The fix and flip phenomena might have most investors seeing dollar signs but consider the following tips before committing to any property. What should buyers look for in a fix and flip property? Lots of things. From purchase price, to rehab costs, to After Repair Value (ARV). Don’t let television shows fool you. It’s much more complicated than it seems.
Finding the Best Fix and Flip Property
Fix and flip opportunities are everywhere but spotting the diamonds in the rough start with researching different areas. First, look in areas with booming real estate markets. Areas like New Orleans, New York, Knoxville, TN, Pittsburgh, PA, and Chicago have proven fix and flip track records. Investors in these locales boast double-digit ROI numbers.
Target cities and urban regions with positive YOY population growth. This generally fuels the strongest economies. Queens, NY is such a place enjoying consistent population booms. Many flippers find homes on the Multiple Listing Service (MLS). Investors often find the best deals on properties that spend the most time on the market.
Not all investors rely on the MLS, however. Some say they find flip opportunities through contacts, auctions, and even mail-outs.
After Repair Value: Why It Matters in a Fix and Flip
Most properties require rehabilitation, but at what cost? How does the After Repair Value (ARV) measure up with comparable units? There’s no sidestepping the rehab costs of a fix and flip property. Any cost associated with renovating the property factors into the ARV. Costs like inspection fees, permits, contractors, labor, insurance, homeowner association fees, and taxes calculate toward the total project cost.
ARV ultimately determines the profit. Decide whether the property is an ideal fix and flip candidate with the following example. The list price of property A is $200,000. It requires a lot of work but surrounding, comparable properties sold for $500,000. After pricing materials, labor, and all associated rehab expenses, the total renovation will cost around $250,000, bringing the ARV to $450,000.
With neighboring comps selling for slightly higher than this amount, the investor must decide if property A is, in fact, a good buy. What if an unforeseen issue arises during construction that increases the rehab cost? The toughest part of a fix and flip property is accurately calculating the cost of renovating the property.
Having a Knowledgeable Realtor and Contractor
Savvy investors understand the value of developing a quality pre-construction crew. The realtor and lead contractor should head your charge. They’ll need knowledge of the area to properly calculate material costs and comparable property sales. A good contractor will know which centers offer the best deals on construction supplies.
Whereas a quality, local realtor offers insight into which areas of town provide the most upside and least risk for your fix and flip property. Also, remember to include the costs of property taxes, association fees, loan interest, and insurance since these are mandatory expenses. The longer the investor owns the property, the more he’ll owe in ownership fees.