The 2 Most Important Rules I Use when Looking at Deals
Wednesday, December 19
Evaluating a fix in flip deal in a competitive market
There aren't many things as tantalizing to me as evaluating deals, especially when it has the makings to be a juicy one.
Many people are getting back in the "game" of fix and flipping here in Phoenix (and surrounding areas) of Arizona, so I thought this post might be of value to those who find themselves digging for info on not only finding deals, but evaluating them. In this scenario, I'm strictly looking at this property to remodel and re-sell on the retail market.
When it comes to mining deals, there's two things I hold steadfast:
Rule #1) Hope is not a strategy
Rule #2) Don't make a deal a deal
Lead source & quick overview
A local wholesaler sent out a couple properties, one of which is in my local farm area (meaning, the area I like to get and do deals). Although personally I have not seen many deals come from wholesalers that make sense (numbers wise) for me to fix and flip, I'm sure other people do, but everyone's criteria and minimums are different. But, in any case, this one peaked my interest so I decided to inquire further.
The house was a 3 bed (yes!) 2 bath (yes!) 1,300 SF property in an area I've done deals and lived, a major plus.
I took my partner to take a look at it and did a thorough walk through, discussing the updating we could do to get the most bang for our
dollar and that would fit in with the neighborhood. We settled on renovating bathrooms, kitchen, new flooring, paint, fixtures, repairs throughout, and landscaping. Roof was in good condition, neighborhood is desirable, no HOA, and AC looked decent (anyone else getting pumped about this deal? So was I!) Given the 200K+ retail value, we budgeted for a 15K rehab given that the neighborhood/comps support using slab granite, stainless steel, faux wood flooring, nicer fixtures, upgraded hardware, etc.
The only major concern was some cracking and settling of the foundation that was apparent in different parts of the house (driveway, roof, certain rooms). The house was built over 50 years ago but has block construction, so it "could" be something to look into further, but daylight was running out so I decided to look through comps more thoroughly and compare remodeling/pricing and revisit that challenge during the daylight the next day if the numbers made sense otherwise.
Here's what I saw looking at comps (from tax records and MLS):
Properties in average condition, that have not been updated but are not disastrous, go between $160K-180K. (This deal is $171K).
Properties that have been fully rehabbed go from the low 200K's, and others that have been "decked out" are listed in the mid 200K's. Looks like a big spread, right?
I like to look at things qualitatively as well as quantitatively when putting a value on homes, accounting for the type of fix up, the available inventory, temperature of the market, etc. For us to get to the recent comps of the mid 200K's, we would have had to go beyond our current remodel to upgrade windows, AC, converting carports into a garage, have a pebble tech pool, etc, ie, big ticket items.
We could have picked up this property for app $171K. If you haven't done a hard money deal before let me show you a quick tutorial:
Purchase price (this is what most HM lenders will go off of, NOT value) = $171K
Required down = 30%, remaining balance = $120K
3 Points = $3,584
18% interest (formula = Loan Balance X Annual % = Total Interest / months = Monthly cost) (Monthly Cost / 30 days = daily cost of HM)
So this would be $120Kx18% = $21,600 in interest/12 months = $1,800 month
$1,800/30 days = $60 day
I figured we would have the property for 70 days (based on other recent sales and time it would take us to rehab). The other properties we'd want to compare to have been sitting for over a month, and another one just came on the market a couple weeks ago, fyi.
Hard money total costs = $7,119
Next is resale. Although I saw comps in the mid 200Ks, the square footage was larger and the upgrades were more significant. 15K for a 1,300 SF home is pretty generous but adds up quickly when you consider the materials are of a nicer grade, and the entire house (inside and out) needed to be painted, all flooring removed and replaced, 2 bathrooms and a kitchen remodeled, etc.
FYI I use solds in last 3 months(ish), within a square mile, within 10% of the same square footage, and 10 years either way on the year built. I take pool into account but don't use it as a filter. For actives I use pretty much the same criteria but of course looking at how long it's been available.
To make a desirable profit on this, we would have had to sell in the $230K+ range. What it appeared as, after all comps, conditions, stats, price per SF but also price range were accounted for, is $215-$225K.
Now take out commission on the re-sale, plus all title and taxes, we see the margins get reduced to a scary number.
If all else fails, read the instructions
Let's revisit rule #1- Hope is not a strategy.
Here's where you start to think, well, the market has been going up so hopefully we can continue to see healthy gains, especially in the Spring selling season.
Those cracks hopefully aren't anything major that's affecting the foundation.
Rule #2 - Don't make a deal or deal
"If we cut back on renovation costs, if the sales price is 10K more, if we sell in less time, we could make a GREAT profit on this!" This is all justification to MAKE a deal a deal, not just see that it a deal really IS or IS NOT a deal.
I have basal numbers I work with, %'s I have to make and if they don't fall in that criteria after much evaluation, I bow out. As much as everything else about the property, location, rehab, excited me, it just didn't make sense to take that much of a risk and gamble and HOPE to make a large profit, let alone break even.
Given the info above, would you have taken this deal? When I see the numbers fall below a 10% margin, given the "ifs" it would have taken to command the higher final sales price, I get squirmy. Rehab takes longer, new buyer needs concessions, something else comes up during the renovation, and now we're slipping into single digit margins. I don't (personally) want to be in any business that operates in that realm, and I've done enough deals to revert and rely on Rule #1 and #2.
So, onto the next one and when the numbers make sense, you jump all over it and sit in the fact you know when a deal is a deal and move onto rule
#3: Cash massive paycheck.
This content was originally posted for Bigger Pockets by Tracy “Royce of Real Estate”. You can visit her blog at www.RoyceOfRealEstate.com/blog
Tracy is an Arizona Short Sale Realtor, Investor, Rehabber and Foreclosure Expert. She is also an avid blogger, vlogger, and consultant on all things Arizona Foreclosures.