When you look at it on paper, flipping houses is a pretty simple business. You find distressed properties and buy them below market values. Then you rehab them to bring them up to market value and sell them for a profit. What could be easier, right? Well, as Tarek and I have found out—and as you’ve seen on our show—things can get pretty crazy when you get started on a rehab. We’ve gotten a lot better at estimating our rehab budgets on fix and flip houses, but you’ll still see us go over budget on a lot of the flips we feature on Flip or Flop.
People ask me a lot how we still manage to make money when it seems like every flip we come across, we go over budget. It seems impossible, right? Well, we actually use a few different techniques to make sure that we get the most profit when we’re flipping houses. With the experience we’ve gained from flipping for the past few years, we’ve gotten a lot better at estimating our budgets, making room for overages, and making the right upgrades to get buyers excited about our houses.
Get All of the Information You Can
In one recent episode of Flip or Flop, Tarek and I were interested in a house, but we couldn’t get inside because it was occupied. To get as much information as possible about the house, we drove through the neighborhood, and I waited in the car while Tarek took a look around. Let me tell you, looking around an occupied property and trying to see as much as possible is stressful enough, but Tarek had to be super sneaky and quiet, especially since we had cameras and a crew with us. It was pretty intense, but it was definitely worth it.
If the house hadn’t needed much rehab, we would have probably made an offer right at or just below the seller’s asking price. But because Tarek saw that the backyard was trashed and because we scheduled a walk-through for a comp in the area, we knew that we had some room. We actually offered about $10,000 less than the asking price because, if the outside was any indication, the property looked like it needed more than $40,000 in rehab.
Always Leave Room to Go Over Budget
A lot of flippers talk about the 70% rule. They say that you should never spend more than 70% of your ARV (after-repair value) on a fix and flip house, and that includes all of your rehab costs. We stick pretty close to this when we’re buying properties, but we keep it a little bit more flexible than a strict 70%, and we always try to leave some room for errors.
For example, if you pay $50,000 for a flip house and then spend $20,000 on rehab, you can sell it for $100,000 and hit the 70% rule exactly with a profit of $30,000. If you spend $300,000 on a property and $30,000 in rehab, and you sell it for $400,000, you’re breaking the 70% rule, but you’re making $70,000 in profit. Still looks like a good deal, right?
That’s why Tarek and I don’t always stick exactly to the rules when we’re flipping houses, but we do keep a close eye on our rehab costs. We pay attention to the costs of certain common renovations for each fix and flip, and we keep those in mind as we make our budgets for our next projects. In this business, you have to make a lot of decisions on very short notice, so mistakes do happen. If you leave enough room for error and do your homework, though, you’ll make money while you get better at estimating your rehab budget.