Wednesday, July 24, 2024
Home Investment News My resale property must meet these five criteria, or I walk away from the deal.

My resale property must meet these five criteria, or I walk away from the deal.

by xyonent
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Some property flippers buy based on the style of the home, the location, or the type of project that needs to be done. To me, property flipping is a game of time and money.

I buy based on expected risk, estimated timeline and calculations. If resources are available and the deal makes economic sense, I buy. My main focus is the value I can create for returns and the data points I can get.

So when I’m assessing whether a deal is right for me, I always look at these five things.

1. Meet the minimum revenue

My minimum goal is a 35% cash-on-cash return in 6 months (or a 70% return per year). There is risk involved in reselling, so the return must be commensurate with that. Knowing the return helps me make quick decisions and establishes my risk tolerance. Creating a standard expectation for return makes it easier to determine how aggressive I need to be.

2. It can be implemented in a short period of time.

The faster you can close a deal, the higher your annual profits will be for the next deal. Profits grow at their maximum with compound interest. The longer a project takes, the higher your profits should be. Take too long and your profits may decrease rapidly.

3. Have friends you can trust

I don’t like to speculate when buying high return, high risk investments, and I always try to have at least two sold comparable properties and at least one pending comparable property to properly assess the post-repair value.

Additionally, I check market conditions by looking at the home’s absorption rate and current inventory level. If the absorption rate and inventory level are high, it indicates whether the property has room to appreciate in value and how quickly it will remain on the market. These data points help me determine my holding period and how quickly I can resell the home.

4. Keep resources on standby

If you don’t have the staff readily available to complete the scope of work for a particular project, you’ll probably turn down the deal. Without the resources to execute the plan, the project will progress slowly, leading to inefficiencies and lost profits.

5. There are no potential deal breakers

No matter how cheap the deal is, my non-negotiable terms remain the same. There are environmental issues, long permitting periods, disputes, location requirements, all of which lead to uncertain timelines. Uncertain timelines mean uncertain returns. I want no part of that.

Executing the plan

The flip/off competition with Henry Washington is based on annual cash-on-cash earnings.

As a general rule, the length of construction and time on market will greatly affect the profitability of a project. I targeted a more superficial style resale to minimize delays and ensure I had resources readily available to complete the scope of work. Profitability is highly dependent on timelines. The length of time capital is committed to the deal (the shorter the better) will directly impact cash-on-cash returns.

When I picked the Kent project, I stuck to my core principles: I purchased this 1,340 square foot home for $380,000 and quickly secured contractors who could start work right away.

I was attracted to this property because the three bedroom, two bathroom home already had a great floor plan, a large family-friendly backyard, and was on a great street. From experience, I know that projects that make minimal changes to the floor plan automatically have a shorter time frame because they don’t require as long permitting and require minimal framing.

You were also able to find three recently built homes of the same style within a half mile of each other with an after repair estimated value (ARV) of $625,000. After contacting brokers in the area, you were able to determine that all of the properties had multiple offers and over 20 interested buyers. This valuable information allowed you to speed up the process by not having to plan for them to stay on the market too long. It also gave you some wiggle room in the ARV.

By choosing the right products, securing contractors who could start work on settlement day, and gathering information from local brokers, we knew we should be able to flip our home within six months.

Final thoughts

Reselling isn’t just about profit. It’s about finding the most efficient way to allocate capital and maximize overall profit. Knowing your resources, reviewing your data, and establishing your buy box will help you mitigate risk and grow most efficiently.

Who will reap the biggest profits from home flipping?

A home flipping competition like no other! Henry and James detail two recent property flips they’ve worked on and compete to see who can make the best profit. Which property will win the flipping showdown?

BiggerPockets notes: These are opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.

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