Flipper/Rehabber · Metro-Detroit, MI · Member since 2014 · 77 posts · 16 votes
Hey guys,
I did some digging on the topic and I'm sure it is somewhere in the archives, but I can't seem to find anything about "quiet costs" (taxes, insurance, cost of money etc) when determining max offer.
From what I understand the standard formula is:
ARV x .7 - repair costs - assignment fee = MAO
I don't see anything about quiet costs in that formula. Are those expenses being paid by the buyer (fix and flipper) out of the 30% discount? Is it not our job as wholesalers to worry about it?
I want to be able to bring solid deals every time I shop a contract around, and understanding what buyers are thinking, and exactly what's happening with all the money will help with that process.
As a flipper, I start by multiplying the ARV by 88%. I am using 6% for commission to sell, 1% closing costs, 3% consession to buyer and 2% cushion off the ARV. I then divide that total by 1 + .20. This is to give me a 20% profit on the money I invest. After those calculations I am at 73.3%.
From that number I will subtract $2,000 (unless I can estimate better) for taxes, insurance and utilities for 6 months. I also subtract $1,400 for closing costs and inspections when I buy.
As you can see, for a property with an ARV of $100,000 I am now at $73,333 - $3,400 or $69,993. Very close to your 70%. I do not figure someone's cost of money. In my opinion, the soft costs (except mortgage) are embedded in the 70% figure.
As a experienced wholesaler, Im not sure your concerns are necessary.
To Thomas
There are other expenses like marketing,buying leads, my phone, paper, ink, internet service, etc. etc. but all these things are just tallied up as cost of doing business.
I use the same formula as above but sometimes I use .65 depending on the motivation level of the seller.
Taxes are pro rated at closing, I dont buy any insurance (why would you?) and I dont have any cost of money because I'm not borrowing any money, we only have the house under contract and assign that contract to a investor buyer or do a double closing.
To Bill
As a wholesaler that formula is way to confusing. Why buy at 70% or 73% or whatever when Im always getting properties for 40% to 50% by using the wholesaling formula? I just dont get it, maybe I missed something there.
@Jeff Smith Hi Jeff. I think there may be a disconnect here. What I was asking about was the quiet costs a fix and flipper pays when flipping a house. I was curious, if when determining the MAO, these costs should be accounted for.
From what I can tell, shopping around great deals is huge to a wholesalers success, and I wanted to be clear where these costs come in for a flipper. @Bill Jacobsen did a great job of explaining what a fix and flipper is looking for and where they're coming from when determining whether a deal is viable or not.
It looks like these costs come out of the 30% discount wholesalers immediately cut from the ARV.