One of the popular strategies in real estate investing is to buy a property that needs some fixing, do the work, and then resell at a profit. Sounds easy, right? They do it on TV all the time.
The truth is …..to fix and flip, you HAVE to know the numbers and formulas first. The most important numbers are the price you pay for the property, amount it costs to rehab, and the ARV–After Repair Value. Also figured into the formula are the holding costs–profit, realtor fees, closing costs. And it’s best to have a cushion for mistakes or unknowns too.
And there’s more… the process, understanding the timing, having systems in place, figuring out the materials, labor and ALL costs involved. Also keep in mind, today it can be tough to get GREAT contractors who are available on your timeline. With a list this long, a lot can go wrong and often does.
To focus on getting a great deal in the first place many of you have heard of wholesaling. It’s buying a property at a deep discount and acting as a middleman by selling it to another investor. (If you’re a rehabber looking for deals, it’s great to know the people who are wholesalers. I do.)
Another strategy is to WHOLETAIL. What’s that? Wholetailing involves buying a property at a deep discount but instead of selling to another investor, you rehab the property “just enough” so that it can be sold on the MLS for retail profits. Essentially, it’s a mix between a wholesale deal and a rehab deal.
Let’s do a real life example from a property in Georgia…excerpted from FLIPNERD.
· A property built in 1999 is roughly 2,100 square feet
· ARV (After Repair Value, remember?) is $185K
· Approximately $28K is needed in mostly cosmetic repairs
· You buy the property for $105K (72% of ARV). In a seller’s market, 72% is a great deal.
· If you decide to wholesale it, sell to another investor for $114.5K with a potential of $9.5K profit. The upside? No risk and a quick transaction. The downside? With a little clean up, you could have profited more.
· If you wholetail the property, you spend $2K fixing it up so it can be put on MLS. With this deal, you’ll have some costs–holding, financing, closing–which in this deal was $17.4K. It’s important to know all the costs. The upside of this deal? Your wholetailing profit after closing (at $145K) is $20.6K! Downside? More risk and cost involved, but maybe worth it if you know your numbers.