One of the most common questions among new real estate investors is how can they close their first rehab deal. While the process of flipping houses is pretty straightforward, getting to the finish line is often more difficult than anticipated. Regardless of if you are looking to close your first rehab deal or grow your real estate business, there are a few basic steps you need to follow. How well you understand and execute these steps will go a long way in determining the profitability of your project.
Here are 4 house flipping tips to help you acquire your first rehab property:
1. Find deals. You can have everything else ready to go but if you don’t have deals to work on you won’t get very far. Like any other business real estate investing is a numbers game. The greater number of properties you look at the better the chance that you will find one that fits with what you are looking for. You may have to look at a dozen different properties to find one that you will make an offer on. It is important to stay disciplined and wait for the right property to come your way. To find deals you need to have as many different sources as possible. Wholesalers, distressed property mailings and local real estate agents are just a few of the different ways to find deals. You can also find potential deals on Craigslist or by reading your local newspaper. Investment club meetings and local networking groups are also great sources for potential deals. Rehab properties will not just fall on your lap. If you want them you need to go out and get them. This often requires thinking outside the box or by outworking your local competition.
2. Cost of repair estimate. The first thing you need to do once you find a property you see value in is to estimate the cost of repairs. Rehab deals only make sense if you can acquire them at a discount. To get the deepest discounts the property often will require plenty of work. You need to get an idea of how much capital you will put into the property as you run your numbers. To do this you need to take your time and evaluate every square inch of the property. An oversight on the foundation or the plumbing could lead to thousands of dollars in repairs that will impact your bottom line. The current condition of the property is not the most important thing. Almost anything with a property can be replaced, fixed or altered. Take a look at the big ticket items that can break the bank. The windows, roof, plumbing and electrical items may be boring but they hold the key to success on the property. Finishing touches on the walls and fixtures don’t move the budget too much in either direction. If you don’t have a good idea on repair costs you should ask a local contractor or inspector to join you. Before you can estimate the after repair value you need to know how much you are going to spend.
3. After repair value. Figuring out how much value you can gain based on the improvements you make can be a difficult proposition. The best way to gain an idea is by looking at recent comparable sales. You need to look at properties with similar size, style and square footage as close to the subject property as possible. The comparables should have closed within a 90 day window. Take a look at the amenities the property offers and how they stack up to your property. You should read the descriptions on the listing sheets to see if there is anything about the property that would have impacted the value. From there you can take make a good estimate on what your property will sell for. Things can often change quite a bit in a market over a few months so never hold these values as absolute. It is also far better to go conservative with your estimates then to expect a high sales price and be disappointed in the results.
4. Make an offer. After you do your due diligence on the property it is time to make an offer. You never know what a seller will accept. You need to walk a fine line between offering an amount that works for you while not upsetting the seller. Before you attach a number to the contract you should be ready to justify that amount. You can do that either through the amount of work that is needed or the comparable sales in the area. Never be afraid to make the offer that you want. You may lose a deal or two by offering too low but think of the alternative. By offering above what you really want you begin the process behind the eight ball. You now need to make up for the increase in purchase price either by cutting corners on the work or increasing your end sales price. Neither of those options will help you sell the property quickly and at the right price. Offer the amount that you want to get the property for and if they accept, great, if not be prepared to review a counter offer. Most offers you make will not be accepted. This is just part of the process. The only offers that are accepted are the ones you make.
There are many new investors closing rehabs every day. If you are wondering where and how to start use these four steps as a guide.