Purchasing fixer upper properties has become very popular in recent years. That’s partially due to the number of shows focused on the topic that currently fill daily television programming.

However, what is shown during a 30-minute to one-hour program is hardly able to include the whole story on the negotiation process, all the issues that arise while renovations are underway or how to price the flip correctly at the end of the project so the most profit can be generated.

Hard money lenders now specialize in financing fix and flip properties to help those drawn to the practice succeed. Along with the availability of financing for such projects, with the upturn in the market it’s obvious the time is ripe to become one of the many flippers in the nation entering the industry.

However, it all starts with the right fixer upper at the right price, knowledge of the potential costs of renovations, an established time-line for work completion and asking the right price when the completed project is put back on the market.

Selecting the Right Fix and Flip Property at the Right Price

Before looking for potential properties to fix and flip it’s important to determine the price a buyer should pay. It’s termed the After Repair Value and is a critical first step in knowing how much should initially be paid for the property as well as to calculate how much it will sell for.

By combining the AVR and projected costs for repairs, negotiations go much easier both when buying and when selling. To determine the AVR, analyze the sales price of comparable properties in the same area rather than the asking price. The properties evaluated should be as similar to the one being considered as possible.

In other words, if you’re looking at a single story ranch, disregard any two story Spanish style homes. If you’re considering a 2-bedroom fixer upper then ignore comps for 4-bedroom homes.

Additionally, look for properties of comparable age, square footage, lot size, with similar features (such as a swimming pool) and any other key features that may affect the price. Remember that the comp data collected and analyzed should be no older than 120 days.

Price to Pay vs Price to Sell

Whether buying or selling a fix and flip, there will be negotiations. Neither buyers nor sellers want to feel taken advantage of while both also want to feel like they got the best deal possible.

When buying a fix and flip, go in with eyes wide open. If homework has been done in advance, you will know how much it should sell for at the end, but if a house is bought without a thorough investigation, a fix and flip project can quickly become a money pit.

Older homes may need extensive and expensive updates in order to be brought up to code. Knob-and-tube wiring, clay sewer and drain pipes or pipes filled with lead and zinc (prior to 1986), inadequate insulation, stairs out of code and a whole host of other issues could be problematic but can also be used to negotiate a lower price.

More expensive projects such as leaky roofs, old heating and cooling systems and foundation issues can also be a plus when negotiating an offer. The important thing is to be aware and make sure to have a sufficient budget and time-line to ensure the work has been done right. Always make sure you have a real estate agent explain why you’re offering the price you are to the seller rather than contacting them yourself.

When negotiating, both when buying and selling, make sure that all offers are responded to as soon as possible. This will help to avoid a bidding war. Most importantly, keep all emotions under control and don’t take whatever is offered personally.

That’s often difficult for flippers to do since they put so much of themselves into each project. Even after the contract is signed, something may come up that will require a slight negotiation and in this case it’s important to deal with buyers in a reasonable way.

There is a simple formula for calculating the price that should be offered at the beginning of a negotiation. Begin with the AVR price then subtract the renovation, financing, closing and holding costs. Next subtract the amount of profit. Experienced flippers generally expect a 10-15% profit based on the AVR.

The amount offered should not go over that total. For example, begin with the AVR of $200,000 – (renovation budget $30,000 + est. final expenses $15,000 + profit $20,000) = $200,000 – $65,000 = $135,000. That’s the purchase price. Many flippers will add a dollar or so just to let the sellers know they’re serious.

During the renovation it’s important to keep accurate records on actual expenses since errors will eat into profits. At the end of the project many inexperienced flippers will say, “I spent around $30,000.” However, when the bills start coming in they discover that they went way over that amount. Since the actual cost of the renovation needs to be calculated into the sales price, accuracy is critical.

Just like with the formula for calculating the price of the offer, the sales price is figured out with the same formula only utilizing actual numbers and starting with what was paid for the property. The only difference is that instead of adding in the 10% profit margin, begin with a 13-15% profit margin.

That way there is room for negotiation that will ensure the desired profit is made. Also calculate in contingencies such as the buyer asking that closing costs are covered. Of course, it’s better to accept an offer without contingencies, but it’s something that needs to be considered.

Negotiations, both when buying and selling, should never take more than 2-3 days. Longer delays sends a negative message. It also opens the opportunity for a bidding war which could lead to a higher price. The goal of flipping is to buy low and sell high.

A couple other things to remember is that to get a fixer, there may be additional upfront costs such as the broker’s commission, closing costs, title fees, transfer taxes, unpaid taxes, lien releases, recording fees, etc.

A real estate agent should be able to estimate all-inclusive closing costs based on the information that has been collected as well as other sales in the area.

The success or failure of fix and flip properties is more about buying and selling at the right price than it is about anything else. The goal is to make a profit so success can build on success. However, it takes some work prior to starting, while working and especially at the end.

If the numbers aren’t accurate you may find that although it appeared you made a profit on the surface, you really didn’t make anything at all. Protect yourself by knowing what to expect then being as on-top-of-things as possible.

Call Orchard Funding Today

Let us help you navigate the complexities of a fix and flip home by providing the necessary capital to secure a smooth flipping process. When investing in this business, it is important to have a professional lender on your side.

If you’re thinking about buying a home that you plan to renovate, Orchard Funding can give you a fix and flip loan. Our underwriting process is easy, and we can approve you in 24 hours or less. The application process is straightforward and some cases no appraisal is required.

If you’re thinking about getting a fix and flip loan, contact us online or call (310) 356 – 7373.