Flipping Property Real Estate Strategy: One-Page Policy

Policy- "eight clauses to this article. All clauses start with the rule in quotation, and then either support for the truth: each shape is as simple, and as complex as you want it to be! These parameters are as examples; replace them by your own (best of all). Sources: Rocket Mortgage, HGTV's Egypt Sherrod, Planner5d, Gatsby Investment, HTAG, and Morningstar."

Why Write a Real Estate Strategy Down

Two sources make the same statement in different words. The source Morningstar says that an investment policy statement is a document that describes the limits of an individuals strategy. They argue that putting the rules on paper and stating them out loud increases the chances of the rules being followed because the document makes instant buying less tempting.

HTAG's property investment brief - be aware of bias A property investment brief written after having made a preferred shortlist of properties is liable to substantiate that shortlist. It may be wise to write the policy before looking at any property.

In other words, a property plan may be a set of clearly measurable rules.

Clause One: The Box for Flipping Property

Rule: I buy character homes that are well maintained located in revitalizing neighborhoods within a certain price range and in the suburbs that I can show ten sales.

Egypt Sherrod's first "do not" is: "DO NOT buy the best house on the street. It is easier to change a house than it is to change a neighborhood." Her once-said "do" is: "Buy the worst house in the best neighborhood. You'll see renovation, some new shops and restaurants, and the city has plans for sidewalk or road improvements.

Planner5d agrees - they suggest that properties, sellers are under-pricing or need to sale quickly, and houses that need mainly superficial work are better suited. HTAG adds in two extra filters: a limit on how much you are willing to spend, and restrictions on certain markets e.g. poor transaction data or only one major employer.

My own addition is the "ten recent sales" requirement. If you don't know those sales, the ARV is a guess.

Clause Two: The Price Rule Runs Twice in Flipping Property

Rule: I determine the maximum offer from the base case and the worst case. I always base my offer on the worst case not to offer more.

Rocket Mortgage describes the 70% rule as a 'rough guideline, not a strict formula': It 'can point you to a potential deal, but you shouldn't rely on it alone to close the deal.' The rule also doesn't account for taxes, loan expenses, and market downturns.

Rocket has a worst-case template: an ARV of $300,000 could bring down to $280,000 and repairs of $15,000 could bring down to $35,000. Both scenarios can be entered using the same formula.

The nadir is $34,000 below the base case. It's about 17.4% of the base offer. The $195,000 scenario (trying to get to the base case) is the result of momentum here and is analogous to price cooperation. If we conclude at or below $161,000, we are resilient to the down side.

Clause Three: Evidence Before Estimates in Flipping Property

Rule: ARV is based on sold prices. It is checked by another person. Before submitting an offer, a contractor goes through the property.

Rocket says that the damage assessed by ARV and repair estimate are both estimations, and recommends seeking a second opinion from a real estate agent or home inspector. Sherrod's next "do" to consider is to bring contractors along the first time to view the property for cost estimates before the purchase.

Australian investors can use realestate.com.au and domain.com.au for sold prices. RP Data can be up to three months behind, missing the moment when the market changes direction. In the US, Zillow does a similar job.

Recollections are rough calculations. A policy turns them into what is generally considered a record.

Clause Four: The Skill Line

Rule: Sherrod is a proponent of the simplest of DIY projects-painting, tiling, yard work, wall demo, cabinets and a flooring upgrade. She points out the more complicated electrical, plumbing, and structural work-bad construction can lead to water damage, fire hazards and re-inspections. She still remembers the roofing mishap she had at her first investment property, saying she "had no business up there".

Planner5d also makes a distinction between small cosmetic renovation and large projects altering plumbing, electricals or layout. The small cosmetic renovation is at low risk; the other is high risk and high reward. The policy should clearly define the extent of work and escalation.

Clause Five: The Flipping Property Clock and the Kill Switch

Rule: I plan for 120 days. I review the numbers at day 90. I decide whether to lower the price at 120 days or change the exit strategy.

Sherrod's 60 days schedule: 30 to build and 30 to promote and sell. Gatsby's passive investments duration is 8 to 14 months. The policy should be balanced between your target and worst case, including a decision date.

Numbers are indicative, but the rationale is not. "A shorter time-on-market means lower carrying costs and higher net profit," Planner5d says. Rocket cautions: "Allow for delays in submission because of approval. Deadlines provide the pressure to make the call before they make it."

Clause Six: Funding Limits in a Flipping Property Strategy

Rule: Utilize funding that one can sustain under the worst-case scenario for holding a property. Maintain a cash reserve to bridge the gap between the base and worst-case scenarios.

Planner5d offers a list of funding sources including: cash, traditional/investment mortgages, and hard money loans. (Cash is the quickest). Although they are easier to qualify for, hard money loans tend to be more expensive as they generally have higher interest rates and shorter terms. Holding costs can include loan interest, taxes, utilities, insurance, and association fees.

The reserve must be linked to the Clause Two. In the Rocket scenario, the penalty for losing is $20,000 in repairs and $20,000 less on the ARV. If your reserve cannot address a $20,000 shortfall, then it is a mirage!

Clause Seven: The Flipping Property Exit Order

Rule: First exit will be a retail sale based on sold comparables. If this doesn't work out, the second exit will be converting the property to a rental. Both needs to be modeled prior to purchase.

Planner5d exit plan advice is pragmatic. It would staging the home, pricing on the basis of recent comparable sales, and marketing with professional photography and open house. The contrasting approach taken by Gatsby is to stage, photograph, and take a lump sum after a sale.

If the market price falls: The rental case should be simulated using the same assumptions. If the backup option fails the maths, this knowledge needs to be known before the purchase rather than after the sale has stalled.

Clause Eight: Changing a Real Estate Strategy

Rule: Never alter this policy during a deal, only during a scheduled review.

HTAG provides a handy rule: "where a test is shown to be defective, the entire screening process should be repeated." We should not a priori switch test screening specific to our pet exception. Sherrod's final 'do not' echoes the same sentiment: don't get personally emotionally attached to a property.

Real estate strategy should also have a review date. Review on a quarterly basis and compare policy metrics against results. Amend parameters in writing and turn every transaction closed into a better policy.

How FlipSync IQ Runs a Flipping Property Policy

There is a screening process for each clause. The deal analyzer is doing an ARV test with increasing max purchase prices and adding in margin coverage. The Flip vs. BRRRR analyzer is testing retail and rental exits at the same time. Holding costs are aligned to time, and ROI dashboard compares projected to realized return as costs are added.

The parameters of your policy can be entered at time of purchase, and the tool will notify the user when a transaction does not adhere to them. It is the policy that constrains the deal in advance and software that validates.

The Real Estate Strategy You Can Check

All Eight Flipping Properties clauses are conveniently formatted on a single page- the box, the price rule, the evidence, the skill line, the clock, the funding limit, the exit order, and the review date- and each is defined by a verifiable metric.

A strategy that lives in your head is vulnerable to pressure; a strategy in writing is durable. Write down a strategy this week, before the next (tempting) listing comes along.