If you purchased a 1,300 sq. foot SFR that needed cosmetic repairs, how much $$$ below FMV would you pay? Also, if you really needed to flip a property, would you ever pay FMV? Thanks!
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
3y
Our formula is pretty straight forward when you think about it. Start with pulling comps from the area to come up with the value after it is brought up to snuff...the ARV (as repaired value). Then we back into the number by subtracting out our required return, the cost of capital/carrying costs, closing costs on both the buy and sell side, real estate commissions, the scope of work cost from the contractor, and then we build in about a 10% contingency reserve for issues that might unexpectedly pop up. That gives us our "Strike Price", which is the highest we will pay for a property. Remember not to get emotional. This is just math. If you can't get it for the strike price or less...move on. Don't get mushy about a property because you really like something about it. Remember...it's just math. To answer your question, there is no "amount to pay below FMV'. That doesn't take into account the differing rehab and carrying costs. It all depends on the math.
@Becca F. the MLS is where you sell properties after they are rehabbed or if you are doing a light value add, most properties on the MLS with qualify for conventional financing, so they are worth more. If you are using hard money then you should be buying from a wholesaler, have your agent find a distressed property or distressed seller from a reputable wholesaler and pay him his commission on top of the purchase price, this will get you the discount you need because it won't qualify for conventional financing, so the buyer pool is much smaller which is why you get the discount. If you are interested in buying something in Arizona I'd be happy to find a wholesale property for you, just shoot me a message.
Thank you. I have not bought from wholesalers yet. Over 95% of what I've looked at is on the MLS with a few off market properties. I was looking at HML or private lender (haven't found one yet) so as not pull money out of my savings but the HML interest rates are high and the holding costs could increase if renovation takes longer, house doesn't sell etc. Not sure if I should be looking at homes that need light rehab vs. more work since I'm new to flipping.