5 min read · Fix & Flip
A flip is won or lost before the demolition starts. It is won or lost on five numbers. Know them before you make the offer and the loan becomes a tool. Guess at them and the loan becomes a deadline.
The five numbers
- 1
1. After-repair value
What the house will be worth when the work is done, backed by recent sales of fixed-up homes nearby. Use the lowest fair comparable, not the best sale on the street.
- 2
2. Your top purchase price
Lenders stop at a share of the after-repair value. Ask the lender for theirs before you set a price, then work back to the most you can pay. Set it before you see the house, not while you are standing in it.
- 3
3. The rehab budget
A line-by-line scope of work and cost. Carry a backup amount for overruns, because there will be some.
- 4
4. Cash for the first stage
Rehab money is paid back in draws as stages of work are finished. The first stage is on you, so keep cash for it and for a cushion.
- 5
5. Holding costs and time
Taxes, insurance, utilities and interest for every month. Add a month or two to your timeline, and know what you will do if it does not sell.
Invert it: how a flip goes wrong
Charlie Munger's habit was to ask what would ruin the plan, then avoid it. For flips, the list is short.
- ◆Pricing the after-repair value off the best sale on the street.
- ◆Paying more because the house needs to be won.
- ◆A budget with no backup.
- ◆Spending all your cash at closing, so the first stage has no money.
- ◆No plan if it does not sell.
A hypothetical, in round numbers
Say a flip would clear $30,000 if the house is worth $300,000 when finished (hypothetical). If the real value is $270,000, that same flip clears nothing, and you need more cash to close because the lender's share of the value is smaller. Add a $20,000 overrun and it is a loss. None of that is unusual. It is why you work from the low end of the value, not the high end.
What to have ready
- ◆The contract or deed for what you are buying and the price.
- ◆A scope of work and a line-by-line budget.
- ◆A general contractor's resume and license, if you are using one.
- ◆A track record of past deals, if you have done them.
- ◆Recent bank statements showing your cash to close and to start the work.
The plain version
Start with the finished value, set it conservatively, and work back to a price you can afford even if things run late. Keep cash for the first stage. Have a plan B, such as renting it and refinancing. This is business-purpose financing for investment property. We are a broker, and the lender decides.
Run the numbers
Free, no credit pull, no obligation. See the math before you talk to anyone.