Planning a Profitable Exit – Rehab and FlipIn our years as a Real Estate Investors we have found the need to know and work many different exit strategies. One of our favorites has always been the Rehab and Flip strategy. We have even found this strategy can be used when acquiring a property through a short sale, equity partnership, subject to, and other of the ProfitWize strategies that are available to us today. Still, even with the vast array of possibilities, the Rehab and Flip model has always offered the highest yield in short term profits.Of course, with the higher profit potential of the rehab and flip profit model, there is also a higher risk. It stand to reason that the higher risk equals a higher potential reward. With that being said, you must understand that if this is your first ever rehab and flip deal then you will benefit from a few pointers that will help you to minimize your risk.
Make your Money When You BuyI know you have heard this said many times, “You Make Your Profit When you Buy, Not when you sell”. That is especially true in a rehab a flip. That means one of the key factors to a successful rehab and flip is first know what you can sell that property for when it is completed.Finding that value, what we call the ARV (After Repaired Value), is not rocket science. It is a simple process of looking at the comps of recent sales in the neighborhood. That is assuming you have comps in that neighborhood. If you don’t, then you may need to reconsider your strategy. After all, if there are no recent sales, then there may be no buyers.When looking at comps try to find the properties that are most similar to your subject. That is to say that they are close in age, close in size and within the same neighborhood. Keep in mind they don’t have to be exact matches, just reasonably close. I will even use a 4 bedroom comparable as a comp for a 3 bedroom subject. The difference in value us usually attributed to the square footage and not necessarily the added bedroom.After you have found your ARV, and you now know what it may sell for, the next step is to be sure your offer allows enough room for you to cover your expenses and your profit. A typical model for that is ARV – 30% – Cost of Repairs = Maximum Allowable Offer (MAO)Once you have determined your MAO, then submit your offer. Just remember, you will always need to keep a contingency clause in your offer agreement, something like “Subject to satisfactory inspections…..” That will give you a way out if you should find a problem with your deal.
Do your Due DiligenceAfter you submit your offer and get it accepted, the next step in the process is to do your due diligence. That means you need to bring in your home inspector, call your contractors and gather more accurate estimates for repairs, double check your comps with your realtor, and then verify that all your numbers still work before moving ahead with your deal.I have found that during this period, you may still have some leverage with your seller to negotiate a better price if you find additional problems with the property. Although for most sellers, a problem worth renegotiating the price is not generally a cosmetic issue. That means that if you find your kitchen or your flooring is going to cost you more to repair than you thought, the seller will probably not care. However, if you find other problems that may not have been visible at the time of your initial walk thru, like say a roof leak, moisture or mold problem or major systems issues then they may be inclined to adjust the price and complete the deal.
Mind your BudgetThis is one of the most important parts of a rehab and flip deal, your repair budget. Believe me, it can be so easy to let this budget run away with your profits. There is a little thing called a “While-ur-at-it” that eats your profits for breakfast everyday if you let it. I know how easy it can be to let the while-ur-at-its run away with you. Things like your painter saying hey, while were at it, how about we put in some extra crown molding, it will only be an extra $200. Be careful, whenever that happens you may think, well it is only $200, but after a few of those that quickly becomes $2,000 and before you know it, the while-ur-at-its have eaten you profit all gone.
Price it rightFinally, after all is completed, and your ready to put your new property on the market, the final step is to be certain you price it right. So now it is time to take one final look at the neighborhood market and then set your listing price. I even take a look a the the other listing in the area to get to know my competition. That helps me to know what else is out there, and how my property looks up against them. The last thing I want is to find a nicer property for a lesser price, and knowing your competition helps you to avoid those embarrassing pricing mistakes.When pricing your property for sale the last thing you want to do is price it wrong. If it is too high your property will sit there doing nothing more than helping your competition to sell. If it is too low, well that just means you left money on the table and that can be just as bad as pricing too high. You really want to be in the middle.Your property will get the greatest exposure to the market in the first 30 days. If you price it too high from the start you may miss that flurry of activity that happens with a new listing and give all your profits away in holding costs. Of course, even if this happens it is not the end of the world, it just means you need to be able to switch gears and use a back-up strategy. For me, whenever I get into a rehab and flip deal that I cant sell, and yes it has happened, then I know I can still profit by switching to a rehab and rent or even offering the property as a lease option.Always remember, it pays large dividends to always have a plan B.