What's your favorite "formula" when analyzing a potential flip?

Question

In my research I've come across several different formulas people use to determine if a flip is worth the risk. The 70% rule [i]seems to be the most used and discussed (?).

While at a workshop recently I met someone who uses this formula:

Figure out ARV.

Deduct 10% of ARV for rehab costs.

Deduct 8% of ARV for all closing costs (including hard money).

Deduct 15% of ARV, which is your target profit.

You're then left with the purchase price.

Does this look good to anyone? Regardless, I'd love to know what formulas work the best for you.What's your favorite "formula" when analyzing a deal?

J Scott · Answer

Here you go:

http://www.biggerpockets.com/renewsblog/2010/03/10/determining-maximum-purchase-price-mpp/

I also talk about this in my BiggerPockets Podcast:

http://www.biggerpockets.com/renewsblog/2013/03/21/flipping-houses-101-j-scott/

Justin S. · Answer

I also add a time element to my remodels.  For example, I will do a rehab for less profit if I can flip it in 60 days vs. 120 days.  Just something else to think about.

Account Closed · Answer

J  Scott - Thank you!

Account Closed · Answer

Awesome, thanks everyone.

Mike LaCava · Answer

Hello Ben Kahle. The #'s here will get you in trouble. You just can't deduct 10% for repairs. You must know what the repairs are going to be. You could underestimate doing this and can cost you financial suicide. It could cost you a deal as well if you overestimate the repairs at 10% because a smarter investor will base his or her offer on accurate repair costs. Based on your #'s you are buying at 77% ARV and you will most likely not make 15% by figuring only 8% for all soft costs and closing costs. It will most likely be at least 10% if your cost of hard money is low but will probably cost you more like 12-15% if you are paying high rates. Use the 70% formula then deduct the cost of repairs to determine your MAO.

Jeff S. · Answer

I suppose that since you end up with less than 70% of ARV, this formula is conservative, but its derivation is completely nonsensical.  HML costs alone will be more like 5-7% of ARV.  You’re saying that if the property is worth $150k you will put $15k into the rehab but a $1M property will require $100k?  What if the deal is done on a Thursday?

Who makes up this stuff?

Go with either the tried and true 70% rule-of-thumb (and good luck with that in Los Angeles), or the more detailed approach taken by J Scott, or best yet, create a standard spreadsheet with estimates for all your expenses and back out from there.

In the end, you’ll get your lunch eaten by using rote formulas without an understanding of either the actual expenses or an accurate way to predict them.   Plus, you’ll lose all credibility presenting unsubstantiated formulas as this to a lender.

Jeff

What's your favorite "formula" when analyzing a potential flip?

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