Fix-and-flip is the strategy of purchasing a property, renovating it, then selling it at a profit.
Investors typically buy a property at a discount because of its condition. It might have lapsed into disrepair due to abandonment or because the current owner couldn’t pay for the upkeep. Sometimes the property needs only some aesthetic updating but, more frequently, it requires major renovations. In some cases, it might not be legal to occupy the house until the investors can prove that they made certain repairs.
After the investors fix up the property, the next step is to sell it as quickly as possible and at as much of a profit as possible.
Fix-and-flip value vs. after-repair value
The cost of acquiring the property plus the cost of the repairs is the fix-and-flip value, but that’s not what investors are chasing. They are seeking after-repair value (ARV), which is the approximate market value of the property once the repairs are complete. The difference between ARV and the fix-and-flip value is the expected profit.
It makes no financial sense to buy a house, spend $25,000 fixing it up, then flipping it for the purchase price plus $25,000. Investors would neither gain nor lose money that way but would waste a lot of time and effort. The point of fix-and-flip is to spend $15,000 on new plumbing and electric infrastructure, which adds $25,000 to the resale price. Meanwhile, the investors could spend another $10,000 fixing up the windows and shutters and improving the landscaping, adding another $20,000 to the home’s curb appeal. In this case, $25,000 in renovations yields an expected resale that’s $45,000 higher than the original purchase price. The profit for the investors, then, would be $20,000.
The question becomes, why would the final homeowners — the ones who bought from the fix-and-flip investors — pay $45,000 for work that might have cost them only $25,000?
Let’s assume the new homeowners fairly sophisticated. They know what fix-and-flip is. Also, they’re aware that this is what happened to their new home over the past few months. It could still be well worth it to them. After all, they probably aren’t inclined to do the work themselves and might not know reputable, competent contractors. Further, they’re probably seeking the immediate gratification of moving into a home that’s habitable and comfortable on the day they make their down payment.