Your Fix and Flip Formula

[Ashley Benning]

I've been doing research and forum stalking for a while now, and am getting ready to take the leap and purchase my first Fix and Flip. (By "ready" I mean "within the next 12 months.") I'm trying to pin down a formula for my flips, something that creates reasonable ROI and that I can use in my decision making. I'm thinking it'll look something like this:

ARV= (purchase price + estimated reno cost) * 1.2

If it doesn't meet that criteria, I won't purchase. But the more I try that formula with sample properties, the more I wonder if that is feasible in my market (Los Angeles suburbs, San Fernando Valley). 

What are YOUR formulas? Or do you do something different to determine if a property is right for you?

[David Robertson]

Hi Ashley,

Generally, there are two ways to analyze flips to determine your purchase price:

1. 70% Rule Formula
2. Maximum Purchase Price Formula

70% Rule Formula 

The 70% Rule is a formula that can be used to quickly calculate a purchase price. The general rule of thumb is that rehabbers spend about 30% of the ARV on buying costs, holding costs, selling costs, financing costs & profit. This roughly shakes out to about 15% for the costs & 15% for the profit.

The rule multiplies the ARV by 70% to calculate the value of the property before repairs. From there, the rule deduct the amount of repairs to calculate the purchase price of the property.

NOTE: 70% is the average the rule is based upon, but the % will depend on your situation. Some investors need to buy at 65%, but some investors can tighten it up to 75 to 80% of ARV and still make a profit.

I would recommend practicing performing detailed analyses of properties (as detailed below), until your figure out your average % of ARV you should be purchasing at. Once you figure out your personal % of ARV, you can start using the 70% Rule to help you quickly analyze deals.

Purchase Price = (ARV * 70%) - Repairs

Maximum Purchase Price Formula

The Maximum Purchase Price calculation is a detailed analysis of every cost on the project (Repairs, Buying, Holding, Selling & Financing + Profit).  

The formula takes your estimated After Repair Value & deducts all of your costs & desired profit to calculate your purchase price.

Maximum Purchase Price = After Repair Value - Repair Costs Buying Costs - Holding Costs - Selling Costs - Financing Costs  - Profit

ARV Calculation

To calculate your ARV, you need to perform a Comparable Market Analysis of 3 to 5 similar properties, compare the resale values and features & adjust your subject property's value to calculate an approximate ARV.

I would not recommend calculating the ARV by taking your Purchase Price adding the repair costs and arbitrarily adding 20%. ARV is based solely on comparable sales valuations and what people are actually paying for comparable properties.