Nobody wants to screw up their first house flip. Everyone wants to get a return on their investment and pay back money they got from family, friends, or private lenders.
The biggest fear that many first time real estate investors have is the fear of ruining a very good deal. Itâ€™s understandable and many first time investors have a hard time trying to overcome this fear.
The best way to ensure that you close your first house flip like a pro is to make sure all the details of your flip are spot on.
You shouldnâ€™t use any type of eraser math or try to adjust the numbers to make your deal work out. The 70% rule should always be applied no matter what.
Teach Yourself How To Analyze A Deal
The single most important factor in house flipping is the ARV (After Repair Value). This is because it isÂ the basis for all other calculations such as the renovation costs. As a new investor, the temptation to overestimate how much you can sell the property or to underestimate the repair costs can be overwhelming. Most of the time this never works and you end up with a crappy deal. You should learn to follow formulas, systems and rules of house flipping.
No Eraser Math
Eraser math is the biggest mistake that a first time house flipper can make. Unfortunately it is far too common and it happens all the time. New investors, who want to get into the house flipping business, most of the time, try to justify why they should pay more than what their Maximum Allowable Offer.
So hereâ€™s an example of eraser math.
You have found property that you could sell for $400, 000 once you have finished rehabbing. You have calculated the cost of repairs and found that they were approximately $80, 000. When you do the house flipping math, you should acquire the property at $200, 000.
So you place your offer at $195, 000 hoping that you could strike a deal at $200, 000. Unfortunately your deal is rejected because there are so many other deals on the table. So what do you do?
Do you increase your offer to more than $200, 000?
Do you try to increase the ARV?
Do you figure out how to lower your renovation costs?
Do you simply walk away?
For many first time investors, they will try to:
- Fudge the repairs. They do this by trying to do most of the repair work themselves and convince themselves they can get the repair costs from $80, 000 to $60, 000.
- Or, they convince themselves that they can sell the property at $420, 000 if only they do a few more renovations.
This is a typical eraser math scenario which often leads to big heartache later on. Here are two ways that you can avoid this scenario and close your first house flip like a pro.
No Matter What, Stick To Your Original ARV
Thereâ€™s a very high chance that the ARV can drop by even 20% by the time you are ready to sell the house. This is why there are house flipping rules which cover you is such a case. If you do not stick to these rules when you are analyzing your deal, you will regret later on. Adjusting your ARV completely eliminates your chances of making a profit.
Donâ€™t Distort Repair Costs
Rarely does the cost of renovations ever go down. As a matter of fact, most of the time, they always come out higher than initially projected. So you can be guaranteed that the figure you initially come up with the first time will turn out to be way lower than expected.
So, just to be safe, consider adding 10% to the cost of renovation. If you are not completely sure, consider adding 20%
Know When To Move On From Your First House Flip
Your first house flip can be exciting and itâ€™s easy for you to get emotionally attached to it. if the numbers donâ€™t work out then they donâ€™t work out. Move on. You can always find another house flip.
How did you close your first house flip?