Flipping Houses Quick Tip: How Should I Adjust For Changing Markets?
June 22, 2008
Question: Steve, when flipping houses, how do you approach the need to adapt your real estate investing business to a changing market?
Answer: Markets go up and markets go down. And many people feel you need to make major adjustments to your flipping homes business as markets change.
Whether your market is sizzling hot or is very slow, youre still investing in real estate based off the same formula. Theres a reason why I use those same formulas. Theyre there to protect me, to help me manage my risk regardless of market conditions and ensure Im profitable as often as possible.
Ive been through both up and down markets, and my experience has taught me that if youre using the right formulas for flipping houses, your business will most often need only minor (if any) tweaking based on the market.
Now at the time Im writing this, my own market (Baltimore area) has just come off an extreme up wave, but is now cooling off a bit. I may be backing off of the formula just a little bit. So its a slight tweak; but its nothing major.
When the market was hot, I was reluctant to start paying more for properties like many others did. At one point, I did start paying a little bit more, but it was really very miniscule. I didnt make major adjustments and start paying 5% more for properties just to be able to have a deal. I may have been willing to pay a percent or two more than what my standard flipping homes formula told me I could pay to pick up a deal.
Otherwise I just stick to my formula.
Now as I said, even though things are cooling a bit now, in recent years the values in my Baltimore market have gone way up. Rentals have also gone way up. I started out in this market where rentals were averaging about $550 to $600 per month. Well that same rental is now probably $1,200 to $1,500 and up.
So you might have to make small adjustments if youre dealing with that dramatic of a change.
My standard formula for buying a house to fix and flip is:
After Repaired Value (ARV), times 70%, minus estimated repairs = the most I can pay. This is a standard formula many investors use. Its not original or magical. It just works more often than not.
Now when Im buying a house to flip wholesale, keep in mind that I will have to back my intended wholesale profit off that number as well. The investor Im selling to is likely to be using a formula very similar to mine, and he expects and deserves a good deal.
From a real estate flipping point of view, as long as youre sticking to a good formula, you should be buying low enough to be profitable. The formula allows for adjustments in the market to keep you safe. So if you stick to the formulas that work, those that are proven, those that are time tested, then the fluxing market really shouldnt affect you all that much.
Blessings,
Steve
About The Author: W. Steve Cook
Since 1998 Steve Cook has been actively flipping houses as a full time, Baltimore-area real estate investor and has taught thousands of his students how to follow successfully in his footsteps.
Steve's specialty is his "flipping homes 1-2 punch", a proven system of real estate investing that powerfully combines wholesaling and rehabbing houses.
Also the founder of "The Flipping Homes 2.0 Community", Steve is dedicated to helping others in this thriving online community succeed through understanding and aggressively applying his time-tested, step-by-step approach to flipping real estate.
Get FREE weekly real estate investing tips from Steve Cook and other house flipping experts at http://FlippingHomes.com
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