Question:
“How much under-market do I need to buy a home to make money on a fix-and-flip?”
Answer:
There’s 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 a loan at the lowest cost possible and avoid any prepayment penalty.
– Fix-Up Cost –
Whether you 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 80’s, 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 neighbor’s 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 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 didn’t bail them out of bad investments.
…I know, that’s a bunch of theory. And you were hoping for a %. So I’ll give you one, but don’t hold me to it.
On average, in a flat market, for a home where you’re 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!
