Flipping & Wholesaling 101
Fix and Flip
If you’ve ever watched the infamous HGTV shows Fixer Upper, Flip or Flop, Love It or List It, and the like, you are familiar with the concept of “flipping” a house. Frankly, the television shows make it look fun and easy - you simply buy a house, slap on some new paint, stage it with new furniture, and sell it immediately for a juicy profit.
Generally, the real-life version of flipping is different.According to ATTOM Data, the average house-flipping gross profit (before any expenses are taken into account) in the third quarter of 2020 was $73,766. However, many people lose money or break even when flipping a house.
To limit the financial downside while maximizing profit potential, it is vital for an investor to know the estimated costs associated with flipping a property before purchasing it.
What an Investor Needs to Know Before Buying a Flip Property:
1) How much is the property worth?
To calculate how much a property is worth, an investor needs to calculate the “after repair value” or ARV of the property. An ARV is the value of a property after it has been repaired and renovated.
ARV is determined by referencing nearby comparable properties (commonly referred to as “comps”) in similar condition, age, size, build, and style that have recently sold. Preferably, try to find a comp within ½ mile from the project property, with the same number of beds, baths, and square footage, that has sold within the last year.
2) How much are the estimated repairs and renovations the property needs to be attractive for a future buyer?
To calculate the estimated repairs and renovations, an investor will need to contact a local general contractor to visit the property, conduct a walk-through, and draw up a “rehab bid.” The rehab bid generally lists the cost of materials and labor to repair and renovate the property.
The 70% Rule
Armed with the above information, an investor can calculate the ideal purchase price for a flip property by using what is known as the “70% rule.”
The 70% rule is a guideline to help real estate investors make the best deals. According to this rule, the purchase price should not be more than 70% of the ARV minus the total cost of the repairs.
Assume the ARV of Property A is $150,000. Assume also that the cost of repairs/renovations is $50,000. By applying the 70% rule and absent unique circumstances that warrant otherwise, an investor should purchase the flip property only if he/she can purchase the flip property for $55,000 [($150,000 x .7) - $50,000].
Most purchased goods from retail stores involved a wholesaler. A wholesaler is someone who purchases a good at a certain price and then sells such good for a higher price. In real estate, a wholesale operates in the same “middleman” capacity between the property’s seller and the property’s end buyer.
Like flipping, wholesaling may seem easier than it realistically is. While the wholesaling sequence is relatively simple and straightforward, wholesaling requires an investor to continuously and monotonously track KPIs (key performance indicators), locate distressed properties, contact sellers, build buyer’s lists, analyze deals, work closely with title companies, and market their wholesaling areas.
How Wholesaling Works:
Typically, a wholesaler finds a property owner who wants to sell their property through various methods (mailers, Driving for Dollars, cold-calling, etc.). A wholesaler typically offers a combination of the following benefits to the seller:
1) Quick closing process
2) Cash offer
3) No realtor/agent commissions
4) Purchase the property “as-is”
5) Pays for closing costs
After a wholesaler enters into a purchase and sale agreement with a seller, the wholesaler then enters into an assignment contract with an end buyer after adding a “wholesale” or “assignment” fee to the original purchase price. A wholesaler never takes possession of the property, but rather sells its contractual interest in the property to another buyer (usually a real-estate investor or landlord). Wholesaling/assignment fees vary, but average between $5,000 - $30,000.
Wholesaling is great for investors who have limited capital and want to break into the real estate investing industry. The costs associated with wholesaling are relatively low compared to other real estate investing strategies which require renovating and holding onto properties.