There is big money in rehab flips. There can also be big loses too. The following can help increase the probability of success and minimize mistakes and unfortunate surprises.
- 70% max LTV – Make sure you have plenty of room to make mistakes, go over budget on rehab, cover payments on long holding costs, etc. Many markets you can find deals around 50% LTV these days. Find great deals, not good deals, great deals.
- Conservatively estimate ARV (After Repair Value) – The market seems to change almost daily now. You cannot trust comparable sales from 6-12 months ago. Try to stay within 3 months, stay within ½ mile of your property and very comparable homes. Active and pending do not tell the story, solds are much more trustworthy. And always take into consider the REO sales, not just retail.
- Get multiple rehab bids – At minimum 3 rehab bids. I know rehabbers that get 7 rehab estimates, then bid them against each other to get the lowest price.
- Align your goals – Contractors want to do the least amount of work and make the most amount of profits. Agents want to do as little as possible and earn as much commissions as possible. Pay your contractors well and give them bonuses or profit splits for finishing on time and on or under budget. Otherwise, penalize them. This will ensure they give you an accurate rehab bid and they will make value added repairs. Also, get your agent involved early. They are experts in the area and know what materials and items sell houses. They can advise you on materials and value added repairs. They will tell you what will help them sell the house fast and for a higher price. Pay them well, bonuses to agents who perform always result in extra profits. If you give an agent a $1000 bonus to sell it by this date and this time, these hungry agents will kill to make it happen.
- Reserves & Backup Plan – There are always surprises, delays, over budget items, extra costs, etc related to rehab. Do not get stuck running out of money, always borrow extra or make sure you have reserves to cover these issues. So what if it does not sell? It never hurts if the property cash flows really well so you can rent and hold the property. Multiple exit strategies are always good. Other backup plans are to lease option, discount and sell to an investor, refinance and hold, etc.
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