Hey there, Peter Vekselman here with my business partner, Julie Muse. You may know us from our deep dive into extracting profits from the default deals arena that we’re surrounded by right now.
What you may not realize is that our exit strategies are broad and cover everything from wholesaling to fix-and-flips to renting properties out that we selectively choose to keep in our portfolio.
See, we LOVE partnering with people on their deals in markets all over the U.S. And as we’re partnering with people in markets across the nation, one of the things that we‘ve noticed is that sometimes people struggle with understanding the real decision filters and best practices at play for fixing-and-flipping awesomely.
Look, we’ve been doing this for a long time, so some of the things that seem intuitive and instinctive to us are not as clear to newer investors when it comes to making great money on a fix-and-flip… and not letting it accidentally eat your lunch.
So we’re sharing some of our insider pro tips and best practices that may not be as apparent to many people or most new investors.
Let’s talk fix-and-flips.
Starting with value….
We’ll start with a couple of different ways you could look at the value of a property:
- the as-is value
- the value once it’s fixed up = ARV (after repair value)
Now, know that the ARV always has to be higher than what you’re buying it for. And sometimes with as-is, we’re even paying more than a property is actually worth because the money is made on the after repair value.
But there is a situation where it’s good to have a high as-is value, because it gives you more options.
So, let’s say we’re buying a house for $100,000 and as-is is only $80,000…
But if we put $50k into it, it’s $210,000 — that’s a deal. But it’s only a deal if we spend $50,000, which makes it much more risky and adds a lot of time.
But let’s say we’re buying the same house for $100,000 and the as-is value is $120,000. Well, that’s a lot less risky of a deal, because we know with that deal we’re going to be fine… even if we have to get of it rid.
So if something happens, and you can’t get the financing for the rehab and have no choice but to just turn around and sell it as-is, at least you don’t lose money — and you might even be able to make $7,000 or $8,000.
Here’s an interesting example…
We did a deal in Gainesville, GA, buying the property for $1.1 million — the rehab was a million, and the ARV was something like $3 million. So initially, it looked good. But then the contractor bailed on us…
So, it’s not just whether you get money or not, a lot of other things can happen. You always want to make sure you have a fallback, if possible.
Bottom line is this…
If your as-is value is higher than your purchase price, you’re a lot safer being in the deal no matter what happens… whether you get financing or not.
And remember, another way out is wholesaling it. Then you don’t have to even close on it at all. You could just flip the deal.
And, sometimes you need cash flow coming in quicker. With a rehab, you could be looking at waiting to get your money 3, 6, 9 months from now. But with a wholesale deal, you’ll get that cash flow coming in fast.
Let’s talk about price ranges a bit.
Now, we’re firm believers in purchasing and renovating properties more in blue-collar working-class areas, sometimes called “hodgepodge” areas.
So, whatever city you’re in, take that median home price and stay at that price or below.
We’re in Atlanta, where the median price is ~$250K. So, I would not go into a $6 million deal. I’d stay at $250K or below.
The other good thing about hodgepodge area deals is that you have a bigger pool of buyers on the backend.
And, usually in high-end properties, there’s a lot more that needs to be done.
If you’re doing a $100,000 or $200,000 home, you don’t have to make it drop-dead gorgeous. You’ve got to make it livable, presentable, nice.
But a $3 million house, it has to be pretty perfect, which is pretty expensive.
Plus, while not everyone would agree with us, we like to pick out the materials from a home improvement store… instead of waiting several months for materials to be delivered for a multimillion-dollar, custom home that needs special attention. The supply chain struggle is still happening.
Remember, you’ve got to think about carrying costs…
If you’re carrying a $100,000 home, it’s very realistic to be carrying that for about $1,200 a month. If you’re carrying a hard money loan, that may be $1,500.
Guess how much the carrying cost on a million-dollar deal is…
About $10,000.
Which means, every 30 days you’re sitting on it, you’re knocking $10,000 off your profit.
And maybe you’re thinking, “Well, I’m making $200,000, so what’s $10,000 gone?”
Well, you’ll be shocked at how quickly $10,000 will eat up a profit. Real quick.
Also consider another expense… commission.
Say commission on a $100,000 home is $6,000. Think about what commission is on a $1.5 million home. You do the math.
Now think about this…
Most people can’t afford to lose at a high-end price.
Let’s face it, we all take losses. Even we do, after being in this business for decades.
It’s one thing to take a loss of $10,000 on a $150,000 home. Most people can recoup that over a fairly short period of time.
But when you’re taking hits upward of $60,000 or $100,000 — most people can’t do that.
As I think about it, there’s no way I can spin it to be able to recommend a newer investor should do a high-end home.
We don’t mean to be all doom and gloom — but we want you to understand the risk and significant money involved… that you could be on the hook for.
Also, generally speaking, the more expensive the home, the less the rent.
It’s not unheard of to have a $150,000 or $250,000 house, where you’re getting $1,500 to $2,500 a month in rent… and your rent is more than your payments.
If you’ve got a million-dollar house, you’re going to get $3,500 or 4,000 a month in rent — barely enough to cover your insurance, taxes, and the mortgage payments.
At least on the smaller deals, if $#!% hits the fan, you can at least put a tenant in there.
Areas and buyer pools matter
So remember, areas do matter. And the number of investors in your pool of buyers matters — and it’s higher with the more affordable houses.
Stay away from the worst parts of town, too, because things can go wrong in those areas… a lot more than things can go right in a $200,000 area.
It’s an easy target.
Areas do matter.