Above FMV but still profitable flip?

10 Replies

Hey all,

I've been a rental holder/landlord for 7 years, but I'm new to the wholesale scene.

I've networked with rehab/flip buyers.  I found a house that meets my buyer's specs exactly.  

He says he wants a minimum of $15k profit and a less-than-6-month rehab.The neighborhood is highly desirable.  Beautiful old houses with a high rehab/resale rate.

I don't have it under contract yet, but I have the cash to do a double closing.  

Here are the numbers I'd like to offer to my buyer:

Purchase Price: $130,000

Estimated repairs:$26,500

Buying/Holding/selling costs: Est. $15,000 (Edit to your experience)

ARV: $206,000 - $215,000

Profit = $34,500 - $43,000

ARV is based on 6 comps within .5 mile sold in the last 3 months. Work required involves pulling up carpet in favor of new floors, updating one bathroom, and updating the kitchen.

Here's the potential deal breaker: this neighborhood has a very defined split price for FMV based on all the old charming houses whose original owners are moving to assisted care or passing away vs the FMV for the newly rehabbed houses. I don't know how low I can get the contract. $130k is way above FMV based on the "as-is" comps. But still highly profitable based on the ARV comps.

Thoughts?

Let's look at your numbers applying the 70% rule and rounding up to the nearest 5k on rehab: 

Let's be conservative and say ARV is 200k.

200k*0.70 = 140k

140k-30k (rehab) = 110k

IMO, 130 is far too high.

Is this a motivated seller lead?  Are you flipping the contract or staying on for the rehab?

Remember, if you aren't embarrassed by your offer, it's probably too high (or something to that effect).

I'll do a double closing - I don't want to do the rehab, but I have a rehab buyer available.  Rehab buyer has been known to circumvent assigned contracts to be able to do the deal directly himself, so I'd prefer a double closing to ensure I get paid. 

Seller inherited the house when her mother died 3 months ago.  She has no use for the house. 

I'm going to read up on the 70% rule. All the flip investors I talked to said they're looking for $15-20K profit for all ARV under $250k. One guy said he holds out for 20% on ARV for everything above $100k purchase price.

The 70% rule is just a general rule of thumb that will provide a potential investor with an attractive return.  Your area may adhere to different metrics.

Circumventing assigned contracts?  Sounds like a decent fellow.  

I maintain that you get the property under contract for <110k.  You can then "circumvent" his involvement and find a buyer who appreciates your services and ability to provide a deal.  

Don't be held hostage, that is no way to develop a business.

The 70% Rule is a guideline for people who don't know their numbers.  The 30% is to cover closing, carrying and profit.  Why anyone would do a deal without understanding the exact numbers is beyond me.  But, some people seem to love it.

Regardless, the FMV of other distressed properties is irrelevant to a rehabber. He/She only cares about the profit potential and associated risk.

IF your numbers are correct, this meets the criteria of your buyer (and a lot of others I'd guess).  It's a shame you can't trust him to review the deal without going behind your back.  Are you able to put together a Proposal with pictures of the needed work without revealing the property address?  I'd want to see the break-down of the $26,500 before committing one way or another.  

Medium fpg logo horizontal 266x82Erik Hitzelberger MBA, Freedom Property Group | [email protected] | http://www.freedompropertygroupky.com | KY Agent # 68970

Who came up with that 70% rule?

Joe Gore

Originally posted by @Erik Hitzelberger:

The 70% Rule is a guideline for people who don't know their numbers.  The 30% is to cover closing, carrying and profit.  Why anyone would do a deal without understanding the exact numbers is beyond me.  But, some people seem to love it.

Eric,  I don't think the 70% rule is designed to be the end all to the offer you make on a property.  It is just a rough guideline to help you decide whether a property is worth pursuing further; to take the time to get better numbers on the rehab.  As anyone who has done some flips will tell you, you can never really get "exact numbers".  There will always be some unexpected surprises behind the walls or under the carpet. 

Thank y'all so much.

Here's more info:

very desirable neighborhood
2229 sq ft
brick exterior
3-4 bedroom, 3 full bath
built in 1969
new roof 5 years ago
HVAC replaced 10-12 years ago, no problems
fireplace, gas heat/ water heater, electric appliances, city sewer, crawl space / full attic, 2 small storage buildings out back, metal carport attached to house

Pics:
https://www.dropbox.com/sh/9okdqd6lj9olk1w/AACeDvF5R133So7URcPnUUoqa

Work required:
pull up carpet, replace wallpaper in 2 bathrooms [apprx: $13,000]
modernize kitchen [approx: $8,000]
modernize one full bath [apprx: $4,000]
wood paneling in living room could be painted or replaced with drywall [apprx $1000]
slight water damage in mother-in-law suite has been repaired and roof replaced, but visible spot in ceiling remains [apprx: $500]

Estimated repairs:$26,500
Holding/selling costs: Est. $15,000 (Edit to your experience)
ARV: $206,000 - $215,000

ARV Comps:
1- Distance: .6 miles
Sale date: 5/2014
Stats: 3046 sqft incl basement, 4/3 full, 2 half baths
Price: $90/ sq ft

2- Distance .4 miles
Sale date: 5/2014
Stats: 1800 sqft, 3/2
Price: $91/ sq ft

3- Distance: .5 miles
Sale date: 5/2014
Stats: 3600 sqft incl basement, 4/3
Price: $86/sq ft

4- Distance: .2 miles
Sale date: 4/2014
Stats: 1700 sqft, 3/2
Price: $93/ sq ft

5- Distance: .3 miles
Sale date: 6/2014
Stats: 1700 sq ft, 3/2
Price: $96/sqft

6- Distance: .3 miles
Sale date: 6/2014
Stats: 1350 sqfr, 3/2
Price: $98/ sqft

The 70% rule probably also takes in to account the holding costs like utilities and a few months of property taxes that a non-rehabber wouldn't consider when evaluating a distressed deal. 

I think I've set a reasonable figure for this flip.  Thoughts, anyone?

All I know is that people like Sharon Vornholt, who has proven to be an extremely effective "wholesaler", mention using the 70%ARV - repairs - wholesale fee as their basis for their offer. I re-listened to Sharon's podcast #12 last night and she specifically refers to using the formula I stated.

Yes, your market may vary.  

As a beginner, if you shoot for and hit that number, chances are you will find yourself with a very attractive deal to flip to an investor.

One other comment. Your ARV comps are using properties with a pretty wide range of square footage. I am not sure that using $/sq. ft is an effective comparison tool when using such a wide array of properties. I may be completely off-base regarding this, but I have read that a 400-600 sq. ft variation (200-300 below and above the subject property) is recommended.

Best of luck to you.

Here are some components to the 30% on a flip. Of course, they vary by situation, but these are close approximate.

6% Realtor costs on the resale after fix

2% closing costs (buy/sell)

5% finance and holding cots

13% net pre-tax profit 

4% fudge factor, misc

---------------

30%

In hot markets like Phoenix, some buyers will take up to 75% less repairs... because it's so competitive.  A cash buyer, of course, may not finance saving him those costs. Some Realtor's will go with 4%.  A property for 50K may require more net pre-tax profit than 13% to be worth the flip. It depends by situation. These are not gospel, but a good rule of thumb.