Possible first flip? Need help

13 Replies

Found a REO that's been listed for 150 days. Needs a lot of renovations. It's a 4b/2b, 1,497sf, built in 1973, has a 2 car garage. List price is $275k. Found 3 very similar comps. First one sold for $319k on Sep 5, 3b/2b, 1,550sf, built in 1977, has 2 car garage. Second comp sold for $325k on Aug 19, 3b/2b, 1,351sf, built in 1972, has 2 car garage. Third comp sold for $340k on Sep 15, 3b/2b, 1,550sf, built in 1978, has 2 car garage. All 3 comps are within 1 mile of subject property.

Not sure what to do next. I don't know how to make adjustments to the comps to determine ARV range/list price. Should I contact the agent and have them pull the comps (would rather learn how to do it so I can do it on my own)?

Possible next steps? Feedback and suggestions?

P.s. Happy Thanksgiving to all BP'ers!

Most flipper want to be all in at 70% ARV (after repair value). If $325k is the ARV based on comps, you want to invest about $220k including the repairs. Subtract your repair budget from $220k and you'll get your max offer price. At the price you mentioned, there's no real margin in there for repairs, holding costs, and closing costs. You'd need them to come down $50 - 75k probably.

@Nathan Emmert  Thank you for your feedback Nathan!

After looking at the 3 comps, I was gonna call the ARV of subject property $305k to be conservative and because I don't know how to make adjustments on comps. I came up with these numbers off of my head, but I figured fixed costs would be $20k, rehab would be $40k, and profit would be $15k.

I was thinking about submitting an offer of $200k since the house has been on the market for 5 months. You know what they say, "if your offer doesn't seem ridiculous, your offering too much!"

Any other thoughts or feedback? @J Scott J. M. 

Originally posted by @Jordan Sizelove:

After looking at the 3 comps, I was gonna call the ARV of subject property $305k to be conservative and because I don't know how to make adjustments on comps. I came up with these numbers off of my head, but I figured fixed costs would be $20k, rehab would be $40k, and profit would be $15k.

 A few thoughts:

- If the ARV is $305K, I'd be looking for a profit of much more than $15K. I generally want 15% of ARV at a minimum (which tends to be about 20% ROI). So, in this case, I'd want to see a minimum profit target of about $45K.

- Your holding costs seem extremely low. I tend to use 10% as my MINIMUM holding costs on a cash deal where I'm using an agent to list the property. If I'm paying 5-6% in commissions, 1-2% in closing costs, 1-2% in holding costs, plus concessions/inspections/appraisals, etc., it's hard to end up less than 10% of the ARV in total fixed costs.

-  Speaking of fixed costs, if you won't be paying cash, you'll likely find that total fixed costs are a good bit higher when you factor in loan costs -- origination fee, appraisal, interest payments, etc.

-  Not sure where the $40K rehab estimate came from, but this is likely the number that's most important in your analysis.  For a $300K property that's been sitting for 5+ months, there could be more rehab cost than you're expecting (maybe not, but something to consider).

- If you're not sure how to adjust comps to get an accurate ARV, make sure your agent provides a comp analysis to ensure you're pretty close. This is part of their job, so it shouldn't be a big deal.

@Jordan Sizelove.  When you say similar comps, to me that means those other properties were also in need of a lot of repair when they sold.  What were the conditions of those other 3 properties, and how does that compare to the current one youre looking at?

@J Scott You've made it very clear that my numbers are way off. lol That's why we have great people like you.

I'm learning more and more every day. Aren't holding costs a part of the fixed costs? So typically, holding costs and closing costs will be 1-2% of ARV? As far as commissions go, I'm a licensed agent (no access to MLS yet). Waiting to hang my license (should happen within the next month). Should I still factor in 5-6% in commission fees if I'm going to be listing on my own?

What does the typical origination and appraisal fee look like?

The rehab estimate was based off of the photos that I saw. Could be way off, which I probably am.

Considering that the house has been listed for 5+ months, if I factored in everything you've mentioned, in addition to lending fees, interest, and more accurate rehab costs, would the bank even consider an offer that's $100k+ less than listing price? Or is that not even possible?

It seems impossible to find any deals that would be worth my while. Sigh.

@Kyle H.  I'm not exactly sure about the condition of the other properties (comps) before they were listed and sold. Am I supposed to be finding comps that needed a lot of work, were renovated, and then flipped? I wasn't under that impression.

For the sake of this thread, I've included links to the houses (hopefully that's okay).

Subject:

http://www.realtor.com/realestateandhomes-detail/1...

Comp 1: 

http://www.realtor.com/realestateandhomes-detail/4...

Comp 2:

http://www.realtor.com/realestateandhomes-detail/4...

Comp 3:

http://www.realtor.com/realestateandhomes-detail/1...

@Jordan Sizelove.  It's not something you're "supposed to do".  However, it can really help you in evaluating your purchase.  If those homes were completely renovated, in perfect condtion, top to bottom, then that would be that max price you could probably get for your property.  But, if those houses were foreclosures, then you may not be able to buy your for less than $300k.  It's just nice to know that you are comparing apples to apples.  When you compare apples to oranges, that leaves room for a lot of guessing and potential risk.  Does this make sense?

It sounds like you're trying to just find deals right off the MLS. A few years ago, you could have easily found hundreds of deals like that without even trying; these days, you may not see a good MLS deal for months at a time.

If you want to find great deals these days, you need to go off-market and start looking for sellers yourself...

@Kyle H.  That makes perfect sense! Thank you for explaining.

@J Scott Thank you! So you recommend that I do a marketing campaign along with letting people know what I do? (The reason I was looking on the MLS is due to lack of capital.)

Originally posted by @Jordan Sizelove :

@Kyle H.  That makes perfect sense! Thank you for explaining.

@J Scott Thank you! So you recommend that I do a marketing campaign along with letting people know what I do? (The reason I was looking on the MLS is due to lack of capital.)

Finding Deals / Capital
Jordan, @J Scott is right about going off market, and to the contrary of your thinking, if you don't have capital, you should be looking off the MLS even more!! This will increase your odds of finding a great deal, and a great deals finds its own capital, like a moth to the light..

Margins
The margins are also way too thin. If you sneeze, the project goes upside down. Most flippers in the Bay Area are still trying to shoot for 75% of ARV - repairs (in other words, there should be 25% margin between your projected sales price and the cost of Purchase+Rehab. So after you finish rehab, you have the 25% to split between your holding costs, transaction costs, and profit...

Holding Costs
Holding costs are not fixed costs. Holding costs are largely dependent upon the time needed to complete the project, and the cost of capital/borrowing. This will include any borrowing costs, including points/fees, and monthly interest. Maybe 2 points plus almost 1% on hard money. Appraisal for a SFH in the Bay Area is about $400-$1k, depending on size and scope of work.

Sales Commissions
If you're going to be your own agent, then you'll only need to pay the seller's agent (2.5-3%), but don't skimp on this. If you're doping your own sale, I would still include the expense as your work on the deal. Would you do a flip with lots of risk and no return, just to get a listing? Value your time and your work.

Comps
Regarding comps, you need to do two different comps: One for the ARV (probably most important), and secondly you need to be able to do comps and value the purchase as it sits today. In other words, you need to know the value so you can purchase it up front, and the value you can sell it at after it's rehabbed..

Hopefully that hits on most of your questions above.. Looking forward to meeting you sometime soon!

J. M. Thank you for great feedback! That is exactly what I was looking for. I'm gonna have to learn the numbers with experience. Anyhow, you made things a lot more clear to me. Keep up the great work!

Jordan Sizelove

Another thing to consider when for going "off-market" ... if it's been sitting on MLS for 150 days, it's not a deal. It means hundreds - and since you are in California, maybe thousands ;) - of other seasoned investors have looked, crunched numbers, and passed.

A listing hit MLS here recently and had nearly a dozen offers on it within 24 hours of being listed - several cash investors and owner occupants. My husband and I went to view it and we arrived as people were leaving, and another couple arrived while we were there. THAT'S what an MLS "deal" looks like...

Good luck Jordan!

Originally posted by @Heather Jones:

Another thing to consider when for going "off-market" ...  if it's been sitting on MLS for 150 days, it's not a deal. [bold added]  It means hundreds - and since you are in California, maybe thousands ;) - of other seasoned investors have looked, crunched numbers, and passed.

A listing hit MLS here recently and had nearly a dozen offers on it within 24 hours of being listed - several cash investors and owner occupants. My husband and I went to view it and we arrived as people were leaving, and another couple arrived while we were there. THAT'S what an MLS "deal" looks like...

Good luck Jordan!

Heather Jones,
I HAVE TO DISAGREE!! 

Maybe a testament to the difference in markets too. Both myself and several investors I know have snagged great deals from 200+ day and expired MLS listings. In fact, I'm making a killing on a 4plex I bought earlier this year in Oakland. $385K purchase. $45K rehab = $430K all-in. Over $5k/mo in rents, w/ lots of upside (as rent-controlled tenant shifts upwards.. then hopefully some increase in market rents would be an extra bonus..). 200+ days on market! Here's some of the specifics if you'd like more info. I would challenge anyone to find a deal like this in the Bay, and if you do, bring it to me so I can partner with you or give you wholesale $$$ for it!!

http://www.biggerpockets.com/forums/223/topics/132989-deal-success-story-in-process-cash-flow-in-the-sf-bay-area

That's when NEGOTIATIONS (and giving the listing agent a double-end commission ;) come in handy. Especially in a market quickly moving upward (both price and rents), a lot of investors haven't analyzed the old (then-too-high) listings in light of the current market, the listing agents usually aren't getting many calls, and the owner may not realize how much the market has moved, or circumstances have changed and they just want to get rid of it. So not the same level of competition.

On the contrary, many listings in the Bay Area right now are listed clearly too low (wow! look at that deal!). Then by the time you show up to the open house and realize how many offers there are about that "DEAL" from the listing price, you're slitting throats against 27 other offers clamoring for the 5 day on market deal..

At least that's what I've seen lately around the Bay Area. If you can buy truly discounted properties off the MLS on the first day in a swarm of investors and retail buyers out an open house in the Bay, call me up so I can partner with you or pay you for a wholesale deal!

Not to say that stale or expired listings are the only ways to get deals - by any means! But to say there aren't any stale or expired listing deals out there is just leaving money on the table!!!

Right @Amit M.  ?

REO's are risky compared to owner owned. There's a whole lot more earnest money and terms involved. Look for vacant properties with equity. Do a yellow letter campaign targeting absentee owners, high equity in an area you find desirable. Do it yourself to keep costs down. Use Listability.com to source your leads. Target 500 - 1,000 addresses per month. Do your due diligence on the motivated sellers that responded. Get some good comps. through Zillow or Redfin. Estimate the repairs/upgrades. Homwyse.com is a good place to fine tune this. Determine if the area is a sellers or buyers market to base the offer on, either 65% or 70% ARV minus the repairs/upgrades. Put the property under contract for $10.00 to make it legal. Market through networking REI's, Craigslist, Zillow, e-bay,etc...., asking at 70% - 75% ARV minus repairs/upgrades. Assign contract at closing to your buyer for your fee. Walk away with 5%. Simple low cost investing. Do it again. It takes time and work but it pays.

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