First Flip looking for advice

[Shay Green]

So this is my first flip and i'm trying to get the numbers right, below is how I have figured my costs. Just wanted to know bigger pockets advice. I will be doing the majority of the work besides plumbing, electrical, and roofing. What do suggest for closing costs and other such things that I may have over looked?

Purchase price: $179,900
Description: 3 bed 2 bath -- 2,356 sqft -- 5,000 sqft lot -- year 1923
Retail value of property after fix-up = $250,000
(Tax assessed value = $221,713)

1) Complete selling cost (8%) = $20,000
[3% list fee + 3% selling fee + 1.78% excise tax + closing]

2) Remaining after selling cost = $230,000
[Value – 1 ]

3) Purchase price = $179,900

4) Finder fee = $5,000

5) Fix-up costs = $20,000

6) Out of pocket expense = $204,900
[3 + 4 + 5 ]

7) Holding costs = $3,500
[6% annually or .05% / mo. = 1.5% holding for 6-8 weeks ]
8) Total cost = $208,400
[6 + 7 ]
9) Net profit = $27,208
[2 – 8 ]
10) Rate of return = 13%
[9 / 8 ]

Comps: Sold properties
1) – 4bed 2 bath – 2,901 sqft – 7,405 sqft lot.
$370,000 June 15, 2010
2) – 3bed 1 bath – 2316 sqft – 5,000 sqft lot --
$228,000 June 25, 2010
3) – 3bed 2 bath – 2676 sqft – 4791 sqft lot --
$194,000 May 14, 2010

For Sale properties
1) -- 4bed 2 bath – 2780 sqft – 9738 sqft lot --
$425,000
2) -- 4bed 2 bath – 2432 sqft – 4791 sqft lot --
$339,000
3) -- 5 bed 3 bath – 3416 sqft – 10000 sqft lot --
$444,000

Thanks for any advice you can offer!

[Jon Holdman]

I would use 2% for purchase closing costs and 2% for sale closing costs as a starting estimate. A better way, though, is to speak to your title company and get them to do a sample HUD-1 for each transaction.

You seem to be allocating 0.22% for closing costs on the sale. That's $550. That's almost certainly low. Title insurance alone will be over $1000. There will be numerous small fees that add up. Similarly on the purchase, there are a bunch of closing costs. You will have insurance.

What's the $5000 finder's fee? An assignment fee to a wholesaler? Why bother? You're at 82% of ARV. That's not a deal, so there's no room to be paying someone $5000 for this crummy deal.

Where did you get that $20K fix up number? You mention electrical, plumbing and roof. I sure hope that's very minor plumbing and electrical.

Don't forget about property taxes. Those are typically paid in arrears. You pay 2010 taxes in the first part of 2011. So, when you buy, you will get a credit from the seller for the 2010 taxes from Jan 1 to the purchase closing date. When you sell, you'll have a debit for taxes from Jan 1 to the sale closing date. You'll actually only pay them for the time you own it, but if the money from the credit just disappears into your kitty, you may be surprised by that big debit on the sale.

Six to eight weeks for holding time? No chance. Assume six months. Then you'll be plesantly surprised if its less. You'll have time to fix it up and get it onto the MLS. Then you wait, wait, wait for an offer. Your agent should be able to help you with that time. Then you have to wait to close, which is 4-6 weeks minimum.

How are you paying for this? You just don't get 6% loans for rehab projects. Six percent is bank rate for investor loans. You won't get that on a property that needs a lot of work. Banks expect those loans to be out for a long time, and if you do get one, then sell it a few months later you won't get another. Hard money, which is the normal funding source for fix and flips is about four points and 15%. Even if you can get a NOO loan at 6%, there will be an origination fee, appraisal fee, and a bunch of little fees.

Your comps tell me very little. Your solds have such a wide range that they're useless. Further, were there just three sales? Or, were these the three you were given? By the "finder" perhaps? And only three houses for sale? You need to have ALL the recent sales and ALL the current listings. On a fix and flip the ARV is the single most important item and you have shown nothing to support your $250K number. If anything, those numbers tell me $194K is a reasonable number. But those current listings are so much higher that I suspect that $194K sale had some issues. In those current listings, what the difference between 1 and 2? Is 5000 ft of land really worth $86,000? Are those comps really comparable? Only sold 3 is actually similar. Have you looked at those and compared to yours? Who came up with the $250K number. The correct answer is that you did, based on your extensive knowledge of the neighborhood that you gained from watching this area for a few months (or longer) and having looked at dozens or even one hundred houses in the area inside and out. The worst possible answer is that you got it from the person who found this deal. If that's your source, rest assured that's that absolute upper limit and its very likely lower. If they are the source of the $20K rehab budget, rest assured it won't be any less than $20K.

This deal looks way too thin to me. The rule of thumb is purchase plus rehab less than 70% of ARV. That assumes hard money for six months and that you actually sell at ARV. That will produce a profit of about 15% of ARV. Realistically, as things go wrong, some of that profit gets spent or given up in a lower selling price. So, 10% of ARV is a more realistic expectation. You're at 82%. That might work if you have the cash. But even then you're counting on the rehab budget, selling price, and holding time to be right as you predict. Unless you get very lucky, that just won't be the case. Especially on your first attempt. If anything, you need and especially juicy deal so you have extra room to make up for the inevitable lessons from the school of hard knocks.