First potential flip! Deal or no deal?

Question

I've heard that starting your realestate adventure with a house needing a complete renovation wasn't very ideal. With the numbers, however, I am somewhat interested in giving it a go.

The house was built in the 1960's in Alexander Arkansas ( I'm aware that there may be asbestos and lead paint issues). The property it'self isn't in too terribly bad of condition. It does need a new roof, ( one with an arch as the one it has is flat.) It also needs all new appliances and a completely new bathroom installed, but the floors, however, are hardwood and look fantastic.

The price they're wanting is 59,500. The ARV is about 120K-130k. With the 70% rule of thumb, I have: 120K * .70= 84K ( minus repairs which I, off the top of my head and with, hopefully, much padding have at $40k) = $44,000 for maximum price.

Then we have the fixed costs, about 15%, which is about $6,600.  That would put the profit at: $29,400.

Question: Does that all sound right? Am I missing anything?

Any other rule of thumbs would be much appreciated! Thank you!

Chadd Naugle · Answer

@Nicole Almond I am in the process of my first flip as well, and my numbers are very similar, purchase 58k, 25k repairs, and 130K arv.  I was talking with a friend of mine about how I was second guessing myself.  His words of advice were this..... Look at as a learning experience, and don't expect to hit a home run or certain amount of profit....The bottom line is you did it, and no matter how much money you make is irrelevant, you will learn a lot about the process, and the repair costs, which is valuable if you want pursue this.

Seems like to me you are buying at a good price, and if there is no chance of losing money, then go for it, and get that first one under your belt.

Marcia Maynard · Answer

FYI about LEAD BASED PAINT...

We checked for lead-based paint in all of our units. The only ones that have it (sealed under many layers of non-lead paint) are our houses built in 1920 and 1941. Our houses and plexes built in 1950, 1956, 1964, 1967, 1976 do not have lead-based paint. We were surprised it was not as commonly used as we thought. For pre-1978 buildings, the closer the age to 1978, the lesser the chance the building will have lead-based paint. The dangers of lead-based paint had begun to circulate by the late 1800s and early 1900s, so some manufacturers stopped using lead in paint earlier than others.

With an internet search, I found this brief chronological history of the use of lead-based paint in the United States:* Use of white lead began in the Colonial times and ultimately peaked in 1922.* In 1951, Baltimore banned the use of lead pigment in interior paint in Baltimore housing – the first such restriction in the country.* In 1955, the industry, working with public health officials and organizations, adopted a voluntary national standard to prohibit, in effect, the use of lead pigments in interior residential paints.* Through the 1950s and 1960s, the use of exterior lead-based paint declined significantly, and ended by the early 1970s.* In 1971, the federal Lead Poisoning Prevention Act was passed.* In 1978, the federal government banned consumer uses of lead paint.

Account Closed · Answer

@Nicole Almond If numbers are correct, then it looks like it would be a good deal. I'd take a closer look into the mechanicals. Given that is a property was built in the 60s, I'm assuming eveything is pretty dated. How old is the HVAC? I'd make sure to check the plumbing. Check the electrical panel, if it's a small one, there's a good chance you will need an upgrade.

Doug W. · Answer

I "second" what Account Closed said. Your electrical system and plumbing will both probably be out of date. Those can be costly to upgrade and will need to be done to maximize your ARV. If your HVAC system is 12+ years old you should probably plan on upgrading it, too.

Michael Leung · Answer

You seem to missing a few things on your estimate.  Your fixed costs is way too low.  With a sale price of $130k...your sales commission is going to be $7800.  Im going to guess that at $130k that its a lower end house...so you need to figure 3% buyers assistance.  Also you have around $1100 in closing costs.   So fixed costs are going to be closer to $12,800

Nicole Almond · Answer

Thank you both so much. I definitely will! @Matt Wood Account Closed

Nicole Almond · Answer

Y'all have  been so helpful. I'm going to revisit the numbers for accuracy. Thank you so much!

William Porterfield · Answer

As a licensed agent, the investor is required to run the property through her firm. However, depending on the firm, she may not have to pay the listing agent portion of the commission (because most of it would be going to her anyway). Additionally, if she finds a buyer on her own, she could potentially avoid paying a commission altogether. Some firms will only require a small fee for agent owned properties to cover E&O liability and document storage.

I do agree that virtually all buyers in this price range will ask for (and need) approximately 3% of purchase price in seller paidclosing cost assistance for a home in this price range. It's almost guaranteed the buyer will ask for it and need it in order to close.

First potential flip! Deal or no deal?

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