To properly analyze the value of a potential flip it is a good idea to have a time-proven formula with which to work.

Adopting a successful formula and following it can help minimize the chances of being surprised by unexpected costs that eat into your net profit and turn a great deal into a money pit.

Far too often, an inexperienced investor will try to analyze a flip by taking the cost of the property he or she has purchased and adding the repairs and carrying costs to arrive at a projected re-sale value.

However, the re-sale price is not arbitrarily based on the amount of money that is invested in the property plus a sizeable profit. On the contrary, the re-sale price is based on comparable sales in the neighborhood that take into account the size of the property, its condition and amenities.

Here is an easy-to-understand formula that works for us:

Realistic Re-sale Value (RRSV)

minus Seller Closing Costs (SCC)
minus Debt Service (DS)
minus Repair Costs (RC)
minus Minimum Acceptable Profit (MAP)
minus Buyer Closing Costs (BCC)

= The X-factor: Maximum Property Purchase Price (MPPP)

We call this the Foreclosure.com Flip Formula for Success. Write it down and keep it in a safe spot, because you will need it one day soon.

In our next post, we will explain this formula in more detail and also tell you how it can keep you on track and under budget.

In our last post, we briefly discussed the various home improvement programs on television that are creating a few misconceptions. Primarily, that it is easy to flip a home. That all depends, of course, on your level of experience.

If you are new to foreclosures, then we want to point out a few more things.

First, renovation expenses almost always run over budget. And that means in the real world investors sometimes run out of money to cover additional repair expenses and a couple extra mortgage payments.

To avoid this situation, build in a little extra cash in your budget just in case issues emerge midway through a renovation project. This way, if problems arise, you’ll be ready. And if they don’t, you’ll come in under budget.

Second, purchasing, rehabbing, marketing and selling a property in 30 days is almost impossible — even if you have years of experience under your belt. Whether the kitchen cabinets you want to install are on back order or the repair crew you hire gets stuck on another job, something unexpected will usually pop up.

So, set a reasonable project schedule and always be prepared to expect the unexpected.

Third, don’t expect to receive positive responses from all of the potential buyers who visit the completed project. Expect to hear comments like “It’s a little pricey for the neighborhood

There are several new real estate programs on television these days that depict newbie investors purchasing dilapidated homes, making repairs and selling them for staggering profits all in 30 minutes.

Put simply, it’s not easy or as fast as it looks.

Because of the editing process, these shows rarely convey all the hard work, knowledge and dedication it truly takes to pull off such a feat.

Instead, these shows often make flipping houses appear to be clean and simple. Here is a general example of a “get rich quick”

We all remember the cute fables we heard as kids, but few realize how these tales can have a dramatic impact on our real estate investment decisions.

I won’t spoil the ending for you just yet, but let’s take a look at how the fast and loose Hare investor compares to the slow and steady Tortoise investor:

• Hare buys the third property he sees because he’s anxious to get started, while the Tortoise looks at more than 10 properties before finding the one that is right for him.
• Hare has his buddy the carpenter look over the house to see what it needs, while the Tortoise orders and pays for a full home inspection.
• Hare passes on pulling a permit for the new roof and plans to install it on the weekend when code enforcement isn’t working, while the Tortoise applies for the permit and is told “at least three weeks.”
• Hare paints the entire interior white because he got a good deal on the paint, while the Tortoise has his sister in law — an interior designer — stop by to help select some eye-catching colors.
• Hare decides to sand and paint the old kitchen cabinets to save a ton of money, while the Tortoise buys new boxed cabinets on sale at the local home improvement store.
• Hare throws down some seed on the patchy lawn, while the Tortoise lays new sod in the front yard and plants a few flowers in the beds.
• Hare schedules an open house for the next Friday, hoping that he’ll have all the work done in time, while the Tortoise wants to wait until all the little details are taken care of so it shows “just right.”
• Hare holds his first open house and gets only three lookers because of the lack of curb appeal, while the Tortoise has so many people come by he can’t talk to them all at once.
• Hare finally signs a contract with the first buyer willing to make an offer, while the Tortoise negotiates with two different interested buyers during which time he gets both buyers prequalified.
• Hare’s contract falls apart because of the financing contingency and he has to hold the open house again, while the Tortoise’s contract closes on time.
• Hare — after making two extra mortgage payments that he did not count — is hoping this new deal closes soon, while the Tortoise has already cashed his proceeds check and is out scouting his next foreclosure investment.

So how did all this play out?

The Hare got started sooner, spent less money on repairs, was first to finish the repairs and hold his open house, went to contract twice before the deal closed and actually netted less money because of the lower contract sales price and extra mortgage payments he made.

The Tortoise, meanwhile, got a later start, spent more money on repairs, was the last to finish his repairs and hold his open house, closed in 30 days at a higher contract sales price with the first qualified buyer and actually made considerably more net profit on his deal.

The moral of this foreclosure fable?

In the long run, slow and steady, persistence and attention to detail will always win out over a fast and shoddy, get rich quick, “don’t care” attitude.