You’re reviewing a list of flip prospects, none yet visited in person. How do you tell now which have possible returns that are worth further an inspection, quotes and further research – and which are not worth your time?

On-the-fly calculations and/or ratios can be done by developing your own standard assumptions (and be prepared to completely change themas you delve into individual properties).

Example of standard assumptions

• Rehab/improvements: 25% of the purchase price (includes labor, materials, permits, everything spent directly on the property)
• If the above number is less than $20,000, use a minimum $20,000 (or $15,000 or $10,000)
• Add a reserve of an additional $20,000to solve bigger problems discovered during rehab
• Buyer’s real estate agent: 6% of the asking/sales price.
• Selling costs and other administrative costs: 2% of the asking price, or $2,500 to $5,000 including staging
• Financing cost: Whatever it is for you, from 0% to 20% of other people’s money in the project.
  • Time is money and this is the way to define the cost of project time and delays
  • While you are at it, calculate your financing cost per week and per month, then tattoo those two numbers on the back of your hand – or well, keep them always in mind when you are discussing the project with your crew
  • Your selling price assumption=the market average for a move-in ready house in this neighborhood
    • Remember that a project house that is smaller or in disrepair has to be brought up to ‘average’
    • Don’t set your sales price at what you require to make the project worthwhile – that defeats the purpose. The market doesn’t care. The buyer will only pay what something is worth to her or him, not what the seller is hoping to get.

Example calculation based on these assumptions

• $100,000 purchase + $25,000 rehab/improve + $20,000 cushion = $150,000 direct costs
• Add all other costs (see standard assumptions above) = $15,000 other costs
• Total cost to you: $165,000
• Average sales price in the neighborhood $185,000
• Profit $20,000 or 12% on the total spend – that’s worst-case, it’s more if you don’t need to spend the $20,000 cushion

If that’s the kind of return that interests you, go ahead with the inspections, quotes, research and analysis to reach a go / no-go decision. If it’s less than your minimum to play, don’t spend anyone’s time on this one and keep looking.

Put together your standard assumptions and even create a wallet card with the answers so you don’t have to re-calculate for common price ranges. For instance (based on the above example), a very quick ratio you can base from the calculations against your standard assumptions is that the purchase price has to be not more than 50% of the market price to continue the analysis – or whatever ratio works for your own criteria.

I like to advise my clients to not spend more than 65% of the “fixed and repaired” value of the home when they first get started. As you gain more experience in what repairs cost, actual time it takes to get the project completed, marketing time, negotiated commissions etc you will be able to potentially pay more for a deal that can still make you money.

Save everyone’s time, analyze effectively and apply your mental acuity to only the best prospects!

Given the risk element for flipping, what is the minimum return you require to make it worth your while?

Contact Andy Werner, real estate investor with years of experience with flips, rentals, wholesaling, and more, and share his knowledge at http://www.streetwisepropertyinvesting.com/contact/