Hey folks, welcome to part six of our Real Estate Fix and Flip Training series. Today, we’re diving into acquisitions. This stage is crucial for your fix and flip projects. Getting it right can mean the difference between a profitable deal and a money pit.
Why Acquisitions Matter
When diving into acquisitions, you’re essentially buying the property. It’s not just about finding a property; it’s about finding the right one that fits your model. Here’s where many investors get it wrong: they force a property to fit their model. Don’t do that.
Stick to your acquisition criteria. Getting excited about a deal is normal, but don’t let that excitement blind you. A deal that doesn’t fit your model can end in financial disaster.
Considering Market Conditions
When looking at properties, focus on areas with low days on market or those that are highly competitive. These spots might offer opportunities that align with your strategy, particularly with techniques like “whole-tailing.” This involves buying a property and selling it quickly on the retail market, often in desirable areas where the structure is sound but cosmetic updates are needed.
Always have secondary exit strategies. You don’t want to be stuck with a property that you can’t unload. Make sure you have a backup plan.
Running Comparable Market Analysis (CMAs)
Your first step in acquisitions is running a CMA to understand the property’s value. A CMA, or Comparable Market Analysis, gives you a baseline for pricing. Various opinions exist on property value—from appraisers to brokers. Always compare similar properties within the same neighborhood, ideally within a 10-year build range and similar square footage.
Stay within 100-500 square feet when comparing properties. Different ranges can lead to different valuations.
Neighborhood Metrics
Stay within a half-mile radius of the property when comparing values. Avoid crossing major streets or highways. Neighborhood boundaries can drastically impact property values. Always keep your comparisons within the same subdivision for accuracy.
Seller Concessions and Special Features
Be mindful of seller concessions. These can impact the perceived value of a property. Concessions often include things like paying for the buyer’s closing costs, which effectively lowers the property’s sale price.
Converted garages usually lower the property’s value by $10,000 to $15,000. For high-end homes, unique features like home theaters or wine cellars complicate the valuation. You may need to bring in an appraiser for these properties.
Making Offers
The right offer can make or break your acquisition strategy. When making an offer:
- Deduct 5% from the highest CMA price for your resale estimate.
- Use 70-80% of that resale price, minus repair costs, to find your Maximum Allowable Offer (MAO).
- Deduct another 5% for negotiation room.
Always make multiple offers. One cash offer, one with terms, and one combining both cash and terms. This flexibility meets the seller’s needs better and increases the chances of acceptance.
Inspection and Costs
Though full inspections aren’t always necessary, having a contractor assess the property can save you from unexpected costs. A good rule of thumb for estimating costs:
- $6 per square foot for paint and carpet.
- $3 per square foot for structural items.
- $10-15 per square foot for total remodels, adjusting based on the area and required finishes.
Remember, you’ll need to adjust these costs based on your specific location and the consistency of your contractors’ bids.
Final Thoughts
Mastering the acquisition phase is pivotal to the success of your fix and flip projects. By adhering to your acquisition criteria, analyzing market conditions, running thorough Comparable Market Analyses (CMAs), and considering neighborhood metrics, you can make informed decisions that minimize risk and maximize profitability.
Remember to account for seller concessions and special features that affect property values, and to craft offers that reflect a well-calculated Maximum Allowable Offer (MAO). Finally, always incorporate inspection costs and contractor assessments to avoid unexpected expenses. With these strategies, you’ll be well on your way to securing lucrative fix and flip deals and achieving your real estate investment goals. Happy flipping!
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