If you have watched enough real estate shows, then you might find flipping properties very exciting. Who wouldn’t be excited about the prospect of turning old, dilapidated, and abandoned properties into lively homes that bring in big returns on investment?
However, flipping properties successfully goes far beyond aesthetics and finding fulfillment. It is also about the bottom line – doing it profitably. Moreover, knowing how to flip commercial real estate is a different ball game – it’s like playing in the big leagues.
In this article, we will identify the 5 steps you need to take to become a successful CRE flipper and the key things you must do at every step.
There are three main classes of properties. Class A properties are high-quality properties in desirable locations; Class B properties are also in desirable locations but are not of high quality; Class C properties are not of high quality and are not in desirable locations.
As a flipper, you should focus on Class B properties. Since they are not yet of high quality, there is an opportunity to improve their value (in contrast to Class A properties). Also, given that they are in desirable locations, you won’t have trouble selling them.
Buy the right properties at the right price
If you make the mistake of overpaying for a CRE property, you have practically thrown yourself into a ditch.
This is because you might need to sell above market value to make any profit on the flip. To sell above market value, you will have to wait to get someone who will pay the price and who says market value won’t decrease within that waiting period.
What then is the right price?
The 70% rule is a good place to start. It states that the purchase price should not be greater than 70% of the after-repair value (ARV) minus the repair costs.
For example, if your evaluation shows that the ARV is $20m and you have budgeted repair costs of $5m, then the maximum purchase price should be $9m ((70% * $20m) – $5m).
Before settling for an ARV, ensure you do proper market research to see what comparable properties are selling for. Also, ensure that your budgeted repair costs include
accommodation for emergencies.
Improve the value of the properties
Now that you have bought at the right price, the repair and renovation can start.
The main point here is that you should focus on utility over aesthetics (unless aesthetics constitutes utility for your target audience). Instead of renovating to your taste, focus on doing what your target audience will find valuable.
If a bigger parking space is more valuable to them than having renewable energy, for example, then focus on the former, and vice versa.
Sell at the right price
Your ARV is the minimum price you should be willing to sell for. This is why it is essential to be meticulous when calculating it.
If you want to involve a real estate agent in the sale, then it makes sense for you to involve them from the beginning – when you are calculating the ARV.
There is nothing wrong if you see an opportunity to sell even for a higher price. However, understand that time is of the essence and economic conditions can cause market value to fall while you are waiting for someone that will pay a premium.
Secure earnest money deposit
It is now a norm in the United States that you need to pay an earnest money deposit (EMD) before you can inspect a property or get negotiation underway. Therefore, you must include securing EMD in your flipping plans.
If you don’t have the cash to pay because you are still working on finances for the flipping, then you need to secure EMD financing. Without paying EMD, buyers won’t take you seriously.
A platform like Duckfund provides EMD financing for all types of CRE properties. You can complete the application in 2 minutes and get the needed funds transferred to the escrow account within 48 hours, all without submitting any credit report.
Duckfund will provide funding for all your CRE deals, so you can pursue as many deals as you want.
