The added profit component in fix-and-flip is the profit you can build into the deal through your renovation or repair function. Of course this requires accurate estimation of two variables. The less complex variable is the value of the home after all of the work, or the ARV, After Repair Value. Using the real estate agent’s CRM, Comparative Market Analysis, approach, it’s not a very complex process to determine the ARV of the home.
When a fix-and-flip deal doesn’t yield the profit margin expected, it’s almost always the other more complex variable, the costs to rehab the property. You know the price you can buy for and a very close estimate of the closing costs. You know a reasonably accurate ARV from your market analysis. The complexity in this investment approach is in the estimate of the time it will take and the costs of repair and rehab. Time is considered as a cost due to the interest you may be paying on borrowed money.
Some fix-and-flip investors have cultivated trusted relationships with their sub-contractors, and they can count on their estimates of cost and factor that into their deal analysis. However, you may be taking the more common approach of making your own repair and rehab estimates. At the very least you’re doing this estimation to determine if you even want to bother your sub-contractors to chip in their thoughts and skills.
Only a tiny portion of an iceberg in relation to its total bulk is visible above the water line. Costs for property rehab can be like that. If there is wall damage, it may not be a wall problem; rather it may be a roof leak in the wall. Floor tile cracks can be hiding slab problems. Roof or foundation issues are some of the most expensive to correct, so always keep that iceberg in mind when you’re evaluating a property for fix-and-flip.
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