There’s risk involved in any investment, and flipping houses is no different.
But there are some things you can do as far as hedging real estate risk on flips, and that’s what I’ll be talking about today.
Related: How to Flip a Home and Save Money
Double-Check the ARV
Before we move forward with purchasing a house for a flip, we check and double-check the comps, to make sure we have a solid idea of how much that property is going to be worth once it’s fixed-up.
Pay as Little for the Property as Possible
If you pay too much you’re reducing your equity for no reason.
The less equity you have, the more you’re at-risk of making little-to-no profit on the deal.
We don’t deal with REO properties for our rehabs. We get all of our properties directly from motivated sellers.
Since these properties aren’t listed, there’s usually little-to-no competition for them. And that’s a good thing, because competition brings the purchase price up.
Maximum Offer Formula
We have a formula that we use to determine the most we’re going to offer on a property.
If the property doesn’t fit, we move on to the next property, because we’re putting ourselves at-risk of not making a profit.
Here it is:
Maximum Offer = 70% of ARV – repairs
So if a home is worth $100,000 after it’s fixed-up, the maximum we’re going to pay for it is $55,000.
70% * $100,000 = $70,000.
The most we’re willing to spend on repairs right now is $15,000, so after subtracting $15,000 from $70,000, that leaves $55,000.
Offer Needs to Make Us Uncomfortable
One piece of advice we were given years ago that we adhere to dearly, is to only make offers that are so low that they make us uncomfortable. If it doesn’t make you uncomfortable, you’re offering too much.