2 House Flipping Rules You Should Never Break

I received an email from someone who wanted to know how to overcome the fear of flipping houses. He wanted to know which house flipping rules you should never break.

I was tempted to refer him to the three secret steps to real estate investing success but I decided to give him the block and tackle stuff.

I still get questions such as Hey Mike, can I break the rules this one time? My usual answer is NO.

I understand why many people prefer to break the rules but when it comes to house flipping, following the rules is not an option but a necessity. Not only do they keep you out of trouble but they can help you analyze hundreds of deals.

I like to stick by two simple house flipping rules not because they can solve

the Middle East crisis, unlock the secrets of the universe or help further unravel the human genome but because they can help me stay in the money with my flips.

Is House Flipping A Numbers Game?

When it comes to flipping houses it is not just all about numbers. After a few years experience, when you have done dozens of house flipping deals, you’ll start to understand when you can and cannot bend the rules slightly.

The key here is EXPERIENCE. If you are a newbie, you should never bend or break the rules. Rules keep you out of trouble so here I have two house flipping rules you should never break.

Two House Flipping Rules Your Should Never Break

1. Stick To Your After Repair Value (ARV)

After Repair Value is what the house will be worth after rehabbing. If you can get a good real estate broker who can tell you how much the house will be worth after ARV, then you can simply work backwards and weigh whether it’s a good deal or not.

Your real estate agent will do a market analysis to determine how much your property can be sold for. Sure, you can try out a few computer services online that can tell you how much the ARV will be but it’s always better to seek the expertise of a real estate agent.

Keep in mind these few things on ARV:

• Stick to the numbers and do not deviate from them because the moment you do is the moment you can start kissing your profits goodbye. Don’t start adjusting the numbers so that they can suit your needs.
• Request the real estate agent to go back no more than six months. A shorter period between sales helps you avoid market fluctuations and any other changes that may affect the market price.
• Once your real estate agent compares what other similar properties have sold for, they will be able to give you an estimate of how much yours will sell for.

The first point is the one many flippers would like to break. Once you get an ARV from your broker don’t do what I like to call eraser math. Eraser math is adjusting the numbers to make them work for you. If your broker gives you a number stick to it and don’t break this rule.

2. Follow The 70% Rule

The effectiveness of the 70% rule depends on the ARV. If you know what you are doing, then you can vary the 70% rule depending on the market. Like I said before EXPERIENCE is key so if you are a beginner, stick to the 70% rule.

The 70% helps you determine how much to spend on rehabbing and the maximum allowable offer for the property (MAO).

How The 70% Rule Should Be Used

Let’s say ARV is $300, 000. You can use this simple math to figure out the numbers.

• Take the $300, 000 and multiply it by 70%. This equals $210, 000.
• Deduct the cost of repairs from $210, 000. Your general contractor for instance tells you that it would cost you $50, 000.
• When you apply the 70% rule, the maximum price that you should pay (MAO) is $160, 000.

The 70% rule will give you a good profit. Remember that 10% should go towards financing, carrying and other costs while 20% is your profit.

Conclusion

Without a doubt, house flipping is a lucrative way of making money. There are plenty of TV shows that glorify house flipping to a certain extent. Remember that when you stick to the rules, is when you realize a profit. Don’t rely on the market’s appreciation to help you make a profit. Honestly, I think you can still be successful at flipping houses whether the market prices fluctuate or not.

But only if you don’t break house flipping rules.

If you’ve made it this far, I’d love to hear what you think about these two house flipping rules. If you have any other rules that you stick to, I’d love to know what they are.