Analyzing a potential flip property involves three basic steps: the purchase price of the property, the costs involved with the rehab and the net price received for the sale.
The investor has to have a good knowledge of what pristine homes similar in size in the subject property's area have been selling for. Retaining a knowledgeable Realtor is mandatory for this step. This same Realtor should be able to negotiate a favorable purchase price.
Step two assumes a high level of contractor knowledge. Use your worst case scenario as your best case. If you are not doing the estimating yourself, get three contractors bids for the necessary work. Don't forget costs of permits, private money fees, and costs of sale.
Finally, the selling price needs to be determined. Your Realtor should give you three recent sales (within three months) and three active listings that have similar features as the subject (gross living area, lot size, age, location, number of beds, etc.).
With the dollar amounts from these three steps, the decision to buy or not should be self evident. Sales price minus rehab costs minus purchase price equals potential gross profit for the project. Play "what if" with all your figures and have your Realtor and contractor go over the figures to see if you have overlooked anything or if you are being too optimistic in any area.
OK, are you going to make any money on this deal?
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