People are making a fortune flipping properties. If you want to join them and set up a flip of your own, the first most important step is to get the best price on the property. 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.
The Price You Pay for the House is EVERYTHING on a Flip
If you pay at or a little bit of the above the market price on a home that you plan to occupy as your primary residence, it’s not necessarily a big deal. After all, since you will most likely stay in the home for at least several years, there’ll be an opportunity for a combination of mortgage amortization and appreciation on the home to improve your equity position.
But when you are buying a property to flip, the process happens quickly. You want to purchase the property, make any necessary renovations, and then sell it quickly. This is in part because you will want to free up your money to move on to the next property flip, but also because the longer you hold onto a property, the more it will cost you to keep it.
After all, just like an owner occupied property, a flip property also requires monthly payments for debt service, property taxes, insurance, and utilities. The longer that you hold it, the higher that those expenses will be, and that will cut into your profit on the flip.
Pay too much for the house, and you could lose money on the flip.
Know the Market Where You’re Buying
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 is worth.
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, such as Realtor.com and Zillow.com.
However, don’t rely so much on the value indicated for a specific property. Online sources have no way of knowing what the condition of the property is or the status of the seller. They may assign a full market value to the property, rather than discounting it for those factors. Instead, use these sources to get a general idea of what properties sell for in the specific neighborhood.
Look for Properties that Have Been Sitting on the Market
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, pricewise. Since the seller has just put the property on the market, 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 come down on the price – if they haven’t already, in an attempt to draw interest in the property.
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. The best deals will never be the properties that are in mint condition. Instead, look for properties that show signs of neglect. Not only will that in itself offer an opportunity to get a better deal on the house, but neglect is also usually a sign that the seller is having financial troubles, and that’s why the property hasn’t been properly maintained. 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 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
- Your offer on the purchase of the property needs to reflect all of these numbers, which is why you need to know what they are before you even begin negotiating. Once you know what those numbers are, you will be in a position to negotiate a profitable deal.If at any point during those negotiations you determine that the purchase price won’t support the numbers that you project for the property, you need to be ready to walk away. If a deal doesn’t work from the beginning, it will only get worse the deeper that you get into it. Instead, abandon the negotiations, and move on to making offers on other properties where the sellers are more flexible.No matter what you see happening on TV, flipping properties is not for the faint of heart. You have to know the values in your area, know the numbers that will make each potential flip profitable, and then be prepared to play hardball to get the price that you need to make the deal work. If it’s anything less, then it’s time to bail out, and move on.