip is to know the market area. Before you even put an offer in on a property, you should have a very good idea of what the house will sell for (not its Zillow value or other estimate).
Location is the single biggest factor in determining the value of property. If the prevailing market value in a neighborhood is about $200,000, then you should fully expect to pay substantially less than this for the flip. In most cases, there’s little justification for a property in such a neighborhood to sell for substantially more.
You can get to know market values in your community by paying attention to sales activity in the area. Local newspapers typically provide news of recent sales, including final sale prices. But you can also get this information from online sources.
Just make sure you’re looking at closed sales, not asking prices.
Look for properties that have been sitting
Though it may be tempting to make offers on properties as soon as they hit the market, these are usually not the most flexible deals, price-wise. Since the seller has just listed the property, they will have the expectation of getting their asking price.
It’s only once the property has been sitting on the market for several months that reality begins to hit. For that reason, you should focus your search on properties that been on the market for many months. Generally speaking, the longer a house is listed for sale, the more the seller will be willing to negotiate.
You should also look for properties that show some sign of distress. That can be indicated by an anxious seller, as evidenced by inducements to purchase, such as seller-paid closing costs and other perks.
Also look at the condition of the property. Look for signs of neglect.
As a rule, the worse the property condition is, the better the price you’ll get on the house.
Make low-ball offers
If you’re looking to purchase a property to flip, you can’t be worried about insulting the seller. You need to get the lowest price possible on the purchase to cover any reasonable repairs and make a profit on the deal.
That might mean making offers that are 30% or 40% below the asking price, and 50% or more below the property’s actual market value (after repairs, if they are necessary). The reason for going so low is not only to get the best price but also to recognize the fact that it will be a negotiation. You may offer a price that’s 40% below the seller’s asking price, but the seller will counter offer. In the end, you will pay more than your offer, but hopefully well below the asking price.
Also, keep in mind that if it’s a distressed sale – which is the only kind you should be interested in – your lowball offer may be either the only offer the seller has gotten or the best of the lot. So keep the offers low, and don’t allow yourself to be negotiated to any level close to the asking price.
If the deal doesn’t make sense, walk!
You should have the numbers crunched on any property that you are interested in before you even make an offer. You should determine the following numbers in advance:
- The price that the house will likely sell for, once you have completed any necessary repairs
- The cost of those repairs
- Transaction costs, such as closing costs for the rehab loan and realtor fees on both the purchase and sale
- Carrying cost of the property, between the time you buy it, and the amount of time it will take to both repair it and sell it
- The profit you expect to make on the flip
Knowing all these numbers will help you buy right and potentially lead to a profitable flip.
Start your property flip with the right financing.Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
