Can Flipping Cheap Houses Really Make You Money?
Many experienced fix-and-flippers out there carry the banner warning new investors to stay away from cheap houses. They believe that cheap properties are money pits and there is no way to make a solid investment on a cheap home. They also claim that usually cheap homes have too many items needing extensive repair. This blows up your rehab budget and drastically decreases your overall profit.
Though these experienced flippers do have a point, Do Hard Money is here to contend that you can make a solid profit off of an inexpensive property! When it comes to fix-and-flip success, one major influential factor is the property’s purchase price. With a low purchase price, you can earn a tremendous profit and return on your investment.
But wait… if the experts advise staying away from cheap properties, how can you claim to earn huge profits off of them?
… It’s because there’s a big difference between a cheap property and a discounted property.
What is a Cheap Property?
A cheap property describes far more than just a low purchase price. There is the simple matter of seller’s motive involved. In this case, a cheap property connotes a worthless property. The seller wants to offload it because they know it can’t make much money, even with an extensive rehab. This type of property is indeed one to stay away from. It sells for an attractively low price, sure. However, it’s priced that way for a very specific reason. Usually the property is priced low because there are far too many problems with the property itself. There could be problems with the foundation or roof truss. There could also be extensive fire damage or mold present in the home. Or, the property could just need major repairs done in order to make the home move-in ready. With these types of properties, you will absolutely sink a ton of money in to the rehab of the home, which will eat away at your overall profit.
Here’s a good mathematical example of a cheap property:
You find a home selling for $25k in a good neighborhood. Wow! This deal seems to good to be true! Upon further home inspections and evaluations performed, you find it is indeed too good to be true. While the after-repair value is estimated at $90k, contractors estimate the rehab bid at $75k. Your hard money lender will only cover 70% of the after-repair value, meaning 70% of $90k. The $63k they cover is enough to purchase the property, but not nearly enough to cover all the rehab costs. You’ll have to come up with that out-of-pocket, and your overall profit shrinks like crazy.
What is a Discounted Property?
A discounted property and a cheap property have one thing in common: a low purchase price. However, there are two huge differences between cheap and discounted properties: seller motivation and rehab costs.
With a discounted property, the seller isn’t looking to offload the property because it can’t glean a profit. Usually, in these cases, the seller is faced with a probate situation where a relative dies and leaves the home behind. Not wanting to deal with the property, the next-of-kin seeks to sell it quickly. Quick property sales are also sought in divorce, foreclosure and short-sale situations. These sellers will be reasonable when it comes to negotiating a property purchase price. As a result, you can make a huge profit from a fix-and-flip.
Discounted properties usually don’t have much wrong with them. They may be older homes, but most have been well-maintained and are in need of just a few minor and cosmetic repairs. Therefore, your rehab costs won’t be crazy and you will retain a large return on your investment.
Here’s a good mathematical example of a discounted property:
You find out that dear Mrs. Flanders died recently and her next-of-kin host an estate sale. You show up to the sale and speak with her next-of-kin, inquiring about the house. They reply they have no idea what to do with the home. You offer to take it off their hands and negotiate a sales price of $25k for the property. Upon further home inspections and evaluations, you determine the after-repair value is $90k. A contractor looks over the home and gives you an estimated rehab bid of $20k. Since your hard money lender funds 70% of the ARV (or $63k), you have enough for your loan to cover the property purchase price, the rehab costs AND have more left over for other loan fees. This leaves you with a perfect example of a deal which qualifies for 100% financing.
How Do I Discern a Discounted Property from a Cheap Property?
It’s easy! You can learn everything you need to know about a property, from the repair costs to the ARV to the overall net profit by using Do Hard Money‘s Advanced Deal Analyzer. This software tool helps you determine all of the loan costs of a deal so you know which deals are worth pursuing. To learn more about this tool, click here.
Ready to get started on the road to financial freedom? Excellent! We’re excited to help you achieve tremendous success. All you have to do is click on this link to schedule your appointment with our investment associates. We can help you pinpoint your financial goals and come up with a profit plan to help you achieve every one of them.
If you already have a property in mind, you can click on the yellow ‘GET PRE-QUALIFIED’ box on the right and fill in the fields to expedite the funding process. If you prefer to get in touch with an investment associate right away, you can also give us a call at 801.692.7703. Our associates are standing by ready to help you open the door to financial freedom! Schedule your appointment today!
Get Started Today