After Repaired Value – the key to flipping
Sometimes I watch TV, and when I do, it’s usually something about real estate. I know I am obsessed and I am a dork but that is my life. So I am watching the TV show Flip or Flop on HGTV and the stars of the show have just violated one of the most important rules of house flipping if not the most important rule.
They bought ha house to rehab and didn’t know what the after repaired value or ARV was on their house. I wanted to scream. The TV show world is a lot different than the real world of real estate investors. For one thing, those guys don’t need to make a profit. In the real world, if you don’t know your ARV before you buy the house, then you are likely in for a very expensive seminar. I can assure you that losing money on your first flip will likely drive you out of the rehab game. Unlike the TV version of this process, if you make a mistake in the real world, you may have to start over again from square one.
I have a fantasy that some day a TV network will do a show that teaches regular people how to correctly fix and flip a property, without all of the smoke and mirrors, without the drama, just plain old reality based education. I suspect that a show based on real investor techniques would be quite popular but maybe that is why I am a real estate investor and not a network executive.
Real estate investing is all about math. If the math doesn’t work then you are going to lose money. If you don’t know the key variable in a flip then you are a fool about to be seperated from your money. Since real estate investors tend to use other peoples money for big projects, you may also find yourself in some legal trouble as your private lender takes your house and destroys your reputation.
You need to know three things to evaluate a flip prospect. The first is the cost to buy the property, the second is the rehab cost, and the last is the ARV. Now you can do the math.
Cost = c
Rehab = r
And ARV = a
Now follow along with me.
C+R had better be considerably less than the ARV
This formula is an oversimplification of the process but you can use this formula as a first teir screening method to decide if you even want to get involved in this house as a flip or not.
I will tell you that sometimes the best deals are the ones that you walk away from. Don’t allow your desires for fame and fortune to drag you into a bad deal. Use your rational mind and evaluate the property by the numbers. Numbers are not emotional, they will either confirm or contradict your gut feelings about a property.