Flippers have much to consider when seeking a property to renovate and trying to analyze a deal.
On the outside, property flipping seem like a simple numbers game.
But making the right decision is much more nuanced than that.
Factors like location, market forces, local zoning laws, risk assessments and exit strategies all need to be carefully considered before committing to a deal.
Get it wrong and you stand to lose a chunk of cash rather than make it.
Here’s a valuable checklist to help you better analyze a deal and give you the best chance of making your flipping business a success.
Property deal analysis 1: Location
Location in real estate is everything.
Seek a property in an emerging area undergoing gentrification.
A rundown house in a good street also has a significant upside.
Look for the drivers that bring buyers to a neighborhood and make it attractive such as:
- job opportunities
- good local schools
- nearby public transport
- low crime rates
Examine sales of comparable properties within a radius of up to a mile and research whether new infrastructure has been commissioned for the area.
If the government is spending money, jobs and house buyers will follow.
Property deal analysis 2: Property characteristics
Consider the total square footage of living area as well as the lot size, the number of bedrooms (and their sizes) and bathrooms, garages and off-street parking.
Then think about any unique features and also opportunities to benefit potential buyers, and what you can do to add and create value through your flip.
It might be adding a bedroom, a pool, revamping outdoor living areas or even adding energy-efficient systems which are highly desirable in California.
These are all important to potential buyers.
Accessory Dwelling Units (ADUs) can significantly boost a property’s value, and are one of the few areas that have a relatively easy approval process in California.
Review the current condition of the property as well as its maintenance history.
This includes the state of and need to upgrade the foundations, roofing, plumbing, asbestos removal or lead paint which can add significant cost to any flip or renovation, depending on your plans.
Property deal analysis 3: Acquisition cost and After Repair Value (ARV)
Regardless of how much potential a property has for redevelopment, you can’t make enough money out of it if you pay too much for it.
California’s real estate market is one of the hottest and most lucrative in the country.
There is no shortage of flippers and developers trawling the streets and online looking for their next target.
Distressed properties and foreclosures can offer excellent value, scope for higher profits and greater ROI.
Use conservative comparisons when assessing similar properties in terms of size, age and style and sold within the last 90 days.
The 70% rule is a good one to adopt – aim to buy at no more than 70% of ARV minus repairs.
In extremely competitive markets, slightly smaller margins may have to be accepted.
Always build a ‘worst case scenario’ into your budget.
Do this by allowing for a sale price 10% lower and rehab costs that blow out by as much as 20%.
Property deal analysis 4: Zoning and development potential
Ensure you know precisely what the local zoning, land use regulations and building codes allow for the lot.
It’s no good buying a property with a big redevelopment vision, only to find your plans are not permitted.
Consider the physical possibility of expansion – is there enough space to build an ADU or add square footage?
Assess what course of action will return you the greatest profit.
Remember that while many local regulations have been relaxed throughout California to encourage development and ease the housing crisis, obtaining permits can still be time consuming and time is money – your money.
Property deal analysis 5: Finance
This is arguably the most important factor when you start to analyze a deal.
The success of your flip depends on your ability to get the numbers right – understanding the market, your budget, capacity, cashflow and how you’ll effectively fund your project.
Experienced and successful flippers and developers utilize the power of hard money loans to access money fast when they need it.
They do this because it:
- secures properties they might otherwise lose with approval in as little as 48 hours
- bases loan approval on ARV of property rather than credit history of borrower
- offers flexibility that traditional loans can’t match
That flexibility can be critical if you run into expensive building or weather delays that can blow out holding costs such as property taxes, insurance, utilities and HOA or condo fees.
Property deal analysis 6: Exit strategies
Exit strategies are absolutely critical to a successful flip when you analyze a deal.
You can work tirelessly renovating a property for six months, making it the best house in the street.
But if you can’t sell or rent it out upon completion, your hard work and your money goes down the drain.
It is also important to have a Plan B and Plan C ready to go if Plan A falls through for whatever reason.
Multiple exit strategies are imperative to insure against market downturns or other unforeseen circumstances.
But an exit strategy doesn’t just involve the sale or lease of your property.
It also means having exit finance to rid yourself of debt and a potentially expensive loan you no longer need.
Smart flippers gain pre-approval exit finance before they close on a property.
Property deal analysis 7: Risk assessment and mitigation
Considering what might go wrong is not pessimistic, it’s smart when it comes time to analyze a deal.
Here’s what you should be thinking about:
Market volatility – markets are volatile by nature and a sudden downturn could wipe out your profit margin.
Economic risk – the health of the local economy is vital. If a local major employer shuts down, jobs are lost and people could leave the area, flooding the market with properties. Assess the potential for rising interest rates to impact local buyers.
Renovation risks – Building delays or unexpected finds such as mold or asbestos can add significantly to rehab costs. It’s why you should build a contingency of between 10-20% into your budget.
Finance risks – Know the terms of your contract and what happens if something goes wrong. There is generally little wriggle room when borrowing from anonymous lenders. You could potentially be forced into a fire sale and significant loss.
Natural disasters – California is a high-risk state for wildfire and earthquake damage. Both have the potential to cause great economic loss and at a minimum, force you into expensive insurance. Retrofitting properties for quakes and using fire-resistant materials may be a necessary part of your renovation.
Regulatory changes – Local zoning laws and taxes are all subject to change. While difficult to foresee, it is important to remain as informed as possible. This is achieved by forming strong relationships with local government and real estate professionals.
Get advice, support and finance for your flip today
There is so much to process and often so little time to properly analyze a deal.
But you don’t have to do it alone.
And if you need help analyzing a deal, crunching the numbers and then accessing capital, you need look no further than Equidy.
Equidy is a private money lender with an intimate and personal 40 year history with all aspects of property development in California.
They work closely with their clients to ensure they don’t make costly oversights when they analyze a deal, helping them maximize the return on their investments without putting themselves at unnecessary financial risk.
They do this because they know the business inside out and advise their clients every step of the way to help them eliminate costly delays.
Critically, Equidy is a hard money lender that will finance flippers and developers in as little as 48 hours as well as providing pre-approved exit finance to ensure their margins are protected.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in uncertain economic times, they love to reward entrepreneurship and strive to help their clients realize their wealth creation dreams.
Contact Equidy today, apply instantly below and you can also book a free strategy call.
