The key to success is in the numbers when it comes to flipping. There are a few key numbers to consider when you start flipping, and you will decide what houses you’ll flip and which ones you’ll pass on based on these numbers.
So, which is more important, purchase price or sales price? There’s actually a third number you’ll need more than anything else.
The purchase price for a home is the amount of money you agree to pay to the seller for a house, and the purchase price is entirely up to you.
Keep in mind, this is not the same as the asking or listing price of the home. A listing price or asking price is a starting point for the purchase price, but the actual purchase price may be higher or lower depending on several factors.
The purchase price might change for a number of reasons. For example, agents may underprice a home to draw a lot of attention and potentially create a multiple offer situation.
The purchase price can also change based on what others are offering. If the seller gets multiple offers, the price is often hiked up, while little to no offers can get you a lower price than asking.
Remember, there are always options when you’re flipping. You can choose what you will offer for a home, and in exchange, you may include other concessions that improve the strength of your offer. These concessions include inspections, closing costs, length of time until the closing date, and the type of financing you may use for the purchase.
If you have solid numbers with which you’re comfortable, you may want to increase your offer provided the potential profit supports it. How you approach your offers will be on a house-by-house basis.
As you can see, you have some control over the purchase price. On the other hand, the sale price, also known as the ARV or after repair value, depends on the market. Supply and demand are key to driving the real estate market.
Even if you price a flip home for sale based upon the comparable sales data (which you should) if your flip is well done, and in an area where choices are scarce, you may find yourself selling about listing price.
A note of caution here: It’s better to price at market and let the buyers determine if the price should be higher. Typically, what will happen is you’ll know pretty quickly by the amount of activity (showings) and interest. As that progresses, there will likely be offers received and if there’s more than one, you’ll see not only an increase in price but also perhaps a waiver of inspection, a quick closing date, and maybe even a cash offer.
As a flipper, you see both sides of the coin here. To ensure your flip is profitable, you’ll want to think ahead. That brings us to the most crucial number as a house flipper.
The Most Important Number
We touched on purchase and sale price, both numbers you need to know and consider before walking into a home. But the number that really matters is the cost to renovate the house.
If you don’t know what number that is, you’ll truly have no idea if profit will be made. That means you’ll be missing pertinent information for the best offer and purchase price and may find yourself in a tough spot when it’s time to sell.
If a purchase price is $300,000 and the resale is $500,000 even with a $100,000 renovation, your project will still be profitable. In this situation, if your renovation budget is $150,000, then this isn’t so profitable once you take out other expenses.
While you don’t need an exact renovation number to determine if you should submit an offer, you do need an estimate.
If you’re new at flipping and unsure how to estimate renovation costs, do your research and start with a budget. According to Home Advisor, the home renovation average across the country ranges from about $18,000 to about $77,000. First, be picky about what homes you go to view, and make sure it’s in the location you like. Check out the photos and any other information before making the trip to see the home in person.
Before you make an offer on a home, consider how much you believe a renovation would be, how much you would need for the sale price, and make an offer that falls in your budget.
Ready to take that next step when it comes to flipping?
Perfect! I’ve got additional resources to help you get the information you need to move forward on creating your flipping life.
Make sure you have the Fixer Upper Checklist so you know which areas are key to added value in a home.
There are several videos available on finding houses, renovations, and funding on the Threshold Homes YouTube Channel. Check out your favorite flipping topics and new videos weekly.
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