Option-Rehab

1 Reply

I've been thinking about this idea and I would like to run it by BP members who does fix and flip. I guess if I have to put an title to it, it would be "Option-Rehab".

The idea is to find a vacant house that is dated. Not needing a gut job. Properties you see listed on the MLS all the time.

You get an option to purchase a property for at least 70-75% of its ARV with the right to renovate and improve the property's condition. After you renovate it you sell/flip the property.

Example Numbers:

  • ARV of home is $300k
  • Option to Purchase: $225k (75% of ARV)
  • Option Consideration: $1,000
  • Renovation Cost: $20k
  • Holding & Misc. Cost: $6k (mostly for utilities)
  • Sales Cost: $18k (6%)
  • Closing Cost: $6k (transfer taxes, Seller concession, ect..)
  • Total Cost: $51,000.
  • Potential Profit: $24,000 ($300k - $276k)
  • 88.88% ROI on monies invested which is $27k (bold numbers)
  • If you borrow the entire $27k from a private lender and pay 12% that's $3,240
  • Adjusted Profit: $20,760.

Pro:
1. Since it's an option agreement, you're not messing with the title. Good for FHA loans.
2. You don't need to borrow money for the acquisition only for the renovation. So no hard money required.
3. No closing costs just an option consideration.

Con:
1. Possibility of option expiring and you lose the money used to renovate the home.
2. Unexpected rehab surprises that can throw the whole numbers off.

Is there any other downside I don't see?

Hi Jonathan,

I am new to BP. I am new to the REI business. I have been researching the subject of Options to Purchase. Your scenario sounds interesting. Can't wait to see some feedback on your post.

Thanks BP

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