After Repair Value: The House Flipping Secret Formula That No One Talks About
If you are like most new house flipping investors, you have already calculated how much profit you are going to make when your first flip sells. Let me offer you some advice, slow down and start with how much you are going to buy the house you plan to flip. Take advantage of the tips to make your flip as smooth as possible. At the very least, and if you do nothing else, make sure you understand After Repair Value, or ARV.
Go into the purchase knowing that most people think it costs much less to flip a house than the actual cost. Remember, for every $1,000 you underestimate, you lose at least as much of that in profit! Severely under estimate your flipped home repair costs and you will be lucky to break even; it is more likely that you will even lose money on your flipped investment.
ARV: The 70 Percent Formula For Flipping Houses
Seasoned real estate flippers know only to flip a house for profit when the 70 percent after repair value rule works in their favor. Basically, the 70 percent rule looks at the After Repaired Value (ARV) for a flip; essentially it is a house flipping formula that helps determine what to sell a flipped home for.
The formula for flipping homes takes the ARV, subtracts anticipated repairs, and multiplies this dollar amount by 70%; which is the maximum amount you should pay to flip and turn a profit.
For example, using a flipped house with an ARV of $200,000 and $40,000 worth of repairs, the 70% after repair cost (or the maximum you should pay to buy this property) would be $112,000 (ARV – Repair Costs * .70 = Maximum Flipped House Purchase Price).
Your maximum flipped home purchase price will be more accurately calculated by using an After Repair Value Spreadsheet. A high quality ARV spreadsheet allows you to accurately anticipate repair costs and resale value when determining ARV in real estate.
What Costs Can An ARV Spreadsheet Help Determine When Flipping Real Estate
Flipping houses always seems to cost more than people anticipate, especially when they are new to the real estate business. This is one reason, when building your real estate investment plan, why it is essential to use the 70% ARV Spreadsheet to accurately estimate costs. Here is a basic rundown of some of the costs associated with flipping a house.
Interior Cosmetic Repairs and Upgrades
- New Kitchen Appliances and Fixtures: $2500
- Fresh Paint (Interior Only): $2000-$3000
- New Carpet or Linoleum Flooring: $4,000-$5,000
Already, your repair costs are approaching $10,000 – and that is assuming everything is going as planned (which almost never happens)!
Most new home flippers understand there are costs associated with cosmetic improvements – however, it is the host of other costs that you may not consider or even know about, including Buying Costs, Insurance, Taxes, Interest, Closing Fees, Title Insurance, and others that will cause you problems. These hidden, additional fees can easily add up to over an additional $10,000 in costs; which come out of your profit is not planned for ahead of time. All the more reason to figure your planning and expenses using an After Repair Value Spreadsheet designed to maximize your house flipping profit.