ACQUIRING PHASES

The Three Phases of a Flip Property

Acquisition Phase
- Initial stage of property flipping.
- Key activities:
- Purchase the property
- Evaluate initial costs
- Market Research: Analyze local real estate trends, neighborhood desirability, and comparable sales (comps) to identify undervalued properties.
- Property Analysis: Assess the property's potential for renovation and its "After Repair Value" (ARV).
- Due Diligence: Conduct inspections and title searches to uncover any hidden issues or liens.
- Example: For a flip home, the focus is on answering "How much am I going to spend to buy the property?"
Holding Period
- The middle stage after acquisition until the property is ready to be sold.
- Key considerations include ongoing expenses and renovations.
- Renovation Planning and Execution: Develop a detailed renovation plan, secure permits, hire contractors, and manage the construction/remodeling process.
- Expense Management: Monitor and manage all holding costs, including utilities, property taxes, insurance, loan interest, and unexpected repairs.
- Example queries:
- "How much am I going to spend to fix it up?"
- "What are the costs while I hold it?"
Disposition Phase
- The final stage of selling the property.
- In simplest terms:
- We buy it, we hold it, we fix it, and we sell it.
- Preparing for Sale: Clean, stage, and photograph the property to maximize its appeal to potential buyers.
- Marketing and Sales: List the property, conduct open houses, negotiate offers, and manage the sales contract.
- Closing Procedures: Complete all necessary paperwork, title transfers, and financial transactions.
- Question at this stage: "How much do I need to make at the end to recognize a return?"

Set Up for Calculations

Components of Calculation
- Identify expenses:
- How much will be spent to buy the property?
- How much will be spent to fix it up during the holding period?
- What is the desired profit margin to recognize a return?

Example Scenario: Problem Number Four

Property Details
- Property value: $200,000$
- Loan amount: $160,000$
- Interest rate: $8\%$
Goal
- Calculate the selling price required for a $20\%$ return.
- List of expected expenses includes:
- Inspection: $500$
- Title Search: $1,000$
- Renovation: $13,000$
- Landscaping: $800$
- Loan Interest: $12,800$
- Insurance: $1,800$
- Property Taxes: $6,000$
- Selling Expenses: $8,000$
- Summary: The total return calculation needs to account for all these expenses over the holding period.

Total Expenses Breakdown

Initial Costs:
- Down payment on property: $40,000$ (from the $200,000$ purchase price)
- Inspection and Title Search: $1,500$ (Inspection $500$ , Title $1,000$ )
- Total upfront costs: $41,500$
Holding Period Costs:
- Interest on loan: $12,800$
- Renovation costs: $13,000$
- Landscaping: $800$
- Insurance: $1,800$
- Property Taxes: $6,000$
- Total holding costs: $34,400$
Overall Expenses:
- Initial + Holding: 41,500 + $34,400 = $75,900
- Monthly expenses during holding: $\frac{34,400}{12} = 2,866.66

Return on Investment Calculation

Required total to realize a $20\%$ return:
- Calculate desired return: $20\%$ of investment = $15,180$ from initial investment of $75,900$ .
- Total needed: 75,900 (total investment) + $15,180 (desired return) + $8,000 (selling costs)
- This totals to $99,080$ required from the sale of the property.
- Quick Summary: For an investment of $75,900$ , the total required at selling to achieve a $20\%$ return sums to $99,080$ .

Additional Considerations During the Holding Period

If holding period extends to an additional year, costs increase.
Monthly revenues:
- Income from property leasing: $1,200$ before debt servicing.
Study point: Understand fully the distinct phases, corresponding costs, and income expectations.

Appraisal and Comparables (Problem Number Three)

Subject Property:
- Key criteria for the appraisal must be met.
Comparable Properties:
- Each has a sale price and relevant attributes.
- Adjustments based on comparisons such as construction quality, bedroom count, location type (corner lot vs. interior), etc.

Adjustments Framework

Time of Sale:
- Older properties may require an upward adjustment.
- Rationale: Real estate markets fluctuate, so an older comparable sale price needs to be adjusted to reflect current market conditions. If prices have risen, an upward adjustment is made.
Condition:
- Identifying if property has issues like flooding or below-average construction leading to adjusted pricing.
- Rationale: The physical state of the comparable property relative to the subject property impacts value. A comparable in poorer condition than the subject would be adjusted upwards to reflect the subject's better condition.
Design Characteristics:
- How design impacts property value (modern vs. traditional).
- Rationale: Unique or highly desirable design features (e.g., open-concept vs. closed-floor plan, architectural style) can add or subtract value. Adjustments are made if the comparable's design is significantly different and affects market appeal.
Garage Type:
- How garage availability impacts pricing
- Rationale: The presence, size, and type of garage (e.g., attached, detached, single, double) can significantly influence a property's utility and market value. A comparable with a less desirable garage type than the subject would be adjusted upwards.
Bedroom Count:
- Number of bedrooms and how they relate positively or negatively to the subject property's value.
- Rationale: The number of bedrooms directly impacts the livability and market segment a property appeals to. If a comparable has fewer bedrooms than the subject, its price would be adjusted upwards to reflect the subject's additional bedroom value.

Summary

All appraisal processes rely heavily on understanding the distinctions between the subject and comparable properties, ensuring accurate adjustments to pricing, and comprehending every aspect of the flipping process.
Engage continuously with the concepts rather than merely recognizing them to ensure full preparedness for examinations and real-world applications of the material covered in class.