‘Flipping’ Property Rules!
Buying to sell, ‘flipping’ buying fixing and selling are all very lucrative ways of making significant profit through property investing.
And it’s a strategy that has become increasingly popular through reality TV’s shows like ‘Property Ladder’ and ‘Homes Under the Hammer’ making the process look a little too easy if you ask us...
So what’s the problem?
You essentially buy a property, and put it back on the market for a higher price, right?
You make significant gains in the short term.
What can be so difficult about that?
In a nutshell nothing. You see, the actual process of flipping a property is not hard to grasp. Any trained monkey can learn the process.
You buy, fix and sell.
However, where a lot of investor’s trip up is they don’t have ‘flipping’ rules to be successful.
Yes we understand nobody really likes following ‘the rules’.
Nobody likes to be told what to do. People would rather break than follow the rules.
But the following two rules are critical to Your success.
They will keep you out of trouble. In fact, Mark sleeps with these rules – the very same he has used numerous times to anaylse our property deals.
They are not earth shattering and certainly not the kind which will unlock the secrets of the universe. But they WILL keep you out of the bad deals and keep you in the good deals. So what are they?
Rule#1: Know Your ARV [After Repair Value]
Essentially know what the property will be worth once it has been refurbed.
The best way is to look at comparables (or ‘comps’) which refers to data about sold properties that are comparable in type and size to the one you’re selling.
This data can be past sold property prices and information or list prices and data on current listings that meets the following requirements:
• Similar in type and size to the subject property
• Sold recently [3-6months]
• Within a prescribed radius from the subject property
A few things to remember about the ARV:
When analysing comps, go back to the shortest amount of time, usually no longer than 6 months.
The reason for this is simple.
The shorter the time period between property sales, the better you have an understanding of local prices which can eliminate market shifts which may affect price. After all, no-one likes an uncertain market, do they?
A word of caution though.
Don’t ass-u-me you can break the ceiling price of the area, or achieve a higher figure to suit your needs, otherwise you can kiss goodbye to your profits. We have a deal analyser that analyses 3 scenarios – 'best case,' 'likely case,' and 'worst case’. Trust the number [s] and stick to it. Don’t massage a notional figure to make your numbers work. Don’t fail because You have happy ears and expect every deal to be the best.
Rule#2 : Follow the 70% Rule
So you’ve determined the end ARV what next?
You use the 70% Rule to determine:
1) The amount you can spend on your refurbishment
2) The maximum purchase price you can pay for the property
For instance, consider the ARV to be £150,000 [on low yielding property]
Using the 70% Rule:
• Take the ARV [likely case] and multiply it by 70%. This equals £105,000
• Deduct the refurbishment costs from that £105,000. Let’s say this equals £25,000 [£10k contingency built in]
• Using the 70% rule, the maximum price you can pay for the property is: £80,000
So essentially, the 70% rule allows you to walk away with a healthy profit minus finance and holding costs, and other expenses.
We would usually budget around 10% for financing, buying and selling costs, while the remaining 20% is profit.
And if your potential buyers knock an extra % of the asking price, this rule will help cushion the fall, making it harder to walk away without you not being in the money!
And if you’re even more paranoid, you can build extra contingences within the buying figures.
So long as You stick to the rules!
You see, in a rapidly appreciating market, you can be forgiven for any mistakes.
In an uncertain market, it can leave you so financially and emotionally burned you'll be begging your old boss for your old job back that you asked him to put in his pipe and smoke
Remember, it’s the rules which keep you profitable, but only if you stick to them!
As always – opinions, comments, other rules which you follow and advice welcomed below!