One of the things house flippers just love to talk about in house flipping is how much they sold a house for.
Yes, its the most fun (especially when it involves a number with lots of zeros after it!)...but the reality is that its one of the final steps in what can be a very long process.
We even refer to this process as the house flipping formula,Â with 12 distinct stepsÂ how to make money flipping houses.
SoÂ how do you make money flipping houses so you get those checks with lots of zeros in them?
How To Make Money Flipping Houses...Comp Style
We've explained how much it costs to flip a house usingÂ ARV (after repair value) before.Â Â And to determine the ARV, you want to get a really good real estate agentÂ to work with you to determine what the after repair value is, which is the selling price of that property after you renovate it.
A good real estate agent will be able to help you with that.
How do they do it?
They first perform a market analysis using "comps", which stands for "comparables" to determine the price of your property. Â Although there are many online comp services that can give you an idea as to what the house will sell for - nothing beats the expertise of a good real estate agent.
Here is typically how they determine comps:
- MLS System: The real estate agent use the MLS System (multiple listings service), but also has various ways to pull properties that have sold in the neighborhood that you are buying.Â Theyâ€™ll take a radius, maybe a mile, maybe two and compare other houses with similar square footage and amentities.
- Six months: Typically I like the real estate agent to go back on the shortest amount of time, usually no longer than 6 months. The shorter the time period between sales, usually the better so you can eliminate market shifts and changes that may affect price.
- Compare: Once they determine what other properties have sold for, they will be able to tell you what your property will sell for.
"Square" House Flipping Math
There are a number of factors that go into determining comps, but usingÂ square footageÂ as a benchmark is an excellent way to determine comps.
Let's do an example to show you how you can use square footage to determine good comps when learning how to make money flipping houses.
Here are the stats:
- You are selling a house that is 1,500 square feet and you've determined that the after repair value is $200,000.
- The real estate agent ran some comps and found a house that sold 2 months ago for $190,000 but the house was 1,200 square feet.
- They also found a comp in the neighborhood that sold for $220,000, but that one was 1,700 square feet.
Is your ARV still correct?
In this example, your comps seem to warrant the ARV you have pre-determined.
House Flipping Science and Art
As you can see by the above example, determining comps is not an exact science by any stretch. Comparative market analyses are - at the end of the day -Â extremely subjective.
Breaking things down individually do help take out some of the subjectivity, but not entirely. You can do this using multiple factors.
Factors may include:
- Square footage
- Number of bathrooms
- Whether the kitchen is updated and modern
- Lot size
- Whether you have new windows, doors, heating system...
All among many factors.
The Biggest Factor In Determining Comps Is...
All the above are important factors in determining comps. However, the biggest factor is the competence of your real estate broker!
Beware of unrealistic comps and over-hyped market analyses done by your real estate agent. Just because you hire a real estate agent/broker and they determine your after repair value, if they give you a price that seems too good to be true...it just may be. Real estate brokers want to earn your business and sometimes they can inflate a market analysis to get that business.
So you'll want to be careful.
If you feel the market analysis is unrealistic, you'll want to get 2 or 3 opinions from other real estate brokers. Do your due diligence, study the numbers and get a second or even third opinion. Remember that you may need to go through multiple house flipping team members before you settle on the one who become a permanent part of your team.
Just by seeking a second or even third opinion, this one act may may save you thousands of dollars later on...especially when first learning how to make money flipping houses.