Estimating Costs Critical in Buy, Fix, and Flip Real Estate Investing

Depending on the degree of distress, a home’s fix-up costs can be elevated, requiring additional skill in managing the renovations. AP photo/Jim Mone

In my last article, I talked about the two most popular real estate investment strategies. Last time we covered buy, rent, and hold; this article will focus on buy, fix, and flip.

Buy, fix, and flip is a strategy that can be very profitable or very expensive—depending on how it turns out. The other thing about this strategy is it doesn’t take as long as the other strategies. These types of projects can be completed in as little as three to six months if done properly.

A buy, fix, and flip is where you buy a house that is “distressed” and you fix it up and sell it for a profit. Now the level of distress can vary depending on the investor’s capability and how much money he or she has to invest.

The more distressed the property is the more skills and the more money that will be needed. For example, you can do simple “cosmetic” changes where all you do is paint the house, change the carpets, and maybe replace the appliances.

This is a minimum-cost buy, fix, and flip where you don’t need a lot of skills. Most people can paint or they can hire people to do this easy work.

The other, more common, buy, fix, and flip is where there are major renovations or fixes. You could replace a roof, replace flooring, make major changes inside or outside. The skill and cost are significantly higher.

When estimating the costs of a buy, fix, and flip, new investors will usually grossly underestimate the costs involved.

1. Renovation costs. Unless these investors already have some background in construction or renovations, they will underestimate the cost. They don’t look at unexpected costs.

For example, maybe you estimate for the painting, but you don’t allow for any costs to replace any of the drywall or molding, or to replace the electrical plates. I usually do a very detailed estimate with an expert and add 25 percent to 50 percent for any contingencies.

2. Carry costs. While you are performing the fix, you will need to take into account carrying costs. These include mortgage expenses, electricity, heating, and any other cost associated with owning a house.

3. Sales costs. When they try this strategy, a lot of people overprice the house. They look at what they paid for the house and they add in all the renovation costs, carrying costs, and realtor fees and then come up with an asking price.

The problem is that the asking price may be higher than what the market will bear. What should be happening is that the house should be priced 5 percent to 10 percent below market value. You want it to sell fast. You don’t want to compete with the market. Every day that you don’t sell is eating away at your profit.

So before you go into buy, fix, and flip real estate investing, make sure you properly estimate all of the costs. If you have underestimated, take a loss, get out fast, and move onto your next deal.

Jim Pellerin has been investing in real estate for over 25 years. He is the author of 7 Steps to Real Estate Riches. Check out his blog at www.jimpellerin.com