“How much under-market do I need to buy a home to make money on a fix-and-flip?”
***ANSWER:
Theres no simple formula, because of all the variables:
– Financing
– Fix-Up Cost
– Fix-Up Time
– Added Value
– Market Time
– Negotiation
– Transaction Management
– Appreciation
– Financing
Obviously, you want to get as low cost of a loan as possible and avoid any prepayment penalty.
– Fix-Up Cost
Whether you DIY (do it yourself) or hire it out makes a big difference. If you hire it out, do you pay full retail or find a way to save money on labor and materials?
– Fix-Up Time
You may not be as fast as Extreme Makeover Home Edition, but planning ahead (before you even close) and keeping a good pace on the repair work saves you time and money.
– Added Value
This is key. Some people freshen up a blah home and add a little value. Others dramatically transform a home and really pump up the value. In the 80s, I sold a friend of mine a home. He took this filthy pig pen of a home and transformed it into a showplace. Plus he topped the neighbors trees and opened up a fabulous bay view. He was rewarded handsomely.
– Market Time –
Get a good agent to give you honest pricing advice and market the heck out of it. The last thing you need is to watch your profits erode as the home languishes on the market.
– Negotiation –
Again, a good agent can often squeeze an extra $2,000, $10,000, even $50,000 more for you in negotiations. And a bad one can give just as much away.
– Transaction Management
This means not having your escrow fall out at the last minute. It also means managing the process so your escrow closes on time and it means holding your costs down when negotiating repairs and avoiding other junk costs.
– Appreciation –
During the recent blazing hot market, many people paid market value, barely improved the home, and still made money strictly from appreciation. In fact, many investors mistook market timing for genius and later lost their shirts when the market changed and didnt bail them out of bad investments.
I know, thats a bunch of theory. And you were hoping for a %. So Ill give you one, but dont hold me to it.
On average, in a flat market, for a home where youre going to do some quick basic cosmetics, figure that you need to buy 15-20% under market to make a buck.
And finding a value like that is NOT easy. Good luck!
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