How much to pay for a $400,000 house in Los Angeles

[Patrick Knock]

I've done a few fix and flips in the Dallas Ft. Worth Metro area, and I know that a general rule of thumb for buying properties is 70% of ARV minus repairs. The houses I flipped had an ARV of 100,000 each, so I bought them for around 60,000 roughly. I have recently moved to Los Angeles, and the housing prices out here are way higher. The average home is about 400,000 each. In order to apply the 70% rule, you would have to buy the house for 280,000 and then take off even more for the repairs. Is that how investors are pricing things out here? Or do they ease up a little on the discounts? $100000 profit for 30 days labor on a fix and flip seems a bit unrealistic, but what do you all think?

[Jeff S.]

You could get lucky, @Patrick Knock, but most of the rehabbers we know out here will pay up to about 75% of ARV minus repairs. The house will have to be a mess to buy at this point and a typical repair budget will be 10% to 12% of ARV, or around $43k in this case. Thus, you shouldn't pay more than about $400 x .75 - $43k = $257k.

I don't know where you got 30 days. No one is Superman, and you should plan on a six month project, closing-to-closing. Assuming you keep your costs in line and finance with private/hard money at typical terms, you'll net about $48k or about 12% of ARV (more if you get done faster or use your own cash).

Don't get stars in your eyes and focus solely on the dollar profit, without regard to cost. This is easy to do but once you exceed 80% or so, your profit will drop quickly and you'll find you're working for all your suppliers, lenders, and agents, little leaving to nothing for yourself. 75% of ARV minus a conservative repair budget should be your max. It will be challenging to find properties in this range.

Good luck Patrick.