Rehabbing and flipping is the process of buying a property below value, making improvements, and then re-selling it for a short term high profit. Let’s look at a time line of a typical deal.
The first thing we’re going to do is to look at a potential purchase. That takes less than a day for a professional investor. Next, you're going to make an offer. You want to require the seller to make a formal response in one or two days. Make this a contingency of the offer. If he or she can't give a rapid response, you want to be able to move on to another potential deal.
Let's say a counter offer is made but with negotiations, it takes three days to come to a signed contract. Once a deal is signed, the next step is closing on the purchase. Typically, this takes 30 days. But if you have financing in place, you can cut this down to as little as three days. It could be less or it could be more but on average about 30 days. After you close on the property, you immediately start making improvements to the property (the day you take ownership). This varies depending on the size and magnitude of the renovations. However, on average, it takes 45 days. Once the rehab is complete, you’re going to market for a buyer. As soon as a buyer comes forward, it should take three days to negotiate and enter into a contract. Once the buyer’s under contract, it typically takes 45 days or less to close.
Total time = 158 days
This entire process from looking at a deal to selling the deal (making a profit) takes about 158 days. If you look from when you purchase the property to when you sell the property, it’s about 123 days.
When you consider each aspect of the rehab and flip model, you really have five areas of focus (pipeline).
In order to maximize your efforts you want to focus on all five areas simultaneously to keep the pipeline full.
The profit is what’s left after you sell the home and subtract all of the costs to do the deal. Here is a profit breakdown:
+ ARV (what it will sell for)
- Purchase price
- Repair costs
- Total closing costs (both when you buy and sell)
- Carrying costs (cost of capital, utilities, and other common expenses)
Closing costs include realtor commissions, property taxes, title insurance, transfer tax, closing fees, etc. These are all the fees associated with buying and selling the property.
Carrying costs are fees for the capital you borrowed from the time you acquire the property until the time you sell the property and pay back the borrowed capital. There will also be costs for electricity, homeowners insurance, and associated costs.
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