This question is at the top of the list when people are getting started house flipping. And while I wish there was a magic, no-fail formula for success; there simply isn’t one.
It’s also accurate to say that different houses with different price points will have different budgets. Larger houses will have more bathrooms, which impacts your plumbing costs and your material costs (more tile and more vanities, etc.). Houses that will sell for a higher resale will have different finishes…you get the idea.
Here, I am going to lay one of two ways you can create budgets for house flips. Remember, in either situation, you need to know what the ARV (after repair value) of the house will be. This needs to be a number that is supported by comparable sales.
This first way will use a standard calculation with you deducting your minimum acceptable profit. I know what you’re thinking. But Amber…I want to make as much money as possible on my flip.
This isn’t a “get rich quick type of deal”.
Here’s what I have learned over the past 12 years.
- You have to start so you can learn. If that means you make $20,000 then so be it. You have to first know how to flip a house if you are ever going to get to the $40,000 or 450,000 profits.
- If you set yourself up with a profit before you get all the bids then you are already cutting into your profit if those bids don’t come in where you thought they would.
- When you squeeze the budget so you can make more on the back end for profit (especially when you are just getting started), you may have an end product that leaves buyers feeling less than excited. Poor workmanship, details missed and inexpensive materials. And if the house ends up sitting on the market because the renovations fell short then your profit is taking a hit too.
Here is how I suggest putting together a budget (when you are just getting started). You do not need to have a house under contract to do this.
1. Before you ever write an offer on a house, call contractors and get price ranges for repairs.
Here’s an example: Call local HVAC companies and ask what standard installation costs are for replacement A/C and furnace systems. Be specific. Ask what the cost would be to also install ductwork in a 1000 square foot basement finish to find totals.
So let’s say you have a house that is $100,000. The comparable sales show that an improved home in that area will sell for $$250,000. Even though you may be hiring a general contractor for your job; I would suggest you check numbers on the primary areas of a renovation.
- HVAC
- Plumbing
- Electrical
2. Create a spreadsheet and input the numbers for each of the trades you collect pricing on
This is the prep work that is going to get you thinking like a professional. Create a spreadsheet with the name and phone numbers of 5 companies. A bonus would be to get a ballpark idea by having another investor give you a range. I have a few local companies I use but sometimes the range can vary anywhere from $9,000-$20,000.
Start with Google. I typed in “average cost for replacement furnace and A/C and the range was in line with the local contractors in my market. ($8000.00 to $15,000.00)
Your spreadsheet with the example above will look something like this:
| Purchase Price | $10000 |
| HVAC | $8000 |
| Plumbing | $8000 |
| Electrical | $10000 |
| General Contractor | $5000 |
| Total: | $176000 |
3. Add in a number for the general contractors’ portion of the job
When you have a general contractor bid on a job they will get bids from these subcontractors and include them as part of their bid. You can request that in their bid they line item out each of these areas so you can see what the cost is.
Don’t be afraid to ask them what the actual cost is so you can more easily determine the cost. They may have an HVAC contractor who is 10,000. But you may have spoken to a company that said they charge $8,000. In this case, it may be worthwhile to have the second company also provide a bid.
You could make $56,000 even after expenses for purchasing and closing if you were to sell the house for $250,000.
(5% of purchase price = $5,000)
(5% of sale price = $12,500)
There may also be some holding costs you would need to deduct. There may be some additional items to include depending on the renovation. Now in certain markets finding a house for $100,000 may be easy. In many, it may not be. You can increase your purchase price if you applied the strategy where you adjust your profit to $20,000- $30,000; by doing so, you can expand your buying range.
Tip – it may be worth the extra cost to use subcontractors your general contractor has worked within the past. You can save yourself more money in the long run by working with someone you are familiar with.
I hope this scenario is helpful in transitioning the process of analyzing deals. Feel free to send me an email at amber@thresholdhomesmn.com if you have any questions.
Don’t miss the post next week where I will discuss a slight variation on putting together a budget. There will also be some tips and you can use them when you are getting bids. That way, you can make sure you are being most efficient with your time.
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Amber
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