One of the most important aspects of making sure your fix-and-flip venture is profitable is knowing how much you should pay for a property. When you add on the cost of any repairs and renovations you make to a home to the price you paid, you need to be able to sell the home for more than that amount in order to consider the project profitable. If you end up paying too much for the property, you will struggle to break even when it comes time to sell. The following tips will help you determine how much you should offer when you’re buying your next flip property.
Calculate the ARV
The ARV, or after repair value, refers to how much you can expect to sell the home for when you’re done renovating. Starting any project without knowing the ARV already puts you at a disadvantage. The best way to accomplish this goal is to work with a realtor you can trust. Their knowledge of the current market, as well as how much similar homes in that area are selling for, is invaluable in determining what you can expect buyers to pay. Focus on homes that recently sold, rather than those that are currently listed to ensure you know how much buyers are actually paying versus what other sellers are expecting. Only use data that is three to six months old because of how rapidly the market can change.
Determine Your Costs
Renovations will always cost money, whether you handle them on your own or hire contractors to complete them for you. The cost of these repairs and renovations is critical to determining how much you should pay to ensure you can make a profit in the end. Some changes, such as new carpeting or painting a few rooms, can be done rather affordably, but if the home needs more extensive work, be sure you get several quotes from contractors, so you know exactly how much to budget. Keep in mind homes that require more extensive repairs are a riskier investment than those that simply need cosmetic changes or upgrades because of the risk of hidden problems you may uncover through the process. Always plan for a few extra expenses to give yourself a cushion.
Don’t Forget Other Expenses
When calculating your costs for your fix and flip, don’t forget about the usual real estate costs that come with this type of investment. You will need to cover closing costs when you purchase the home and may even pay the buyer’s closing costs when you sell, if that’s part of the deal you make. Unless you have the funds to invest yourself, you’ll also need to get a loan to buy the property, which means making payments with interest until you’re able to fix and resell the home. Finally, if you work with a realtor, there will be commissions to pay on the selling price of the home. When calculating how much you should offer for a property, don’t forget to factor in these costs as well.