House Flip scenario in Sacramento area

5 Replies | Sacramento, California

I have been struggling to find deals that really make sense once the cost of financing, construction, holding and sales are all calculated into the mix.

Typically I'm trying to purchase single family homes at the 70% ARV - cost of repairs and I feel like I end up being so low someone always comes in higher and I watch them rehab and sell.

My latest property in negotiations has potential but a huge chunk of the profits will go to the cost of $$ with the hard lenders offering 10% interest and 3 points.

Would you walk away or go after a deal with these numbers?

Purchase Price: $320,000
Rehab: $60,000
ARV: $440,000

Profit: $60,000??

My calculations say no and this is why...

With a hold time of 4 months:

Cost of money is: $15,200 ($7200 points, $8000 interest)
Cost of Holding( Taxes/Utilities/Insurance etc): $3200
Cost of Sale (6%RE fees, title, escrow etc): $26,400

So, if all goes right I'll make $15,200?  Seems like a lot of work for so little, not to mention if costs exceed the $60k or sale price is $10k less I'm not making anything.

If I had the cash I'd probably pull the trigger... but I don't.  Instead I'll try to cut the purchase to $305k or bail out.

What would you do?

380 on a 440 is too tight. If it were 380 on a 440 and only 10k in rehab then maybe! 60k rehab anything can go wrong then your debt service eats up the profit. Also once you get to 400 you're looking at a different buyer profile. It might take longer to find a buyer, again eating up your profits. Don't be anxios about a deal. You can find yourself in a world of hurt. Good deals are out there. If you're not finding them then you're not networking well enough. Join a REIA or start one.

Rick 

That a pretty slim margin once all said and done.  Does the rehab factor in a cushion for unknowns? I see you're a broker in CA, why not list it yourself and save on the listing commission? Another thing to think about is if you are holding for 4 months that puts you into Oct/Nov which is typically the slower season.  I've seen people flip for slimmer profits but its usually at the expense of quality products and quality work. $15k is still a decent profit though, do that 4 times a year and you made $60k. 

You can either do many smaller flips and make ~$15k each or wait around for ones that meet your requirements and do 1-2 flips a year for $50k+ profit.

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Sounds way to thin. I know it hard to find the one that makes sense. Act like a title rep and just keep digging thru. You will find one that makes sense. There are many home equity lines of credit that are ballooning soon and mods are ballooning too. I hope this helps.

I think I would walk away from this one. Not enough profit.  The deal has to make sense when you buy it without hoping for the best.  

Great job on running the numbers and remembering to add cost of money and holding costs.

Good Luck!!

Suggest more desirable areas near job centers where people are likely to get into a bidding war. The flips must be cosmetically better than what is on the market. Higher quality materials, better kitchens.  The ones that will work is add a bath, another bedroom etc.