I found a nice deal but not sure if I should go in for it
Interior Decorator · brooklyn, NY · Member since 2008 · 121 posts · 0 votes
I am new at this game, so being such I have some reservations about a good deal I found. It is a rehab flip project in Suffolk county Long Island, there is a simiar home two blocks away selling for 160k more, it has a larger back yard and is in move in condition. The rehab house needs 40-50k in work. I want to finanace the property meaning I will have to pay another 20k in mortgage and taxes.Another 20k in closing costs. Is their enough money to run the risk of this current market
You dont give us enough details to give you an opinion. Particularly the purchase price. Here would be the formula you should factor this deal with and you decide.
ARV (use only sold properties for your values, do not use the local asking price)
multiplied by 70% (Thsi can be somewhat flexible if you arent using hard money and the deal warrants a deviation. It is a good rule of thumb though)
Take that and reduce it by the amount of your repairs and all of your acquisition costs and an error margin( I always use 10% of the cost of repairs for those little uh ohs).
That will give you a good idea of the maximum amount to offer.
So here are the numbers based on what you gave us.
Assume true ARV is 150K
150K*.70= $105000.
105000-50K(repairs)-5000(repair contingency)-20K(your mortgage and taxes)-20K(your holdiong costs)=$10,000.00
There you have it. Pay 10K and you will have a 45K profit on the deal based on your numbers. Seems a bit ludicrous doesnt it. Anyway, if you are going to go with Hard Money to fund the deal, (and I am basing this on your costs you mentioned which seem out of whack by the way), they will require the 30% margin in order to loan you the money. Some may even want the deal to be in the 35% range.
My thoughts are as follows.
1. You really need to find out more about true comps for the area. Not based on what the house down the street is listed for but what similar properties have actually sold for recently. KNOW YOUR MARKET
2. I would ask that you verify your numbers on your acquisition costs because they seem really out of whack. Where I am a HML would run you about 12K on a 100K note for a 6 month term. Taxes couldnt be 20K on something in this value range.
3. Again research your closing costs. I dont know anything about where you live but in Houston the closing costs are in the area of 2% going in and 3% on the sale. That doesnt count realtor fees which could be what you are including in your costs.
4. how solid are you on your repair costs? They are pretty high and that is a sign of a lot of work needed. Lots of surprises on houses that need alot of work. Better be certain or get someone to help you make sure of your costs. That 5K contingency will go fast if you miss a major structural, electrical or plumbing issue.
That should give you some things to consider. Let us know how it goes.
I have a spread sheet I use to look at potential deals that takes into account most of the things that pop up including closing costs, realtor fees if used, utilities during rehab, hard money fees and interest, arv, purchase cost and alot of other junk. IF and this is a big if, you are accurate on your reahb costs, dont use a realtor to help you sell the place (my formula uses 6% of sales price) this place can make money. It is slim but will make money. If you can get the financing for less than the HML fees I took under consideration (4 points and 14% interest) then it should bring in a tidy chunk of change. Somewhere in the area of 40-50K( this is with a cash deal) according to my estimates. So this dog may hunt and it may not. Like I said you really better be right on with your comps and all your fees. If you are good to go there then I would go for it. Just keep in mind that if you are using hard money this deal may be a little tight for them. Let us know how it goes.
One final note that I should have mentioned but did not. Never work off of their asking price. Come up with your own using the formulas that were given. That is your offer price. (You can use their price as a reference.) If your number is higher than their asking price then fantastic you make more $$$. If it is lower, dont make allowances and try to make it work. Offer what is right for you and not necessarily what they are "asking". In fact, I tend to offer lower than the dollar amount I really want to spend as it gives me some room for negotiation to help the seller feel better about the deal. The most important rule is
Make your money when you buy and not when you sell.