There are four main skills you must master in order to be a successful fix & flipper:
- Finding Deals
- Valuing the Property
- Planning/Estimating/Hiring for Rehab
- Doing the Rehab
The most overlooked is how to properly value properties. New investors find a deal that looks awesome, and then only do cursory research (or worse, fudge the numbers a bit) so they can move on to the rehab part of the deal!
This step is the “eat your vegetables” part of the deal – the step that isn’t as fun, but is incredibly important.
If you can’t value properties correctly, you will lose money on deals. It’s that simple.
So, before you get too excited about planning the rehab, here’s some advice about valuing properties correctly.
1. Find Three Recently Sold Comparable Properties
You’re not interested in comps that are still on the market – you don’t know if they’re actually going to sell for that amount. You need properties that have fetched that amount of money to make a proper assessment.
A comparable property is one within a mile, has the same number of beds/baths, and has roughly the same square footage. Ideally, the features will be roughly the same as well – such as quality of materials and construction.
2. Use the Cheapest of the Three
Now that you have the three, disregard the two more expensive ones! Yes, it’s conservative, but it will keep your deals profitable a huge percentage of the time!
For example, let’s say you find $300k, $315k, and a $330k recently sold comps in the area. Instead of using the cheapest one, you use the average. That’s a difference of $15k, and often can be the difference between walking away with a nice profit and walking away with nothing.
3. Make Sure There Aren’t Any Natural Barriers Between Your Comps
This may sound obvious, but when doing property research, especially in an unfamiliar area, you need to make sure your comps are really comparable!
There are parts of the country where houses on one side of the street are worth $25k to $50k more than the properties literally on the other side of the road… for the same size and layout.
It’s crazy, and it’s a real estate investor’s nightmare. You can’t use comparables from properties literally across the street – you have to use ones on the same side of that road or else you could lose massively on your deal.
What other natural barriers could affect the value?
4. Factor in any Deductions
Here’s a good list of issues that should result in automatic deductions from the property value:
- High percentage of rentals in area
- Boarded up homes
- Close proximity to commercial areas
- Railroad tracks
Those are just a few examples, but people often want to make the deal work so bad they’ll overlook obvious reasons to devalue the property.
Do you really think that property next to a fast food chain will sell for as much as the one 6 blocks away from any commercial property? Not a chance!
5. Avoid Deal-Killing Issues
There are also issues with properties that should make you walk away from it altogether. Some of those include expensive structural issues, awful crime rate, or other problems that complicate the deal to such a level that you can’t possibly predict how much the rehabbed property will sell for.
Also Check Out: Data Is An Investor's Friend