Hey there! I heard on a podcast. I'm not sure which one that's my problem. Anyway, I'm trying to find out the formula that people use in evaluating deals. I heard it on a podcast many months ago. I'm not sure who it was. Or again what podcast it was. He went through what he did step by step. When his numbers fell in a certain parameter. It helped determine if the deal was worth pursuing or not. I've been trying to find this to no avail. I'm sure someone here has an answer or maybe heard this podcast. Or could help me out here. I would sure appreciate it. Thank you! Nolan
(ARV minus rehab cost) times 65% = preferred purchase price.
You have to know your market for the ARV
You have to be great at rehab estimation.
Then find someone to sell at that 65% price.
All Difficult to do.
I have always tended to underestimate rehab cost. Always cost twice what I figure and takes twice as long.
After 15-20 flips in my area, I decided I could make as much money renting the property for a year or so as I made on a flip. And still own the house. I don't rehab flip.
A good rule to follow when doing flips - the less you have to rehab, the more you make on a flip.
Thank you, Arlan! That's very helpful. I'm new here and trying to find my way around. Thank you for your insight. I will take that into consideration for sure. I'm guessing that you are not using a hard money lender if you are renting for a year or more? Of course, as you can see I've got a long way to go. Again, Thanks
@Nolan Bohler this is more commonly called the 70% rule.
( ARV X 70% ) - repairs = MAO
ARV is the After repair value
MAO is maximum allowable offer. Note the work Maximum. Ideally your cost should be less.
Note the subtle difference between the 70% rule and what @Arlan Potter posted above. In Arlan's example the 65% was calculated after subtracting out the repairs. In the 70% rule, the 70% is calculated from the ARV then the repairs are subtracted.
Some people use 70% some use 65%. Each investor may choose a different percentage but 70% is common. This formula may not be the best in very low priced area or very high priced areas. It is a crude rule of thumb but good enough by itself for many investors.
This formula does not mean you will make 30% on the deal. The 30% covers your soft costs and your profit. Soft costs are the hidden costs like cost to purchase, cost to hold, and cost to resell.
J Scott who wrote the book on Flipping published by BP prefers to use actual numbers for purchase holding and reselling and then add his expected profit in to come up with his offer price.
Thank you, @Ned Carey and @Dave Gaines! Yes! This helps out tremendously!!! I'm getting a much clearer picture now. As you can see I've got a long way to go. Thank you for sharing your knowledge and for spreading some light on this for me. And thank you for your time. It looks like I'll be picking up Flip Your Future here soon. Thank God for you guys and BP