Hello,
I would love to flip a property. I have been approved for up to 700,000. I have up to 150,000 (borrowed money) for down payment holding costs and ect. I live in Orange County California. Looking for something not to far away max 45 minutes. I have one realtor telling I can't do it - not in today's market I will loose. I have another realtor telling that I can do it. I need to find a property at least 25-30% below market value. I have yet to find a property where the numbers make sense. Any expert advice will greatly be appreciated.
If you are looking to buy, refurbish and then sell you need the buy price to be at least 30% or more.
Standard formula says:
((ARV * 70%) - (all buying costs + all holding costs + all selling costs + all repair costs + contingency)) is the maximum you can pay and consistently make a profit. Stuff happens so costs run over. You also might find more deals than you can fund so by staying at 70% or less a hard money loan becomes possible (not always the right idea but possible).
Most agents do not deal with investors and therefore do not know about much other than retail deals with retail buyers. Hence they many times do not know how to work with investors.
The agent could also be telling you that the present market is worse than you are thinking so your hold costs could be an issue. Hard to say given the info posted so far.
At some level forget what agents tell you good or bad unless they are working your market. Most agents that I run into do not own investment property so they have no clue. Nice people, able to manage the paperwork, clueless on what investors care about.
Agents who also invest and work with multiple other investors are diamonds. Keep them close.
DRIVE- best way of finding property is to take long drives into areas that you may or may not know-unknown streets and cities. generally when you see overgrown grass and general unkept look you've found a possible deal. thats one way, the other is to look in the RE books in the market and checkout realtor listings,get 2-3 books.lastly is google "foreclosure listings" in your area. you have got to your end of the legwork- otherwise the deals will pass you by.
((ARV * 70%) - (all buying costs + all holding costs + all selling costs + all repair costs + contingency)) is the maximum you can pay and consistently make a profit.
Really? The formula that's bandied around a lot seems to be that the max price to pay is ((ARV * 70%) - (all repair costs)). Given that buy costs are 3% of purchase price, sell are 8%, hard money would be 8% (12%, 6mo, 2 pts), plus other holding costs and contingencies, this formula says purchase price should be something like 50-55% of ARV, not counting repairs. Now, such a deal would certainly be a money maker. But pretty rare. 70% less repairs deals are scarce enough.
((ARV * 70%) - (all buying costs + all holding costs + all selling costs + all repair costs + contingency)) is the maximum you can pay and consistently make a profit.
Really? The formula that's bandied around a lot seems to be that the max price to pay is ((ARV * 70%) - (all repair costs)). Given that buy costs are 3% of purchase price, sell are 8%, hard money would be 8% (12%, 6mo, 2 pts), plus other holding costs and contingencies, this formula says purchase price should be something like 50-55% of ARV, not counting repairs. Now, such a deal would certainly be a money maker. But pretty rare. 70% less repairs deals are scarce enough.
The formula comes from two factors.
1. If you do such a deal you can wholesale it to someone else who still can get it financed using hard money or similar.
2. If you do such a deal you can get hard money for the deal without trying too hard. You have the margin to pay the points.
Yes, it will be hard in many areas. Yes in some areas other investors are willing to do deals for a smaller margin.
Note that if they get it wrong by 10% on their estimates for the value and the costs overrun you are likely looking at being upside down.
If you never make such mistakes you need less room for error.
The formula is conservate and it is that way for a reason. It does not require that you follow it.
If you do run into a situation where a rehab loan is needed over 70%, keep in mind that there are conventional rehab loans that will get you to 80% of the ARV.
I suggest as John says to try keeping your deals at 70%, but just wanted to let you know other options were out there that could cover the purchase, fix up, and costs.
You want to buy using the formula so that you can flip to an investor who has crap credit. Or you want to get a hard money loan without a credit check.
If you have a more established track record you can use less expensive financing (Working Line Of Credit for example). When your financing costs are less and you do not need to pay points each time you draw down funds then you can compress the margins and still make good profit.
The issue is the next investor many not have a WLOC set up so they stop being someone you can sell to if you need a fast exit. The need for a fast exit could happen when you find 2 great deals one after the other and you want out of the first because the 1st is somehow better.
So, know the market and know your numbers. Work with a good mortgage advisor or a local bank so your financing costs are lower than the next guy you are bidding against. Remember that you want multiple exits so you do not get locked into bad deals when things change.