House Flip Pricing—Expectations vs. Reality
One of the most important issues to plan for when renovating and flipping an investment property is price. What can you realistically get out of the house once it is fully renovated and listed for sale on the open market? Will that price cover your purchase and renovation expenses, while also leaving enough room for a healthy profit? Is the juice worth the squeeze? These are good questions to ask when it comes to house flip pricing.
It should all start with your property analytics process. You have to study the market (location, floor plan, property size, what similar homes in the neighborhood are selling for, etc.). This will help you get a solid estimate for the home’s value once it is fixed up and ready to sell. You want to be very detailed during the analytics phase. This is where many real estate investors make a major mistake. They either underestimate renovation expenses and/or they overestimate the property’s ultimate resale value. Both of these mistakes can lead to a lot of lost money!
When it comes to property analytics and renovation budgeting, you want to account for every detail. It’s also smart to build some cushion in your budget. Very rarely does everything go exactly as planned during a remodel. It may end up taking longer than anticipated. There could be problems and added costs that come up during the process. Be conservative with your construction budget and project outline. This gives you some wiggle room to expect the unexpected. If your margins are super tight from day one, you will likely find yourself in a tough position by the time all is said and done.
Next, you have to estimate how much the property will be worth after your renovations are complete and it is ready to sell on the open market. You should study the market and comparative homes before you buy the house. You will also need to understand the ebbs and flows of the real estate market. If your renovation is going to take six months, you could be looking at some different market conditions when it actually is time to sell. The market could go up or come down. There is a lot to research to do and this will help you get at least a realistic range for the selling price.
Having a house flip price range is a smart idea. There should be a rock bottom price you are willing to accept that still gives you enough profit to be worthwhile. Never plan your fix and flip or commit to buying a property based on the highest end of your projected resale price range. Assume you will get the lowest possible price. If there is enough meat on the bone to cover the purchase price, renovation costs and acceptable profit, then it should be a good investment. Again, don’t make the margins so tight there is no room for error.
House Flip Example
Let’s say you are able to buy a house for $200,000 and you are projecting your renovation costs to be between $75,000 (best-case scenario) and $100,000 (worst-case scenario). Based on real estate market trends, the property location and the home’s size, design and floor plan, you estimate it should sell for somewhere between $400,000 (worst-case) and $550,000 (best-case). To do your math, you want to look at the highest end of the renovation costs ($100,000) and the lowest end of the resale value ($400,000). In this example, you would be spending $300,000 to buy the house and renovate it ($200,000 purchase price plus $100,000 renovation costs). At worst, you should be able to sell it for $400,000. This gives you at least $100,000 in potential profit.
If that $100,000 number is within your desired profit range, then this would seem like a good investment. If it is not enough to be worth your while, then you may want to move onto another property. The key is not to make your decisions based on the opposite numbers (lowest renovation costs and highest resale value). It is great if you are able to keep your renovation budget lower and/or the sales price ends up higher. That just gives you more profit. However, you shouldn’t plan expecting the best outcome. Plan for the worst and hope for the best.
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