I am an investor in Baltimore area and currently looking for good deals. When I looked deep and started to understand what do you you mean by god deals I came across all sorts of metrics ( 70% ARV, 50% rule , 2% rule etc). These metrics serves as a good starting point in filtering the noise.
I am considering flipping and rehabbing around Baltimore area; but how do you classify the good deal. What are the few "soft" emotional factors that you look at apart from hard metrics and jump out saying "Good Deal"
Is it the agent who is vouching for it, other investors investing in the area, gut feeling, neighborhood.
@Nilesh Makhija If you are looking to flip properties I think the 70% of ARV rule is a great place to start. Once you find a deal that fits those parameters I would dive really hard into the numbers and run your rehab costs past 2-3 contractors and your ARV past 3-4 local agents. I am a numbers guy and I am hesitant to trust anybody else's numbers other than my own.
@Zach Evanish - I agree with you on validating numbers and the key would be to run it through the right team members and trust their opinion.
An agents opinion of the deal would be the last on my list. First is the numbers and then it is, how confident am I of those numbers.
Some deals are easier to evaluate than others. Something that is obviously a good deal is better than something that might be a good deal.
@Ned Carey - Makes sense, an agent may or may not have ulterior motives. I am a data guy (that's my full time job) and I believe in numbers too. You mentioned "confidence" in those numbers, I think that's the key and it will come as you grow.
Came across rehab worksheet by @J Scott Rehab Worksheet. Looks like the numbers are good way to start for flipping/rehab deals (e.g. Baltimore market)
@Nilesh Makhija For me the numbers are the most important criteria, but there is a "gut" feeling also. I am very concerned with area and the ease of resell after the rehab. I feel very in control of the entire process until it is time to find an end buyer. That part is such a wildcard and that is where the "gut" feeling for me is important. I try to buy in modest but desirable areas and then give them a really nice house for the area.
@Austin Lee - agree completely. As you mentioned gut means "decent neighborhood", ease of finding end buyer. So then what's the typical ARV you look at ? Purchase costs? Rehab costs ? Because adding value is such a high variable cost and it depends personally on each of us.
I am all over the board on ARV for my properties. I invest in a few different markets. Where I live, the prices are higher, almost prohibitive. The other city I invest in the ARVs are usually under $100k. I try to stay in the 70% range (ARV-costs) for purchase price. Here is an example of a project I have going right now in my lower cost city:
Purchase Price - $41,000
Rehab estimate (including acquisition and holding costs) - $15,000
ARV - $75-80,000
So you can see on that deal, it doesn't exactly hit the 70% rule, but it is close. It is such an easy rehab I am willing to do it. It is a cash purchase and rehab, so the acquisition costs are low and it will make me around $20,000.
@Austin Lee - Makes Sense. Thanks for walk through
I would think for a flip, it would be incredibly easy to know what is a good deal or not.
Purchase plus estimated rehab plus holding/closing costs is your all in cost.
Estimated sales price MINUS your all in cost is your estimated profit.
Give yourself some cushion there for contingencies that popup during rehab and then make sure your estimated profit is what you want it to be.
Its also going to depend on your price points too.
A 20k estimated profit might be fine if you're buying a house for 60k and it needs 10k in rehab. The lower the rehab estimate, the less likely you are to need more rehab money. As compared to a 30k purchase with 40k in estimated rehab. The more stuff you're doing, the more things you're likely to add to the budget.
Also, the profit target is going to be different based on total price. If you're doing a 250k flip, 20k may not be that much. But a 120k flip and its probably about right.
The more money you're all in at, the more the risk. So the more the reward you're going to want to get. On one of J Scott's million dollar flips, he's not going to be too happy with a 20k estimated profit. Not when he's risking a million. :-)
I agree totally about the profits. I absolutely would not do a huge deal with only a $20k profit. I am very happy with that number if I am staying around $50 or $60k invested and not doing any work myself. I see some of those TV shows where they are doing $600k houses and making $40k profits. I just don't think I'd be interested in doing that. The risk goes WAY up with those kinds of numbers.
But I think that also depends on the frequency you're doing them and how much money you have to play with. If you only have enough to do one flip, then at 650k and a potential 40k profit doesn't seem that great.
But maybe they went into it thinking they were going to make 60k and just went over budget. If my mistakes still allow me to make 40k, I'd be pretty happy.....
The one show that always gets me is flip or flop.
They run the comps and come up with a high ceiling. Then tell us their rehab estimate. Their rehab estimate is ALWAYS way off and they blow by it by at least 50% every week. And then they list the house about 10 to 20% higher than any other comp they mentioned.
I can't help but point it out to my wife every single time. Here is the rehab estimate. The actual rehab is going to be that plus 50%. Here are the comps, so they're going to list it for that plus 20%. Its amazing how often that turns out to be true.
They're not investing out there. They're just printing money.
Lol Mike, that is the exact show I was thinking of! I like the show, but it is a recipe for disaster. If you can't estimate better than that, you need to find a new profession!
@Mike H. - I am trying to stay under 100k of ARV and looking for 10-20k or profits. I agree that adding some cushion to numbers helps. The question where I was struggling was what if you end up holding the property for few months and no one is putting an offer for the desired ARV.
I think the answer to that question is undervalue ARV and if it is selling at an average market price it will be moving quickly.
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