# How to Analyze a Fix and Flip Deal?

According to the most recent 2021 US house flipping report, there were almost 32,526 houses flipped in the first quarter of 2021. Whether you are a seasoned house flipper or first-time investor, it is important to analyze every aspect of a fix and flip project to get the most out of the deal. Let us shed some more light on how to analyze a fix and flip deal and what are the factors included in the process.

## Determining the after repair value

The most primary and important step is to determine the after-repair value of the property you want to purchase. The after repair value (ARV) is the estimated value of a property after all the repairs or renovation and ready to be sold. ARV includes the total repair costs and the estimated selling price of the property, determining the ARV is important as it defines the performance of a property in the real estate market.

The formula to calculate the after repair value (ARV) of a property is as follows:

Current Value of The Property + Repairs or Renovation Costs = after repair value (ARV)

For example, if the current value of a property is somewhere around \$180000 and the repairs will cost you around \$35000, the ARV of the property will be:

\$180000 (Current Value) + \$35000 (Repairs cost) = \$215000 (ARV)

There are primarily three steps involved in determining the after repair value (ARV), using which an investor can understand the depth of a fix and flip deal and invest according to it.

### Step 1 – Appraisal of the property

A seasoned investor may have the skills to appraise the property on their own, house flippers also have the option to appraise the fix and flip property from a licensed appraiser who will analyze the property, inspect each corner of the property, look for all the repairs, and let you know an exact value of the property you are willing to invest in.

### Step 2 – Analyzing the comparables

The second step is to analyze the comparables, popularly known as comps. It includes gathering detailed information on similar properties which are up for sale or have been recently sold in the same neighborhood.

Investors must refer to the nearby comparables which are in similar condition, age, size, type of build, construction style, etc. Investors can take the help of the online multiple listing services (MSL) to access information about the comparables.

### Step 3 – Estimating repair costs and expenses

The final step is to estimate all the repairs and renovation costs. This is a crucial part that defines if a property is worth investing in or not. The most common repairs a fix and flip home can have are the interior and exterior paint, roofline, landscaping, plumbing, drywall, doors, and windows. The following table will provide a better idea of the repair costs included in a rehab property.

The above mentioned are the approximate costs to repair an average US home of around 1200 sq. ft. The repair work and its costs can vary by the condition of a property.

## Determining the associated costs

You’ll find people telling you the purchase price, repair costs, and the selling price but most of them do not mention the associated costs or quiet costs an investor should emphasize before investing in a fix and flip project. The most common costs associated with a fix and flip can be as follows,

1. Closing costs at purchase – \$2000 to \$8000
2. Property Insurance – \$500 to \$2000
3. Property Taxes – \$500 to \$3000
4. HOA Fees – \$1000 to \$6000
5. Closing costs at sell – \$10000 to \$150000
6. Property Maintenance – \$500 to \$1000

Fix and flip projects are executed in a short time and require a quick funding source like hard money loans to invest. These types of loans usually have an individual or group of private investors lending money to the investor. Hence, the costs can be relatively higher than the conventional loans.

Major costs related to a hard money loan are the down payment and the interest rate which can be determined by the loan-to-value (LTV) ratio. An investor should consider the following costs related to a hard money loan before investing in a fix and flip project.

a. Hard money loans generally have an LTV ratio of 50% to 70%,

b. Lenders can charge anywhere between 8% to 15% of interest rate,

c. About 10% to 50% of the loan amount goes towards the down payment.

Other costs related to hard money loans are the closing costs which generally include:

### Origination Points

Hard money lenders will usually charge 1% to 3% of the total loan amount as an origination fee. Lenders cover up the processing and administrative fees with the origination points.

### Underwriting Fee

The underwriting process for acquiring a hard money loan is simple and can cost around \$750 to \$2500.

### Extension fees

You have the option to extend your hard money loan past the due date while paying an extension fee of 0.25 % to 1% per month.

### Prepayment penalties

Hard money loans require any borrower that pays the mortgage before the specified time; they will have to pay a prepayment penalty. The average prepayment penalty for short-term loans is about 2% of the outstanding balance.

## Scope of profit in a fix and flip

House flipping is a great way to gain profit in a short time frame. Leaving aside the closing costs, carrying costs, buying and selling costs, an investor can easily make around \$30000 to \$50000 of profit behind every fix and flip project.

Investors can earn a profit of up to \$100000 on a high-value property with a purchase price of over \$200000. These types of profit margins are rare and can be only obtained on high-value properties, but the higher value of the property means higher risk for the investor.

The key here is to flip multiple properties and earn small profit margins of around \$30000 – \$40000 with fewer risks involved, rather than sticking to one and expecting a large profit.

The fix and flip strategy of real estate investment may seem simple, but it is hard to find the right property, get the best deal, find the best financer, estimate the repair costs, find the right contractor, fix all the repairs, and sell the property at a profitable price. An investor should be able to multitask and have the managerial skills required to successfully execute a fix and flipping project.

## Determining the maximum offer price

Finally, an investor has to determine the maximum value they should bid to purchase an investment property. This helps investors to better plan their finances and determine the cost of repairs. The simple formula to calculate the maximum offer price is, to sum up, the total repair costs and fixed costs with the profit margin and subtract it from your after repair value (ARV). Let’s have a look at the following example to better understand the maximum offer price.

Let’s say the after repair value of a property is around \$200000

The fixed costs (closing costs, lender fees, insurance, etc.) are around \$25000

The total repair costs are up to \$30000

The expected profit margin on the property is set at \$40000

So the maximum offer price for a property can be carried out as follows:

ARV – Fixed Costs – Repair Costs – Profit Margin = Maximum Offer Price

\$200000 – \$25000 – \$30000 – \$40000 = \$105000

Investors can also make effective use of the 70% rule in real estate investment to determine the maximum offer price. The 70% rule state that an investor should not offer more than 70% of the ARV while subtracting the repair costs from it when purchasing a property.

For example, if an investor is willing to flip a house with an ARV of \$180000 and the estimated cost of repairs is \$20000. So the maximum offer an investor can bid for the property could be,

ARV x 70% – Repair Costs = Maximum Offer Price

\$180000 x 0.7 – \$20000 = \$106000

Investors must determine the accurate ARV and repair costs of the property they want to invest in for the 70% rule to work.

## The Bottom Line

Fix and flip projects can be profitable for an investor who can better analyze the risks and forecast the profits of each project. Determining the exact after repair value is very important for an investor as it defines the overall performance of a property in the real estate market. Another important factor in a fix and flip project is to estimate the repair costs and expenses to plan out the financing options.

Hard money loans are the best option for investors looking to fund their fix and flip project. 14th Street Capital understands the different project needs and provides flexible hard money loans that best suit your requirements. Get customized terms, competitive interest rates, best loan to value ratio, with 5-10 days closing time. Apply for a hard money loan to get started on your fix and flip project today.