In this latest installment in our multi-part “Getting Started” mini-series I’m going to give you 5 options for evaluating a flip. This episode is all about how we evaluate flips when we’re doing deals in Atlanta and Charlotte.
I’m talking about flips only. I’m planning an upcoming segment or two about rentals, comp rates, IRRs and that kind of thing, but in this segment I’m really only going to talk about flips.
It’s Not as Difficult as the Gurus Make it Sound
The way I look at them is very, very simple. Everybody talks about comps: active comps, sold comps. It’s not crazy-complicated as some of the gurus might make it sound.
Here is how I look at it. Let’s say you have a subject property and it’s a two-bedroom, one-bathroom, 900-square-foot home. Immediately the options that come to my head and the options you should be thinking about are these:
Option 1: What is it going to cost to keep it a two-bedroom, one-bathroom, 900-square-foot home? Meaning, what is the renovation cost going to be? And what is the home going to sell for once I’m done repairing it?
Option 2: If you were to convert this to a three-bedroom, two-bathroom, 1,500-square-foot home, what will the repair costs be, and what is the after-repair value (ARV)?
Option 3: Suppose we were to convert it to a four-bedroom, three-bathroom home. How much is that going to cost and what is my ARV?
Those are the first three options you want to take a look at and decide which makes the most sense to you and how much profit you might make per option.
My Favorite Options: New Construction
Then there are another couple options, which are my favorite, and which requires a little bit of expertise. In a hot market, this will separate you from the crowd.
Those options are new construction. How much will it cost to tear down that nasty two-bedroom, one-bathroom, 900-square-foot home and build a brand new three-bedroom, two-bathroom or a brand new four-bedroom, three-bathroom home? Ok?
Those are generally the four or five options you want to take look at. If you want to think about it in terms of buckets, you have your renovation bucket and your new construction bucket. Options 1, 2 and 3 are your renovation options. Options 4 and 5 are your new construction options.
How Do You Figure the Costs and Returns?
How will you know how much it’s going to cost? By going to Angie’s List or your local real estate investor’s association. Talk to some of these expert investors, seasoned investors. Find contractors and find builders that investors have used in the past. You have them bid out your jobs; it’s super easy.
Then you can go find a local mentor or go find these same experts that you asked the referral from and see if those renovation price points are within margin. If they’re within a good range, then great! Just using that information, you’ll be able to get exactly how much it’s going to cost for each of the renovation options and the construction options. That’s kind of how you gauge it.
Now, how do you know what’s going to sell and how do you compete? Those are great questions. This is where a real estate agent comes in handy. Your agent will be able to tell you and walk you through, step-by-step, which homes within a quarter mile and within 30 days, 60 days, 90 days have sold in that area. Look at what’s going to help you get your minimum and maximum price thresholds for your ARV. Also, within that quarter mile, you don’t want to cross any railroad tracks, any major intersections or any bodies of water or anything like that. You want that quarter mile circle or box to be nice and tight when you’re looking for where those comps are.
That’s generally how we’re evaluating renovation or rehabbing deals in Atlanta and Charlotte.
To see this video episode in full, click here:
And in our next installment in this series, we’ll look at how to structure your real estate deal.
About the Author
Abhi Golhar is the host of “Real Estate Deal Talk” and Managing Partner of Summit & Crowne. Abhi uses a “value-added” approach to invest in real estate renovation, new construction and development opportunities in the Southeast United States. He actively educates and works with investors to deploy market-driven strategies that yield success. He holds a B.S. in Electrical Engineering from the University of Michigan. You can find him on Twitter, Snapchat, and Instagram – @AbhiGolhar.