Everything You Need to Know About Flipping a Home

Get to your desired profit by doing the math and avoiding these common pitfalls

Home-flipping is quite the trend -- and a risky one. But it's also not rocket science. In this video, I'll teach you how to do the math on a potential flip and which common mistakes to avoid in order to flip a home and reach a specific profit goal.

More of a reader? Catch the transcript of the video below!

Hey guys, Brent the Broker here. Today we’re going to talk about how to do the math on flipping a home.

So, first of all, what is after repair value (or ARV for short)? 

When you’re looking at buying a home to flip, the first thing you need to consider is - what is this thing going to sell for when I’m done? You’re going to buy it at a certain price, put some money into it, and then sell it, and hope the acquisition price plus the repairs minus the purchase price equals a profit!

The price that your home will sell for after you make the repairs is called after repair value. So, depending on what you’re going to do to the home (for example, are you adding square footage or are you just doing a cosmetic remodel?) and other factors (does it sit on a busy street? Is it better or worse than the homes in the surrounding area?), you have to come up with an idea of what the place is going to sell for after the repairs are completed.

Let’s pretend like that number is $850,000. How do we figure out a purchase price on an after repair value of $850,000? 

First, you subtract your construction costs, holding costs, and cost of capital. Let’s say these costs total to $100,000 (just making up random numbers here). 

This brings us to an offer price of $750,000 just to break even. 

Next, you need to decide how much profit you need to make this deal work. Most investors that I know try to shoot right around that 25-30% profit range. So, back to our example: if your costs equal $100,000, you’re going to want to make around $25,000 to $30,000 in profit.

$850,000 - $100,000 + $30,000 = an offer price of $720,000.

This has you buying the home at $720,000. You put $100,000 into it, which brings you to $820,000. If you sell it at $850,000, you get $30,000 in profit. 

Again, this is a very simplified version of how these investors go about analyzing the flip deals.

So, that brings us to the pro tip of the day: This stuff is risky. It sounds so great - “Oh, I can put $100,000 into a property within a few months make $30,000 back!” Well, the reason why you stand to get such a huge reward is because there is a huge risk involved in flipping a home. 

For example, you walk into a house and you say, “Yeah, this is going to cost me about $100,000 to remodel.” And then you start doing demolition and you realize, “Oh no, there’s more behind the walls than what meets the eye.” And all of a sudden, your construction costs are increasing and your profit is diminishing.

Another thing - let’s say your construction estimate was exactly on point and you go to list the property at $850,000. You get no offers because you misread the after repair value so now you’re getting offers at $800,000 or $820,000 and boom, your entire profit evaporates because you’ve miscalculated the exit price.

Other risks are construction delays or cost overruns. You might have everything dialed in with your after repair value, but if you’re ordering items that are on backlog or if you have a contractor that quits or other things happen that delay your progress, your profits can be eaten away. 

To summarize, there are potentially large rewards waiting at the end of that rainbow, but you need to make sure that before you embark on your house-flipping adventure, you understand the risks from top to bottom. Consider your exit price, cost of construction, holding costs, and the potential pitfalls and delays. Then, make a quality offer that’ll make sure your home flip is profitable.

Brent Edwards aka Brent the Broker is a residential real estate agent and Realtor in San Diego, CA who helps clients buy and sell homes in San Diego, California and all surrounding areas.  Brent is a highly-recommended Realtor in San Diego by family, friends and past clients. Call Brent today at 619-550-8070 if you have any questions about real estate in San Diego or you'd like to buy or sell a home.