How To Close Your First House Flip Like A Pro
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. It’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 shouldn’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 is 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 here’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
There’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.
Don’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 it’s easy for you to get emotionally attached to it. if the numbers don’t work out then they don’t work out. Move on. You can always find another house flip.
How did you close your first house flip?
Eraser Math is another way of saying trust the data, not your wishes. Data controls everything in almost any business. Example, I buy vacant houses and having a contractor I trust to give me real rehab numbers prevents me from the very dangerous thinking “repairs shouldn’t cost that much.” The other dangerous thought is “The value will go up soon and I’ll make a boatload of money.” Get real current value today.
Terrific insight and advice Bob.
Thank you for chiming in.
Hello there Mr Mike LaCava. Im new in this and i want to start my very first house flip but i dont know how to get started or who to find to help me fund my first house flip. Im reading and watching all kinds of videos and books about it but still is a little confused and scared to make it happen. But im willing to try hard and need some help with this. I was wondering if you offer training classes teaching people how to flip houses and make profits. And if you do do you have classes out here in Rochester New York. Thank you in advance Faleisha Willis
I would recommend getting started by downloading Mike’s Tool Kit > https://houseflippingschool.com/tool-kit/
The Tool Kit contains a home study, on site videos, plus the forms and documents Mike and his team use in their day to day business operations.
Right now we are not hosting any classes in Rochester, NY. Perhaps sometime in the future!
People also get caught up in the “either A OR B” mindset and don’t think outside the box for an answer. A friend of mine had that issue and decided to do neither and ended up spending less and renting it out instead of selling
Absolutely Isaac, being creative and thinking outside the box is a valuable skill in real estate investing.
I have a friend that wants to partner with me and do house flipping. I have a little experience, and she has none. We have no idea what we can realistically expect for a first year in business goal/plan? This will become full time for us. Also, how can I pick a good, honest contractor that won’t try to sock it to me since I’m new at this? Thanks!
Hi Dave! Thanks for chiming in.
All of those questions can be answered in our Tool Kit > https://houseflippingschool.com/tool-kit/
Most new investors have the same concerns that you do 🙂 Check out the Tool Kit and let me know what you think.
Ryan, thanks.. will do. I just hope you all are here if I have questions on the fly!
We’ll be here Dave!
Right now our team is focusing their energy on their own personal real estate investing businesses. However we are still available to answer the occasional question and am happy to offer guidance where we can.
Just drop us a line here on the blog or via email. It might take a few days but we will always get back to you.
Thanks! Very happy to see you’ve taken action by downloading the Tool Kit!
My husband and I want to start flipping houses full time. Where/how can we find private investors to help us get started immediately in the Denver metro area?
Networking at REIA meetings is a great place to begin > http://www.nationalreia.com
The information in our Tool Kit would also be very useful > https://houseflippingschool.com/tool-kit/
Inside the Tool Kit we have an entire module devoted specifically to strategies for finding and working with investors. We even provide some scripts as starting points for beginning the conversation with potential investors.
Check it out and keep us posted!
Very good tips!
We found it very hard to know when to stop the renovations… there always seems like there is more that could be done, but it does just chew up your budget.
Well said and yes there always seems to be just one more thing to add, but knowing when enough is enough is definitely critical to your bottom line.
Thanks for chiming in!
You just have to constantly remind yourself that it’s not YOUR house, it’s your future buyer’s house. The tendency is to treat the property like it’s your personal property and that’s where renovation fever sets in.
Exactly Richard, well said.
Thank you very much for the information i really appreciate it. keep it up
We are glad you are finding the information to be of good value Ektra!
My name is Joshua August. I am 19 years old and I am interested in embarking a possible career of house flipping/restoring older homes. I saw you have a link to training school and am thinking about taking it. However, I would at least like some direct insight to me. Feel free to reply back as soon as possible.
Yes we currently offer the Tool Kit for training > https://houseflippingschool.com/tool-kit/
If you are ever in the Massachusetts area, please swing by one of our free MeetUps so you can meet Mike and his team > https://houseflippingschool.com/house-flipping-school-meetups/
Hello, I know I little about wholesaling but I have been working under someone. But im looking for a new mentor in the Hickory north Carolina area. Help me please!
Do I need a mentor or can I do wholesaling independently?
Thanks for commenting Crystal!
Mentors are never necessary in life, however they sure can help quite a bit, especially in the real estate business.
Unfortunately at this time we do not have any recommendations for mentors in the N. Carolina area.
I would recommend attending a REIA meeting or similar real estate networking event in the Hickory area to find a suitable mentor > http://nationalreia.org/find-a-reia/
Happy to Read your informative article, All tips that you have described in your post is very helpful for real estate investors. Thank you !