What to offer for a rehab for flip or hold

Question

Hi - My first house offer coming up soon. It's a trust owned property passed on by deceased parents to their children. The house needs a real good inside/out cosmetic update, maybe some walls modified etc. Property is in Nashville TN area. They are asking 210k but the tax assessment value is 166k. It looks like other properties on the same street that are more modern interior (not fully updated) are selling at $128/sqft to $173/sqft for a more updated interior except outdated kitchen and bathrooms. I was thinking of offering 170k which matches cost/sqft of two other units that I mentioned before, little more updated. I'm assuming I can sell it for $250k after a good repair. I feel like i'm pulling numbers out my backside and don't want to get shafted. What's the best approach to get the best deal? BTW - the unit is located in a high risk flood zone. Flood insurance is required.

Kevin Romines · Answer

Here is the industry standard:

ARV minus 70-75% minus cost to rehab minus wholesale profit = max. offer price, so start lower.

ARV 150,000

X.75%

= - 37,500

= 112,500

-20,000 Estimated Rehab

= 92,500

If wholesaling, Minus wholesale fee? 10,000?

= 82,500 Max. offer price

Starting offer - 70,000

Roll it out to rehabber at $95,500, make difference between accepted offer price and 92,500?

Leland S. · Answer

Thank you all for your input.

Aaron, I was always under the impression the 70% rule is both profit and repairs! I did ask to get a quote for flood insurance, the realtor told me $300/mo. The PITI formula though would be <100, assuming the loan is only 150k or less.

Brian - thanks for reminding me the closing costs are on both ends, but I think it should be like 3k each. On the sell side, the realtor said he will only take seller commissions.

Looking at for sale prices of 8 units on Zillow I get an average price of 221k with avg sqft of 1645, avg cost per sqft of 139. The units are all in better shape to some degree, but certainly no full rehabs. Looks like the average prices in that whole neighborhood are all low 200's, but some are trying to pop up for sale now for more.

Hozan Barwari · Answer

I am a Realtor and flipper in Nashville. If the house is listed for 210k I don’t think you will get for 170k. Unless it is crazy overpriced. Most listings in Nashville currently sell at list or over asking in a couple of days. I would be careful with flood zone areas. We had a bad flood several years ago, thus buyers are worried when they see that.

Justin Mullennix · Answer

where/when you factor in the realtor fees? I see all the net numbers but never see the 6% realtor fee factored in.

In our market, buying from wholesalers involves their closing costs x 2 (normal) to obtain property, then resale fees to realtors to sell.  Based on many wholesale properties we've worked since January, the wholesaler & realtors make as much or more than we do.

Therefore I suggest you don't forget  factor these costs up front too.

Josh Braun · Answer

You will want to find out if it flooded during the 2010 flood. If it is in a flood zone, that will be one of the first question potential buyers will ask.  I always discount flood zone properties by around 10% more because I know the potential buyer pool (no pun inteaded) will be smaller than non-flood zone properties.

Brian Pulaski · Answer

Really basic way to look at it.

$250,000 - $170,000 is $80,000. Of that you will have a certain amount of closing costs on both ends of the deal, subtract that from 80,000. Let's say, $15,000. Now you have $65,000. From that you will have holding costs, let's say, $7,000 (just using random numbers). Now you have $58,000. Now factor your renovation costs, let's say basic, $35,000. You now make $23,000. This is a very basic way to look at things, and your going to need to really grasp how much work/money is needed to put into the house to sell it for $250,000.

My initial thoughts on a basic redo on an ARV $250,000 house is an offer well under $150,000...

Aaron Anderson · Answer

Here's a good rule of thumb/starting point:

Start with what you think it should resell for, under underestimate it.  You think it should sell for 250,000, lets assume $240,000 to be safe. That is your ARV. From there, people aim for different percentages depending on how much risk you want to take.  I like to aim for 75% of the ARV which would leave you at $180,000.  Then subtract out all of your repairs and potential repairs.  Include everything from paint, new appliances, new flooring, landscaping, roof/gutters, need HVAC updated. Calculate the flood insurance to be 5-10% of the PITI mortgage and factor that into your expenses as well.  There is a good starting point for your offer price.

Now, how you get that resell value is very different.  take a small radius from them home (1-2 mi) and only look at sells in the past 6-12 months.  Hopefully this will give you a few good comps (10 minimum).  Sometime when Zillow runs the estimates they will pull comps from 3-4 years ago!  and the tax records will almost always be less than the Market Value and thats a good thing.  It means you'll only be paying taxes for a $166,000 home!

And remember, if you put in an offer that you're not embarrassed about, you paid too much :)