A few months back I toured a property that might be a good potential to flip. It is a big house (maybe even duplex potential) in a good neighborhood. It sits on several acres, and has waterfront shore line. I call it a “snake Farm” because it is narrow and very long. The house sits at the front of the property a long way from the water. The pictures in the listing don’t look too bad. They make the price justifiable. Even the text of the listing says the house is in need of major repairs. Always a good sign that there is wiggle room on the price.
All of that information triggered my Potential Buy alarms. When I first called about the property there was an offer pending. I said I would call back in a few days to see if the offer was accepted. When I called, the offer had been removed. A good sign that a low price is justified. It was worth going and looking, which we did. The pictures, to the credit of the Real Estate agent, made the property not look too bad. The reality was something different.
The pictures did not show that the most recent tenants had been mice and racoons. It did not show the obvious leaks in the roof, the wavy floors, sunken walls, and doors that are out of square. It was definitely not a quick or cheap Flip. This would take major work. Yet the house “spoke” to me. It was whispering that it could be beautiful again. That might be true, but how much will that cost, and can I get my money back?
Flipping houses in reality is nothing like on television. Most of those shows are in the States. Financing there is much more liberal than in Canada. Canadian banks are only allowed to finance (Non-owner occupied) up to 80% of the purchase price, OR 80% of the appraisal price, WHICH EVER IS LESS! This does not apply in the US. What this means is, if you get a smoking hot deal, where you pay $100,000.00 for a house listed at $200,000.00, you can only borrow (mortgage) $80,000.00. So the money for the cost of the renovation comes out of your pocket up front.
You have found a potential project. Now the important part. “What does the MY buying price have to be?” To find this out we start with, what is the selling price of this property if it is in top shape? Your Real Estate agent should be able to give you a reasonably accurate number. Example: You are looking at a house listed at $400,000.00. The Agent tells you that houses like this one, in good shape, are selling for $525,000.00 to $550,000.00. I like having a safety factor, so the number I would use is the $525,000.00.
Now the calculation. Take the estimated renovated resale price, ($525,000.00) subtract the selling commission (5% of $225,000.00), subtract the cost of doing the renovations, then subtract the profit you want to make. This will give you the price you need to pay for this property.
| Renovated Sell Price | $ 525,000.00 |
| Less Commission (5%) | $ (26,250) |
| Renovation Cost | $ (100,800.00) |
| Desired Profit | $ (20,000.00) |
| Buy Price | $ 377,950.00 |
If you pay more than your calculated buying price, you either have to spend less on the repairs, or reduce your profit expectations. DO NOT KID YOURSELF!! If you can’t buy it for the calculated price: DON’T BUY IT!! There is always an other house.
The renovation cost is dependent on how much you can do yourself versus how much you need a contractor. Material is not as expensive as labor. I learned a lot by just watching You Tube videos. Just a suggestion, if the person on the video makes it look easy, they are probably the one to copy. Pros always make it look easy.
The property I looked at had a few other flaws that really detracted from the price. About 2/3 of the acreage is under environmental protection. That means it is basically unusable. It is also so marshy, that you can’t get to the shoreline. If you can’t get to the shoreline is it really water front property??? We did not get the property at calculated price so we walked away. There are many things to consider when trying to find a flip house. The calculation I gave you will help determine what is a realistic BUYING PRICE.
If you are looking for investment or flip properties in Northumberland, Quinte West, or Prince Edward county, Canada, send me an email and I will put you on my notification list, when I spot a good deal.
P.S. I kept an eye on the house. It did sell for more than we offered. I talked to the buyer a few months into the project, he was about 3/4 done and his budget was gone.