What is considered a good deal?

5 Replies

There is a neighborhood 5-10 mins from my house that has many investors swarming to, who are picking up great deals on real estate and fixing / flipping, wholesaling, renting, you name it, their doing it. But is it a great deal or does it just appear to be? From what I've gathered, these properties are being purchased for $100-120k with a $35-50k repair cost and sold for $185-230k is this considered a great deal or a to close to call or run fast deal?

Every deal shares certain constants and certain unique costs. Using your example neighborhood, let's say you can safely flip for $200,000, you'll incur somewhere between 6-12% in selling costs (3% selling commission, 1-3% listing commission, 1-2% excise tax, 1-4% closing costs).

Next you'll have more specific costs including improvement costs (huge range, but let's go with your $45,000ish) and holding costs (depends on time and other factors, but let's say $1,500ish average). At this point, very generally, you're down to $135,000.

Now you work from the purchase price end. With an on market deal, you're mostly looking at closing costs (1-4% or $2,500ish) and, if you're using it, hard money costs (2ish% origination + 1ish% a month around here). There may be unpaid obligations, so let's round up to $10,000.

Budget for unknowns and property specific knowns, and you arrive at your estimated profit. With no additional costs your example net would be $25,000.

So yes, the numbers appear to work for flippers, but each deal really is its own. Generally speaking, a neighborhood with more deals will also have more competition, driving offer prices up and profits down. It's often helpful to have a minimum acceptable ROI for making an offer (includes unkowns) and make your offer right up against that. The number of deals you'll have the opportunity to pursue will largely depend on that minimum.

Hi @Gideon Sylvan , thanks for the reply. So your analogy is assuming I get the deal for 100k right? I used the house flipping calculator and I came up with around the same numbers $23k range of course this is a very general evaluation that can fluctuate one way or the other. If I paid $110 and put $40 into it and only sold it for $190k I'm only up $10k, on the other hand, if I get it for 100k, spend 35k on rehab and sell for $210 thats a $45k profit, but do I really want to take that chance on a potential 10k to 45k? Or should I wait for a more profitable deal to allow for mistakes and unforeseen situations. I am a contractor so I feel safe with my rehabbing costs and time frames. But as a first time REI deal, should I make sure I get the best situation before I pull the trigger or take what I can get just to get the first one out of the way? By the way there are a lot of questions here and they are for everyone to chime in on, not just you Gideon, you've done a great job analyzing this scenario, and I appreciate your time. Any other takers? Thanks in advance!

@Nick Stango My 2 cents, wait for a more profitable deal to allow for mistakes and unforeseen situations. You will get a ton of different answers to this, some will say just jump in and do a deal, others will argue stick to the numbers as they don't lie. I am an analytic person and look at over 50 houses before I jumped into my first deal, Purchase price of $65k, $38k rehab with an ARV of $155k, paid for an appraisal so I knew ARV was good. The numbers worked so I did it....now 7 months later...still not on the market I echo what I have read hundreds of times on here about your first flip, something always happens and eats up money. My something was being broken into and having copper stolen, having to replace some new drywall and carpeting in my finished basement due to the broken copper, having the furnace go out 3 days before it was getting staged. Finding a roof leak, on a brand new roof in that same week....etc... It has been an eye opening process for me to say the least so thinking I'm going to have all this profit to now just hoping to have profit has been a big deal for me. Anyway...after my ramble, you will never be 100% certain it is the right deal, just practice on learning your numbers and stick to them. Being a contractor you have a huge leg up because typically the most difficult number to come up with is the rehab costs, ARV and purchase price are easy. You have the experience to have a good idea of rehab costs which will help you get to your purchase price quickly.

Hey @Travis Boyer , Thank you for your input, that's just what I want to here, the good and the bad. I think being prepared for anything and everything is the best defense against taking a bad deal. I feel making a ridiculously low offer can't hurt and accepting a few no's, is just a part of getting a great deal. I will be looking for the best ways to get the best deal possible before I just jump in to any deal, at least that's how I feel right now! LOL! Thanks again for the reply, I do appreciate it. Hope you have some better luck with your next deal. Keep in touch.

Originally posted by @Nick Stango :

Hi @Gideon Sylvan, thanks for the reply. So your analogy is assuming I get the deal for 100k right? I used the house flipping calculator and I came up with around the same numbers $23k range of course this is a very general evaluation that can fluctuate one way or the other. If I paid $110 and put $40 into it and only sold it for $190k I'm only up $10k, on the other hand, if I get it for 100k, spend 35k on rehab and sell for $210 thats a $45k profit, but do I really want to take that chance on a potential 10k to 45k? Or should I wait for a more profitable deal to allow for mistakes and unforeseen situations. I am a contractor so I feel safe with my rehabbing costs and time frames. But as a first time REI deal, should I make sure I get the best situation before I pull the trigger or take what I can get just to get the first one out of the way? By the way there are a lot of questions here and they are for everyone to chime in on, not just you Gideon, you've done a great job analyzing this scenario, and I appreciate your time. Any other takers? Thanks in advance!

Real estate investing is always risky, but being a general contractor mitigates that risk substantially.  Another way to mitigate the risk is to use an experienced investor agent; and he or she should give you a discounted listing on the backend. 

From there, budget for unknowns and make offers that reach your minimum acceptable ROI. The offers should include an inspection clause or other out; know that you can always turn back after a closer look.

But if the deal is still good post inspection, with solid, reliable resale comps, and you've budgeted for unkowns, go for it!  In the wise words of one of my original mentors, "listen kid, the only way to do it is to do it."

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