1. Find a Property
The first and most important step in this process is finding the right home to flip. This includes location, size, etc. Though all methods of buying a home are possible, many flippers prefer direct sales from the homeowners (called “For Sale By Owner” or FSBOs). These owners are typically very motivated to sell, there’s no realtor to be paid, and there’s more time to evaluate the home than there is at an auction. Explore all of your options because there’s no one specific way of buying your property!
2. Determine the After-Repair Value
Once you have found a property, it’s time to figure out its after-repair value, or ARV. This is how much you can likely sell the house for after you’ve done the necessary updates and appropriate upgrades. The ARV is speculative, but your success depends on it, so it’s crucial that you do as much research as possible here. Get to know the neighborhood you’re considering working in, find out what buyers in this area and price range will pay for, and study recent comparable sales, or comps. All of these can play a huge part in your ARV.
3. Do the Math
Once you’ve determined the property’s potential ARV, the next step is to work with the numbers to figure out how much you can pay for the house and still turn a profit. People all over the country that are flipping houses all across the country use the same basic equation to determine their maximum purchase price. The equation gives you a starting point; each deal requires fine-tuning based on specific projected costs and situations. To do the math, you’ll need to have a renovation-and-repair budget and timeline. The timeline will help you determine the likely financial costs and carrying costs. And you need to have a target-profit margin. Most flippers aim for a profit of 15% of the ARV, which can always be adjusted based on personal goals.
4. Purchase Property & Get to Work
Two sure ways to diminish your profits are to blow the renovation-and-repair budget and/or timeline. Your renovation-and-repair plan should be based on what buyers are willing to pay for in your specific market. In many markets, “upgrades” will never yield a return from cost-conscious buyers—they will only lower your profit
5. Sell for a Profit
Don’t waste any time getting your property back on the market once you’re done with the renovations and repairs. Not only will you continue to incur carrying costs as you wait to sell, but the likelihood of the market changing increases. If you did your research, your property will now be precisely marketable to buyers looking for homes in your neighborhood in the price range of your speculative ARV. This is the final step, so do the research and it’s time to get that house sold!