Fix & Flip Foundation

Fixing and Flipping a property means you buy a property, repair and or renovate it, and then sell it. Sound simple? It is, actually. And it’s also really challenging to implement, at least on your first few properties. Like most things, it gets easier with practice.

So what are the essential elements you need to know before getting started?

  • What is the value of the property in its current condition which you are going to flip?  This is commonly referred to as CMV or Current Market Value.
  • What is the likely value of the property once it has been renovated? This is commonly called the ARV or After Repair Value.
  • What is the cost of the renovation, meaning what is your budget for the repairs and renovations?
  • How are you going to pay for the property, the renovations, the holding costs, and the cost of capital (the money you borrow to purchase and repair the property)?

To help you get started, here is a quick formula of the costs and profit associated with the purchase and repair of a property.  In this example it does not consider using a financing lender nor private investor to help pay for the project.

What this example shows is that if you purchase a $350,000 property at 65% of its ARV and complete a standard renovation with a budget of $35,000, the project will net you nearly $51,000 in profit which equates to a 19.7% return on the total amount of money you invested in the project.

So, how do you get started?  The first thing you should understand is how to calculate the CMV and the ARV. Those are two of the foundational pieces to investing in real estate. Here are some guidelines to begin.  They are the same for both ARV and CMV. The difference lies in choosing to compare properties in similar un-renovated condition to the house you are considering to purchase (CMV) to a fully upgraded house (ARV). Use comparable property sales (“comps”) using  the following guidelines:

  • Within ½ mile of the target property. We are looking for similar neighborhoods and types of houses
  • Within 100-150 square feet in size of the target property
  • Same number of bedrooms and bathrooms
  • Similar years when the homes were built
  • Look at the condition of the properties as best you can from available pictures. For CMV you are looking for houses in similar condition inside and out. For ARV you are looking for houses that look very upgraded. You want to estimate your projected flip as the 2nd best property on the market meaning don’t use the highest comparable sale as your target ARV but rather the second highest
  • Properties sold within the last 3 to 6 months
  • Be aware of houses very close to or on busy streets or near commercial areas or power lines or railroad tracks
  • When practical, use the advice of a local real estate agent. Often they are willing to provide a CMA (current market analysis) if you are working together on purchasing and/or selling a property
  • Another option is to obtain an appraisal. These can be costly and often determine a higher ARV than is realistic for a market
  • Consider also the seasonal nature of selling houses, especially in the colder climates
  • Finally, you want to sell your finished property quickly. For this reason, it is prudent to err on the side of estimating a lower ARV (quick sale price) vs being the best on the market. Yours may look the best to you but that doesn’t mean it will sell more quickly at a higher priceOnce you’ve mastered the art and science of determine the CMV and ARV of a property, you’re ready to get started searching for a property to purchase and flip.  How to pay for the property and the renovations will be presented in the next article.