This is my first fix and flip, so help is greatly welcomed. I understand the equation for calculating a good deal offering price is (After Repair Value * 70%) - Repair Costs. But can someone help me understand the "range of acceptability"? For example, I've found a 4/3/2 in a great neighborhood. The ARV is 195k and has about 20k in repairs. Using the calculation, I should offer 116.5k. But, what if I don't get 116.5? What if instead the owner says 145? Is 145 still a good deal? Or is 116.5 my threshold? After 20k repairs on 145k, I would think the 30k difference (195-165) would still be a pretty good profit? Can someone clarify, please? Thank you! --New Flipper
@Erika Banks Welcome to BP! Nothing is set in stone. Every deal has many factors that must be weighed, including the local market and economy. What is the demand for the neighborhood? How confident are you in the repair numbers and that there's not other work that would be required? Will you be doing the work yourself or subbing it out?
How did you come up with the ARV? Do you have good comps?
The biggest question is are you paying cash or financing? If you are financing, what is the cost of your money going to be?
I know I haven't answered your question, but there's a little more information needed from you before anyone can really give you advice.
Wow! Good points, Karen. I got repair estimates from 2 different contractors for the 20k. I pulled comps for the last 6 months within a few streets from the house. Comps show a range of 190-215 and about 4 months of inventory. I plan to finance the deal, looking at hard money lending (which may be a whole separate discussion) that would give me 70% ARV and charge about 14% with 2 points. How can I now use this information together to better my conclusion? Thanks
Since you are basing your numbers on ARV I can assume that this is not a buy and hold. You want to be able to flip this property . The 70% number has about 20% of the money that you put up as profit. It also assumes that it cost you about 7% to sell the property, you may have to pay buyers closing cost, you may have to discount the price, and you may go over on rehab costs. If you pay more than the formula you most likely will reduce your profit.
If you plan on 6 months between your buy and sell and that you are earning 20% during that time you can count the cost of financing and subtract it from your profit.
thanks Bill and Karen!
Get the Ultimate Beginner's Guide
Sign up today to receive the popular eBook for free!