How to Evaluate a Fixer-Upper for House Flipping

The post How to Evaluate a Fixer-Upper for House Flipping by Sarah Edwards appeared first on Benzinga. Visit Benzinga to get more great content like this.

You may be ready to scoop up a fixer-upper for house flipping, but do you know how to evaluate that cheap home and turn it around for maximum profit? 

A house listed well below market can be enticing, but hidden problems could have you underestimating repair costs and overestimating its resale value. A proper assessment can be the difference between making and losing money.

To help you get started on the right path, here’s an up-close look at evaluating fixer-uppers. 

7 Steps for How to Spot a Good Fixer-Upper

To improve your odds of successfully flipping houses, here are the seven steps to follow.

Step 1: Evaluate the Location and Neighborhood Potential

Finding a profitable fixer-upper for house flipping requires research. You want to find an under-market home in the right location, which means identifying a neighborhood with potential for growth and rising prices.

An ideal area has good schools, public transportation, and access to shopping, dining, parks and other amenities. You should also track crime rates, watch demographic trends, keep an eye on infrastructure projects and business growth, and compare the property’s price and an after-repair value to homes that have sold nearby.

Step 2: Estimate Repair and Renovation Costs Accurately

An accurate estimate of your renovation costs is critical to successfully flipping a fixer-upper for a profit. Create a detailed list of cosmetic fixes to major structural repairs before you buy a property.

Consider hiring professional inspectors and check these parts of the home:

• Lawn, driveway, roof and siding
• Electrical system
• Plumbing, pipes and components
• Foundation
• Heating, ventilation and air conditioning
• Attic and insulation
• Flooring and walls
• Appliances

With your detailed list, get at least three bids from licensed and reputable contractors, factoring in unexpected costs and local prices for materials and labor.

From here, you can use the “70% Rule” to calculate the maximum bid to make for the property. The rule of thumb says you shouldn’t pay more than 70% of the after-repair value minus the cost of repairs and the cost of renovations (ARV x 0.7 – repair costs = maximum offer).

Step 3: Calculate the After-Repair Value

The after-repair value is the estimated worth of the home after you’ve made renovations. It can help you determine whether a property might be profitable.

The ARV must be anchored in real data rather than blissful optimism. Use sales of homes comparable in size and age with comparable renovations to determine an ARV.

If nearby homes are selling for an average of $200 per square foot and your property is 1,500 square feet, then the ARV would be calculated as: $200 x 1,500 = $300,000.

Then, you can subtract the total cost of your investment (purchase price, renovations, holding costs and closing costs) from the ARV to get your potential profit. Divide the potential profit by the total investment to get your return on investment.

If the property costs $200,000 and your total expenses are $50,000, subtract $250,000 from your ARV of $300,000 for a profit of $50,000. Then, divide $50,000 by $250,000 to get an ROI of 20%.

Step 4: Consider Holding and Transaction Costs

Hidden expenses can eat into your profit margin in house flipping, so you should budget and build in a contingency fund. Consider these potential expenses:

• Holding costs: Property taxes, insurance, utilities, homeowner association fees and financing costs
• Repairs and inspection costs: Unexpected repairs, permits, code compliance and trash removal
• Cost of delays: Construction delays caused by weather or inspections
• Selling costs: Agent commissions, marketing and staging costs, closing costs, and buyer concessions
• Taxes: The sale is a short-term capital gain taxed as ordinary income

Even if you hold the property longer than a year to avoid the short-term gain, your holding costs, also known as carrying costs, are likely to eliminate any tax savings.

Step 5: Assess Market Conditions and Demand

To predict property values, gauge demand and identify neighborhoods on the upswing, you’ll need to analyze local real estate data, demographic trends and economic indicators. Consider working with a real estate agent to get the average days on the market for the area.

Fix and flip during spring and summer when home buying picks up and the weather is conducive to completing renovations without delays. However, keep in mind that competition and the costs of materials and labor rise during the summer.

Consider assessing the job market, home value trends and interest rates, which can all influence buyers.

Step 6: Spot Red Flags Before You Buy

If you want to know how to spot a good fixer-upper, you must know the red flags to look for.

• Structural problems: Foundation cracks, water damage and roof issues
• Unpermitted renovations: They can result in violations, tear-downs and denied insurance
• Environmental issues: Pests, mold and asbestos
• Location challenges: Is the home in a declining neighborhood or near a busy road or industrial site?

You can protect your profitability through due diligence, thorough research and an inspection.

Step 7: Run the Numbers and Decide

Whether you buy a property will depend on your profit projection, which involves itemizing and totaling all revenue and expenses. You can use a spreadsheet for the calculation or find a house flipping calculator online.

To project a profit, subtract your total expenses (purchase price, renovation costs, holding costs and selling costs) from your revenue (ARV). It can look like this:

Consider building a trusted team, including real estate agents, contractors, inspectors and property appraisers, who can help you accurately evaluate properties.

Smart Evaluation = Successful Flip

Flipping houses can be lucrative, but it requires due diligence, accurate budgeting and realistic expectations. The numbers, not emotions, must drive decisions. Start small, follow the data and leverage professional inspections before you close on a fixer-upper for house flipping.

Frequently Asked Questions

The post How to Evaluate a Fixer-Upper for House Flipping by Sarah Edwards appeared first on Benzinga. Visit Benzinga to get more great content like this.