ArticlesFirst Time Flippers Advice for Finding Your First Real Estate Investment
Flipping a property usually involves finding a home that is listed below market value, performing the needed repairs and renovations and then reselling it. But finding a property to purchase can often be quite difficult for would-be flippers. The biggest trap we see first time flippers fall into is purchasing a property that is in need of simply too much work. The scanerio we usually see looks something like this:
The first time flipper finds a property that has been on the market for a long time and is in "rough" shape. He purchases the home for $100,000. After doing his homework, he figures that this property can be sold for $175,000 if it were in a condition similar to it's neighbors. He estimates the need for repairs, comissions and all other bills to be about $35,000. This includes updating the breaker box, fixing some leaky plumbing, a new roof and some cosmetic work. Sounds like a winner, with an easy $40,000 profit, right?
We have found that a first time flipper tends to take a property like this and look at it optimisticly. He doesn't "pad" for the worst case scenario, and he hopes that repairs will come in under his estimates.
On the other side of things, an experienced flipper will look at a roof that needs to be replaced and think "sure, maybe it's only $4000 for a new roof, but that could easily be $6000 if they pull up that old roof and find out is has been leaking" ...and... "okay, so maybe the shower and faucets have only been leaking a little bit, but what other water damage have they caused? I need to budget for the worst case scenario which may require replacing floors and walls and removing pests..."
This is precisely why we steer first time flippers away from homes that require excessive repairs, regardless of the profit potential. Excessive repairs are almost always accompanied by excessive over-spending on the repair budget.
It is our opinion that since the owners of this home clearly have not given it the TLC that it needed in the past, it is very likely that when something went wrong, it went unfixed for too long and was probably never repaired "properly". An experienced flipper will plan for this somewhere in his budget, whereas a newbie flipper will not. We tell first time flippers to just simply avoid these properties if at all possible.
If he insists on still going after the run down properties which require excessive repairs, then he should simply double the repair budget. It's true that an experienced flipper will have his own formula to predict budget overrun, but as a stubborn flipping newbie, if you can double your repair estimate and numbers show that it will still be a profitable venture, then go for it. Otherwise, run!
(c) Copyright 2007, T.J. Etherton. All rights reserved.
T.J. Etherton, is one of the founders of The Cashflow Crunchers, a web site for Real Estate Investors to share investing tips and other information. For more articles, tips, and free online calculators to help determine if a property is a good investment or not, please visit http://www.cashflowcrunchers.com
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