determining offer price

4 Replies

I am looking at my first rehab flip property and am having a hard time finding a good offer price. When researching how to get my offer price, I see several methods to get there. The MPP (Max Purchase Price) suggested in J. Scott's book, The Book on Flipping House suggests:


MPP=Sales Price-Fixed Costs-Profit-Rehab Costs

Here is my problem. If the fixed costs include hard money lender fees and interest, how do I know the what to use for my calculations if I don't know the loan amount (as I'm trying to find out what to offer)? Do I just guess? Use the listing price? Same goes for closing costs. I don't have the loan amount yet so I'm not sure where to get that number.

The other method is the 70% rule. As I understand it, you offer 70% of the ARV. Is that right? I have tried both of these methods and they each result in different numbers for offer price.

I know the septic has major issues and there are clouds on title, but these still need some research. Here are the numbers I have come up with:


ARV- $286,587.00

Current List Price -$95,000.00

70% rule- $200,610.90



Fixed costs:

Purchase costs

Closing $2,850.00

Hard Money lender fees $4,750.00 (I estimated 5% of the current list price)

Hard Money Lender interest $14,250.00 (I estimated 15% of the current list price)

Holding costs

mortgage payments $1,500.00

property taxes $1,000.00

Utilities $1,000.00

Insurance $200.00

Selling costs

Commissions $7,737.85

Closing costs $7,737.85

Home warranty $300.00

ARV- $286,587.00

Fixed Costs-$41,325.70

Profit- $20,000.00

Rehab costs -$70,000.00

MPP- $136,602.60

So the 70% rule says $200,610, and MPP says $136,602. The list price is $95,000.

Please, I need help! Any advice or suggestions would be greatly appreciated.

@Olivia Story - First, my advice to you would be to run away from this potential deal. Especially as a newbie. Title issues and $70,000 in rehab costs and having to rely on hard-money to do this - that's a hell of a lot of risk for $20,000 profit. Unless you have experience as a builder or contractor, run from this deal. I've been rehabbing house for more than 10 years, and I would run from this one. There's better deals out there. Just my 2-cents.

@Mike Hurney, I searched for similar properties that have sold in the last 180 days, similar bed/ bath, sf, lot size, year built. I only used properties in great condition. Found the average price per sf, and multiplied it by my subject house sf. I'm still new to this so if I made a mistake, I would love to know where I went wrong. I'm a Realtor, so I have access to the MLS. That's where I got my comps.

Originally posted by @Olivia Story :

The other method is the 70% rule. As I understand it, you offer 70% of the ARV. Is that right?

No. The 70% rule, which is really a rule-of-thumb, says that the project cost should be no greater than 70% of the ARV, where the project cost is the purchase price plus repairs. You seem to be ignoring the repairs in your rule-of-thumb calculation.

(Purchase Price + Repairs) ARV

or

Purchase Price ARV - Repairs

In your case, Olivia, your project cost is $95k + $70k = $165k. This is 57% of ARV and on it's face, a screaming deal. In fact, using this formula, you could pay nearly $131k (70% x $287 - $70k) for this property and still make a fair profit. This almost exactly matches your $136k.

My fear is that if this property is available on the open market, there's no way it will go for $95k. I also think some of your estimates are too conservative, (though I congratulate you on a six significant figure ARV). :-)

Using the rule-of-thumb you should make 15% or so of the ARV, or about $43k. In fact, if it were a CA deal, my spreadsheet indicates a $51k profit, but let's not quibble.

You're not specific enough regarding the title "clouds" but you can't close until they've all been cleared and you can get title insurance. The bigger issue is at $70k, the rehab on this house appears substantial, and you have no experience. The latter could make it difficult to borrow money as well.

My suggestion is to partner with an experienced flipper and have him or her confirm your rehab estimate. He or she will know how to find money for a deal as this, which shouldn't be a problem, and also show you the ropes. If your purchase price and repairs hold up, you should both be able to make a fair profit on this one.

Good luck, Olivia.

Jeff

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