Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
The simple forumla for flipping is that if rehab cost plus purchase price are 70% of ARV you will turn a profit of 10-15% of ARV.
There are several assumptions in that formula. One is that you're using hard money for the financing and that you will spend about 10% of your purchase plus rehab costs on financing. In other words, 7% of ARV goes to money. That's what you would typically pay for hard money for six months.
It assumes you will use an agent to sell. That's six percent off the back end. If you FSBO it, but get it on the MLS with a flat fee listing and pay the buyer's agent 3%, you can knock three percent off that figure.
You'll have closing costs on both ends. You'll have insurance and taxes. Be sure you understand the cost of insurance on an empty house that's being rehabbed. The last time I bought a policy like this it was about 60% of a landlord policy but was good for only three months and had very limited coverage.
Assuming your HML (hard money lender) will give you 70% of ARV, you will need to have about 10% of ARV in your own cash. There will be points and closing costs up front, along with inspections, insurance, and who knows what else. Then, you will have holding costs like utilities and interest payments to the HML. You will typically have to do the work, then get reimbursed by the HML, so you'll need cash to make payments for materials and contractors.
At the moment, retail buyers in many areas want some concessions. Figure about 3% or so in seller concessions. All together, I'd use 11% right now for the back end. That is, commissions, closing costs and concessions will amount to about 11% of the selling price.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
The simple forumla for flipping is that if rehab cost plus purchase price are 70% of ARV you will turn a profit of 10-15% of ARV.
There are several assumptions in that formula. One is that you're using hard money for the financing and that you will spend about 10% of your purchase plus rehab costs on financing. In other words, 7% of ARV goes to money. That's what you would typically pay for hard money for six months.
It assumes you will use an agent to sell. That's six percent off the back end. If you FSBO it, but get it on the MLS with a flat fee listing and pay the buyer's agent 3%, you can knock three percent off that figure.
You'll have closing costs on both ends. You'll have insurance and taxes. Be sure you understand the cost of insurance on an empty house that's being rehabbed. The last time I bought a policy like this it was about 60% of a landlord policy but was good for only three months and had very limited coverage.
Assuming your HML (hard money lender) will give you 70% of ARV, you will need to have about 10% of ARV in your own cash. There will be points and closing costs up front, along with inspections, insurance, and who knows what else. Then, you will have holding costs like utilities and interest payments to the HML. You will typically have to do the work, then get reimbursed by the HML, so you'll need cash to make payments for materials and contractors.
At the moment, retail buyers in many areas want some concessions. Figure about 3% or so in seller concessions. All together, I'd use 11% right now for the back end. That is, commissions, closing costs and concessions will amount to about 11% of the selling price.
Real Estate Investor · St. Louis, MO · Member since 2008 · 443 posts · 91 votes
16y
It really depends on your area as well as price ranges. The general rule is 70% of the after repaired value minus any repairs. That is what most rehabbers and landlords try to buy at. If you plan to wholesale it then you need to offer less to make your spread.
Real Estate Broker · Altamonte Springs, FL · Member since 2009 · 4 posts · 0 votes
16y
George,
I pretty much follow the course as indicated above. With the exception that I am a Appraiser as well so try to look objectively at the property to determine the value the appraiser might determine. Get in close with a local appraiser to insure your property will value out after repairs.
Real Estate Investor · Dallas, TX · Member since 2009 · 183 posts · 153 votes
16y
I have never used a ratio to evaluate a deal. I have never even considered it. I use what I would consider a Line item to evaluate the deal.
I just run every single number into the equation and then I add in overages in rehab expenses, add in additional holding expenses if the property doesn't sell in a reasonable time frame, and I add in a worst case ARV fudge factor. Once I have all of those put together it is very easy to see if the deal makes sense.
Once I have all this data I can pretty much see a worst case scenario and a best case scenario. These never end up being true but they can be close.
I think we all have our own levels of risk we are willing to take and I think we all have our set amounts on how much we must make from a deal in order for it to be worth our time.
Anyways that is how I do it and so far I have been fortunate enough to profit on every single deal I have ever done.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
16y
Originally posted by George Moehlenhoff:
How many Deals have you done? Any details? Thank you.
I've only been doing this for a year, but I've completed 13 deals...10 full rehabs, 2 wholesales, and 1 in-between (minor fix-up to investor)...
Happy to provide any details you're interested in...all the details are on my blog as well (including all financial breakdowns in great detail for those interested in the specific cost/profit side of things).
Investor · St. Louis, MO · Member since 2009 · 153 posts · 44 votes
16y
J Scott, that question wasn't aimed at you; I'm a big fan of yours and follow your site very closely!!! Please check your bp messages, I sent you a message a while ago. Thanks for a great site j Scott!