I am looking at a house that will comp for $165-$175k. The reno is about $33,000. I placed a bid today for $110,000. When I sell the home for $170k I will make 20k. The sale is a short sale. The bank has pre-approved a sale for 150k.
Here is my question. Is 20k to much? I don't mind making 10k or even 5k. Its more than what I had when I started. I'd hate making any money because my offer is to low and won't be considered by the bank. Part of the reason for 20k is in case I make a 10k mistake (something I didn't see was going to be a problem).
$160,000 sales price
-$9,600 Realtors commissions
-$1,600 closing costs (assumes 1% of sales price)
-$1,320 closing costs on purchase (assumes 1.2% of purchase price)
-$110,000 purchase price
Now subtract your costs for insurance, utilities, lender fees, and cost overages. How long will this take from settlement to settlement?
Doug breaks it down nicely. The rule of thumb is to have your purchase price plus rehab costs to be 70% of the ARV which in your case is $170k. This means you should pay for the property and rehab a total of $119k.
@Ian Tuttle Mike is right, never too much profit and people make more than 20k on smaller flips but it just depends on how sweet the deal is and the execution.
The reply to my offer was This
the bank verbally said no. The appraisal value of the home is what they have listed it for. Which is 150k. Looks like it's time to find another flip
Move to the next deal... the bank/seller doesn't care how much profit you are making, they only are about whether they will accept your offer or not. Do not make an offer higher than you are comfortable with, whether the profit is $10,000 or 100,000. Personally I always shoot for a minimum of $20k on lower cost houses and $25,000 on a bit higher cost houses. As was pointed out above, your offer might have actually lost you money if they did accept it.
Thank you everyone. A 20k profit sounds like that is a good place to be. Since something could arise that was not foreseen.
Ian, the question really is, how much is it worth for you to take on the liability and risk of this, or any other deal? Remember, YOU must decide if the risk is worth the reward. And there are a lot of risks involved in RE flipping. The market could change when your ready to sell, you could've misjudged the market value or reno costs, might take longer to sell or reno, unknown costs may come up, more holding costs, etc. $20k potential profit can go down very fast with some unknowns, but then again, it sounds like a descent profit on that value of house, if it is a relatively quick deal.
I would be okay with a $5,000 profit. But like you said there are so many unknowns and the risk of burning through 5K for things unseen is highly likely.
I think 20k is a decent buffer for the unknowns and the possibility of the sale not napping ad quickly ad o would have hoped for.
Honestly there are WAY easier and less risky ways to make $5k. If you break down all of the hours you will spend on that flip (we are talking fix and flip not a quick wholesale deal), you would be better off getting a part-time job IMO. Not to mention the financial risk. The realtors will make more than $5k!
I think you're spot on having a $20k minimum after accounting for all costs. More if you are in higher price points or dealing with older or larger homes.
@Ian Tuttle I use the 72% rule as a quick qualifier on purchase prices and using the $170k (middle) ARV, the most I'd be willing to pay for a home that needed $33k in rehab is $89,400.00.
That would be my offer.
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