Last Updated on November 22, 2021
House Flipping Market Analysis: How-To Guide:
Any market decision should be preceded by a market analysis, and house flipping is no exception! Without comprehensive analysis behind it, house-flipping can be a real gamble. There are many different ways analysis can take place, depending on the specifics of the project and the information needed. In the simplest possible terms, there are a few very compelling reasons to perform a market analysis. You can…
- Decide whether a given property is a viable candidate for flipping in the first place
- Figure out the potential ARV (After Repair Value) of a home
- Determine a fair price at which to purchase the property
- Discover just how you could make by flipping a property
You may be wondering where to begin, and understandably so.
The ABC’s of House Flipping Market Analyses
There are some basic elements any house flipping market analysis would be incomplete without, basic points that should always be covered in the interest of making a well-founded decision. First and foremost, you should always look into the market performance of comparable properties over the last two to four months. If you’re in a slower-moving market, you could also look back further: whenever working with data, remember that more (relevant) information is better.
There are a few key conclusions you should try to draw from this step of the analysis. Are home prices trending up, or down? How long are homes staying on the market? As in any form of investing, you want to buy low and sell high. Accordingly, properties that are appreciating in value are preferable to those on a downward trend. Here’s a good place to start your search for undervalued properties which could appreciate, right here on our blog.
There are many factors influencing a real estate market, and you should always look into the underlying reasons behind the price. What kind of amenities and infrastructure are available here? Are there any major developments going on nearby? If a major employer is opening in the area, or desirable amenities could be moving in soon, it’s likely that prices will rise. This can be your opportunity to profit!
It is also worth noting that if the property could take a long time to sell, your maintenance costs and taxes could start to add up. Make sure to check how long properties tend to stay on the market, and especially note whether there’s an increasing or decreasing trend. If the total time spent on the market is decreasing, it means that properties are selling faster and demand is higher.
Look into other house flips in the neighborhood too, if possible. You could try to avoid others’ mistakes, or plan around any shortcomings the neighborhood may have.
Analyzing the house itself— what am I flipping?
The surrounding environment and the market as a whole are very important, but nothing is more crucial to a house flip than the house itself! It’s second to none that you know the property inside and out, all its potential pros and cons included. Here are a few things to take into consideration:
- The date of construction
- The number of bedrooms and bathrooms
- Age and condition of infrastructure, such as plumbing and electrical wiring
- Whether the area is prone to flooding or other adverse conditions
- The presence of any potential hazardous materials, such as asbestos (which can be common in older homes)
All these factors can have a considerable impact on the financial cost and time commitment of renovation, as well as the home’s value in general. Your goal, as a house flipper, is to find a poorly maintained property that can easily be made marketable— not to get bogged down fixing a property with serious structural problems.
On a more market oriented note, look into the purchase records of the home itself, either through online resources or the area’s assessor. This can give you an idea of how much the home was bought and sold for under different market conditions, which can give you important leverage in negotiating.
Likewise, try to examine the renovation history of the property. Does the house have a history of serious problems cropping up every so often? Has someone else already fixed serious issues in the past, such as lead-based pipes or asbestos-infused ceilings, common in older homes?
A newer home on the market is likely to need less serious repair work, and can make for a faster, easier flip. These listings aren’t necessarily as common as homes in more dire situations, but especially for inexperienced investors, they are very valuable opportunities.
Consider the areas of the home most in need of renovation; your resources, as a renovator, are best focused on the areas that carry the most value. A bedroom or bathroom is likely a higher priority than an unused storeroom. Choosing the right renovations is key; look at what buyers are interested in, and try to avoid spending on what they aren’t.
Analyze the area, too
The neighborhood and the property itself are the first things that come to mind when analyzing any house flip, but don’t disregard local government entities, homeowners associations, and school zones as well; these regulatory boundaries can seriously impact the profitability of a given property. It goes without saying that having good schools nearby appeals to many buyers, but keep in mind that you may have to pay special taxes or fees to the local government and homeowners association, as well as make sure to observe local regulations in your renovation planning. For instance, some neighborhoods may have strictly enforced color schemes, and local governments may require the involvement of special agencies whenever working with plumbing or electricity.
You should also check on the local housing inventory, as it serves to indicate demand. If more people are moving into an area than leaving it, it is likely that demand is high and inventory is low. As always, climbing demand translates into climbing profits for the seller. Tip: Don’t be afraid to ask the area’s Chamber of Commerce or Census Bureau for information on inventory!
Of course, the local economy underlies all aspects of the local housing market. Low unemployment, high wages, and plenty of job openings make for an environment that draws new residents in, and those residents need housing. In a bad economy, low wages and poor job security will serve to dissuade people from making a serious commitment, such as buying a home.
The Economics At The Heart Of It All
Local factors aside, keep in mind too that the national housing market can rise and fall dramatically over time. Many investors lost money by buying while property values were very high, and then selling after the 2008 recession. Currently, home values seem to be high and only rising higher. Prices fell dramatically at the beginning of the COVID-19 pandemic, but have risen to current highs since then; right now, owing in part to low interest rates on mortgages, there are more buyers than sellers on the market. The situation could change suddenly though, so always keep a close eye on national trends.
Having gathered all this information, an investor should be able to come up with a rough idea of how much a flip will cost versus how much it will earn. Your formal analysis should inform the decision to purchase any property, and you should always keep in mind the 70% rule in the simplest possible terms, you should aim for a profit margin of at least 30% of the sales price. It’s best to always keep that in mind when analyzing a house flip, as much of your success could hinge on this simple rule.
Analyze your own situation, too
Last, but certainly not least, you should always keep in mind how much risk you are willing to accept. Analysis can help you make a very safe investment, but even the safest investment isn’t guaranteed to be profitable. As noted above, markets can be unpredictable.
A comprehensive market analysis should also incorporate a clear picture of your own finances and bargaining position. If you are an inexperienced investor, you’ll likely want to stick to safe markets and conservative estimates. If you have many years of experience flipping houses, you may be ready to take on relatively risky projects. Never intentionally seek out a gamble or turn down an incredible opportunity, but always be aware of your own comfort level and limitations when investing. Just as you need to account for any unexpected difficulty in the flip itself, you should make sure you have enough resources available that you will remain financially stable even if things don’t turn out as well as hoped.
Flipping a house can be a complicated affair, and a thorough analysis is absolutely crucial when deciding if a potential flip is a worthwhile investment. An analysis should be thorough and holistic, incorporating extensive information on the property, the area, and the market as a whole. Always be conservative, too, especially if your access to the property is limited.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.