Investors who follow the fix and flip strategy are often referred to as “house flippers,” and commonly have a background in carpentry or home improvement. Ultimately, the fix and flip strategy is ideal for investors who are experienced with renovations as this can help them expand their margins and reduce the risks associated with uncovering hidden problems during the flipping process.
What is the fix and flip strategy?
The fix and flip strategy is an investing approach that involves purchasing an outdated or distressed home with the intention of fixing it up quickly and then reselling it for a profit.
While it might sound simple on paper, the fix and flip strategy does hold inherent risks. For instance, purchasing a distressed property requires a thorough inspection and valid estimations, or an investor risks going far over budget for necessary repairs. Additionally, getting below-market prices requires a great deal of legwork in order to uncover pre-foreclosure homes and homeowners in distress.
The fix and flip strategy is not new, but with house prices soaring, flipping homes continues to be an appealing way for investors to enter a market without paying top dollar for a property. Oftentimes, house flippers will seek out deals by finding distressed properties, pre-foreclosures, and homeowners who have back taxes or liens against their property.
Fix and flip strategy case study
As a flipper, the condition of the properties you buy could range from uninhabitable to simply outdated. Imagine that you find a property for sale that’s in poor condition and listed for $120,000. Figuring out the necessary investment and potential profit will help you negotiate.
You’d start by budgeting out all the necessary repairs to make the property livable. With any money remaining, you’d want to consider all the upgrades you could invest in to make the property even more appealing to local buyers. If you plan to invest $35,000 into the property, you might estimate that the after-repair value (ARV) will increase to $175,000.
Once you negotiate with the seller and they accept a fair offer for the property, it’s on to the next step. You now have an investment property and a goal to spend as little time and as little money as possible on the renovations in order to minimize risk and maximize returns. If you buy it for $110,000, you’ve got a potential profit of $30,000 waiting for you after you pay for the repairs.
In a matter of a few months, you could turn that distressed home into an updated family abode, and you’re walking away with $30k in profit to put into your next investment.
The bottom line
The fix and flip strategy can be applied in practically any market by purchasing a home that is distressed or outdated and spending the money to fix it up. Investors are able to build instant equity in the property, allowing them to offer a competitive selling price for a quick sale or charge a favorable rental fee.