May 26th, 2016
WHY DO BOTH HGTV AND DIY NETWORKS HAVE SO MANY FIXER-UPPER AND FLIPPING HOUSES SHOWS?
© 2016 by M. Mitch Freeland
The simple answer to the popularity of fixer-upper shows is the premise of attacking an ugly house and making it beautiful—or maybe it is Chip and Joanna Gaines and their stunning personalities. Perhaps? But more likely a combination of comfortable, cozy, and warm interior and exterior designs with two personalities that complement one another.
The business of flipping fixer-uppers is part art and part business. To do a successful fixer-upper you have to think artistically--have the imagination to see the finished product. As for the business end of it, you have to run the numbers, do your comps, and sell the property for a healthy profit.
What is Flipping Houses Exactly?
Flipping is buying a property and holding it for a short period of time, usually under a year, then selling it for a profit. Most flips, and we would assume (no information to support our assumption) that 99% of all flips are sort of slimy. To get the best deals (prices), you need to get the houses that have been seriously neglected--the ugliest of ducklings pay the largest return on investment. The house that nobody wants--nobody except an experience, professional flipper.
Flip properties are properties that are typically rundown when purchased, fixed up or completely renovated and resold at a reasonable market price. They are typically purchased at low prices because they are usually inhabitable in their current condition or have had interiors that are extremely outdated and unwanted among the vast majority of buyers.
You purchase a property at 20% below value; you think it is a good deal. You then resell it without doing any fix up work to it. You price it 5% to 10% under appraisal for a quick sale. You sell the property yourself to minimize your costs. You make about 7% to 10% on the value of the house. If you paid a commission to an agent you would make about 3% to 5%, on average. The percentages are not big enough considering the risk. I do not recommend doing a “Plain Flip” unless you acquire the property at 60% of appraised value.
Quick-Fix and Flip
This is the correct method of doing a flip that will ensure you the greatest return on investment with the least risk. A quick fix is typically two to three weeks. However, many of the projects you will undertake will take about four weeks. Here you will be adding value to the property by making improvements that will force the appreciation and give you the advantage to make a much greater return on your investment. Here is an example of a quick fix.
You purchase a post-foreclosure fixer-upper for $105,000; it is a 3 bedroom, 2 bath house in a lower working class neighborhood, with 20% down ($21,000). You assess the fix-up to costs $15,000 and it will take about three weeks to fix. The fixed up homes in the area are valued at about $180,000. You decide to list the property for $170,000 after it is fixed. Your costs including fix up is $122,000, carrying costs of $2,000 included. Two months pass and you get the property under contract for $165,000. You sold the house yourself and saved 3% sales commission, but you also paid out 3% or $4,950 sales commission to the buyer’s agent and another $900 in closing costs and title insurance. Your total purchase price, and costs total $127,850, less your sales price of $165,000 and you have a profit of $37,150. The transaction closed in 30 days and you made 30% in three months. You put up $21,000 cash $15,000 for fix up and another $2,000 carrying cost. Your profit is almost 100% from the cash you put up (Total cash outlay: $38,000 vs. $37,150 profit).
The house in the photos was one of over a hundred fixer-uppers we completed. The house was purchased from a foreclosure auction for $93,000. Fix up costs was $33,000 and the house was appraised at over $235,000 after fix up. If you would like to participate in fixer-uppers with us, shoot me an email: MMitchFreeland@gmail.com
To learn more about flipping or how to make offers that get accepted, get a copy of The Millionaire Real Estate Flippers or 5 Day Flip: How to Get Offers Accepted Fast on Fixer-Uppers by M. Mitch Freeland and John Freeland. Available on Amazon.
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