Evaluate that speculative real estate venture before you purchase.

Published January 23, 2012

It’s always taken courage to purchase a piece of real estate, fix it up and Flip it for a quick profit. But, when the market was hot, and there was consistent appreciation, it didn’t always take a lot of planning. Today things have changed. It’s still possible to make money as a speculator…but it’s much more difficult than it was just a few years ago. Today’s real estate speculator needs to execute a great business plan, based upon careful evaluation, in-depth planning and artful execution. It’s also necessary for the speculator to surround himself with a great team, including a real estate professional who is intimately familiar with values, pricing, marketing & merchandising AND a contractor who can get the job done rapidly and inexpensively.

The pitfalls which most often cause a Flip venture to turn into a FLOP are:
• Over Paying for the property when it is acquired.
• Under estimating the time and money it will take to complete the renovations, thus adding to carrying costs.
• Over estimating the price that the property will fetch when it is re-sold.

One of the greatest bits of business planning wisdom ever is; Start With the End in Mind. When it comes to flipping property, the end is the price the target property is likely to fetch after it has been renovated. With this in mind, evaluate the target neighborhood, not just the target property. Research comparable homes; those which are currently on the market, those which have sold AND those which didn’t sell. Then, be very realistic about what the likely sales price for the home will be when it is renovated to neighborhood standards.

Renovation to neighborhood standards is a critical component of successful real estate speculation. One of the biggest mistakes that an investor can make is to over build for the neighborhood. As an extreme example, if the investor intends to purchase a single family home in a neighborhood of 3 bedroom, 2 bath, 1,800 sq. ft. one story homes, it is generally not advisable to add a 1,000 sq. ft. second story addition. ON THE OTHER HAND, if the target home is much smaller than the majority of homes in the neighborhood, it may very well make sense to build out that addition.

Another critical component is the build out and carrying cost of a project. It’s been our experience that even the most experienced contractor often (more often than not) underestimates the price of the project and the time it will take to complete it. Be diligent with planning and make sure the contractor stays on time and within budget.

AND finally (FIRSTLY) don’t over pay for the home to begin with. If you can’t get it for the right price, walk away. It’s best to wait for the right purchase. Remember… the goal is to buy low.
Below is a sample worksheet that we use when helping our clients to evaluate a speculative real estate purchase.

The Real Estate
“Flippers” Worksheet

Ultimate Sales Price Goal
What do comparable properties in this
neighborhood sell for when “fixed up”? $_______________

Cost of Sale
What will if cost me to sell the property:
Commission, Title & Escrow fees, advertising,
etc? A good conservative estimate is 7-8% of sales price < $_______________>

Net Sale Price
Ultimate Sales Price Goal minus Cost of Sale $________________

Restoration $ Estimate
The combined bid of all contractors to complete the work < $_______________>

Override Reserve
Very few restoration projects actually come in on time and
on budget. We recommend you set aside extra funds to cover this
contingency. A conservative estimate would be 30% of Restoration Estimate < $_______________>

Adjusted Net Sales Price
Net Sale Price minus Restoration $ Estimate and Override Reserve $_______________

Desired Profit Goal
The return on investment you want to receive for this project < $_______________>

Gross Purchase Goal
The total amount estimated for you to buy the property $_______________

Risk Analysis Expense
Home Inspection, Appraisal, Contractor estimates, etc. < $______________>

Purchase Costs
Escrow fees, title fees, loan origination fees, etc. < $______________>

Targeted Purchase Price
The sale price of the home to be restored $___________________

For more information, or to schedule a private investment consultation, click here.