San Diego. Is this a good deal for a flip
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Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
3yYou seem to be using the rehab accounting method from HGTV, @Juan Mora, and have ignored all expenses except your purchase cost and rehab estimate. Nor does the number of Zillow saves represent anything. You will break even on this project if you are lucky.
The first thing we do when presented with a deal is to simply add the purchase price to the rehab estimate. If the total is less than 75% of the ARV, then I know there's a potential profit of 12 to 15% of the ARV. That's our definition of a good deal. When the percent hits 85%, you will break even (and it's linear). This calculation takes seconds and it's a good way to screen scenarios. This is the well-known 70% rule of thumb except you can use 75% for properties over around $250k. If all looks good, then we estimate all the expenses, which you didn't do.
From experience, we know that rehab costs have been around 15% of the ARV lately. This is not any sort of rule of thumb. It's just our observation since we collect as-built statistics from our borrowers. Your $80k estimate could be legit but unless you had a contractor estimate, which we always bump up, or we personally walked the house to confirm, we use 15% of the ARV, or $94.5k in your case. (If no one can get into the home, which happens on occasion, we use 20% of ARV or sometimes just won't do the deal.)
Using $94.5k for your rehab, here are the expenses we estimate:
Click on the image and it will become readable.
Notice you'll break even here. With a project cost (purchase price + rehab estimate) that's 86% of ARV, you could have predicted this at the start.
Last, don’t get crazy trying to calculate every expense to the last dime. Remember, these are all estimates. That is, the only accurate number here is your purchase price. Notice, it's always the case that your rehab costs, financing (HML) fees, and realtor sales fees always comprise the majority (around 85%) of your total expenses. The rest, individually, are small potatoes and could be lumped together. Simply add the first three, which are easy to obtain or calculate, and multiply the total by say 1.18, and you get a pretty good estimate of your total expenses.
Backing out of the rule of thumb, you can’t pay more than about $378k for this property, Juan.
Keep looking.
16 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
7e investments53 Reviews - Real Estate Agent · Washington, D.C. · Member since 2022 · 37 posts · 15 votes3y
- Real Estate Agent · Washington, D.C. · Member since 2022 · 37 posts · 15 votes3y
- 3yRandall AlanPro MemberInvestor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
- Real Estate Agent · San Diego, CA · Member since 2015 · 190 posts · 77 votes3y
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes3y
You seem to be using the rehab accounting method from HGTV, @Juan Mora, and have ignored all expenses except your purchase cost and rehab estimate. Nor does the number of Zillow saves represent anything. You will break even on this project if you are lucky.
The first thing we do when presented with a deal is to simply add the purchase price to the rehab estimate. If the total is less than 75% of the ARV, then I know there's a potential profit of 12 to 15% of the ARV. That's our definition of a good deal. When the percent hits 85%, you will break even (and it's linear). This calculation takes seconds and it's a good way to screen scenarios. This is the well-known 70% rule of thumb except you can use 75% for properties over around $250k. If all looks good, then we estimate all the expenses, which you didn't do.
From experience, we know that rehab costs have been around 15% of the ARV lately. This is not any sort of rule of thumb. It's just our observation since we collect as-built statistics from our borrowers. Your $80k estimate could be legit but unless you had a contractor estimate, which we always bump up, or we personally walked the house to confirm, we use 15% of the ARV, or $94.5k in your case. (If no one can get into the home, which happens on occasion, we use 20% of ARV or sometimes just won't do the deal.)
Using $94.5k for your rehab, here are the expenses we estimate:
Click on the image and it will become readable.
Notice you'll break even here. With a project cost (purchase price + rehab estimate) that's 86% of ARV, you could have predicted this at the start.
Last, don’t get crazy trying to calculate every expense to the last dime. Remember, these are all estimates. That is, the only accurate number here is your purchase price. Notice, it's always the case that your rehab costs, financing (HML) fees, and realtor sales fees always comprise the majority (around 85%) of your total expenses. The rest, individually, are small potatoes and could be lumped together. Simply add the first three, which are easy to obtain or calculate, and multiply the total by say 1.18, and you get a pretty good estimate of your total expenses.
Backing out of the rule of thumb, you can’t pay more than about $378k for this property, Juan.
Keep looking.
- Member since 2019 · 7k+ posts · 4k+ votes3y
- Member since 2019 · 7k+ posts · 4k+ votes3y
- Member since 2020 · 2 posts · 3 votes2y
- Member since 2019 · 7k+ posts · 4k+ votes2y
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