This looks like an awesome deal but formula says otherwise!

11 Replies

Case Study:

I found a property located in a very wealthy area (Red Bank) that is an estate sale with highly motivated sellers that is being sold in "AS IS" condition. The sellers (of estate) need to push this property fast and just reduced the price from $520,000 down to $405,000 and wont really budge as they have to pay a REVERSE mortgage off. I have reviewed and verified three recently closed homes on the same street that were completely renovated but were similar in terms of size (within 200 Sq.Ft.) room count and lot size (as per city assessor) to this property. One sale was at $590,000, $625,000, $700,000 and the house next door sold at $665,000. My estimated cost to cure/repairs is estimated at $60,000. I am going to utilize transactional funding for this deal as it seems the best solution for wholesaling. I offered $360,000 and they laughed at me!!! What is the most I Should pay for this property as I want to make a minimum of $12,000 on the deal. If I estimated the house at $665,000 (most similar comp) and use the formula of 65% of that would be $432,250 - $60,000 - $12,000 = $360,250. However, an investor (rehabber) friend of mine in the area says that his company does not do a deal unless they make a minimum of $90,000. In this case they could make ALMOST $150,000-$200,000 even it if pay full price of $405,000 as the formula does not appear to be consistent in this high end market. Somebody PLEASE help me to structure this deal, I don't want lose it. THANKS BP

Good luck on this one.  It will be difficult to lock this property up to flip it like you want.  They are either looking for a cash buyer or qualified home owner.  Your strategy might not work.  

If you use TF can you close on the deal quickly and do you have a legit buyer lined up?  What happens if your buyer falls out?  Come up with a back up plan.

Curt Davis, Real Estate Agent in TN (#00321765)

@Curt Davis  how do you know they want a "Cash Buyer" or  "homeowner" you never saw the house or area? My funds are considered Private Financing (No Mortgage Restriction) which they don't have a problem with. They haven't had any offers as retail buyers are very fussy in this wealthy area and want renovated homes. The percentage is tight but equity spread is high. 

@Angelo Mart   I have found that the 65% or 70% formula needs to be adjusted based on price range of property, among other things. Do you know what that formula is made up of? It accounts for closing costs (2%), agent costs (6%), holding & finance costs (~5%) plus investor profit. Now those numbers can fluctuate since some agents will go with 4%, finance costs may be less if you put more cash in, etc. On higher priced homes, investors will take a lower % of profit on the total deal since the total profit is so much. So the formula may be 75-80% on a property such as yours.. It depends. But, I think from the sounds of it, the $400K is doable. But note.. With a higher priced home.. The usually move slower and have longer days on market.. That means longer holding and finance costs. There are fewer buyers, both investors and end buyers, at that price range. Personally, I would not want to lock such a deal up unless I had a buyer already in the wings for this type of property. One thing you might consider is to put an option to purchase contract on the property between you and the owner. You could do it at the $400K mark. Put down a small earnest ($10) and about 2-3 week timeframe. This gives you the right to market that option and find a buyer at the option price,yet it leaves open for the seller to find someone themselves as well. If you find a buyer, great! You then formalize the deal with a standard purchase contract then assign or double escrow to the end buyer. That's what i would do.

@Account Closed  thank you ver much for the help. This area is extremely hot with Buyers coming out of Wall Street,New York. I saw investors paying 80% within this market it's crazy. I am negotiating as we speak with owners if I could lock @ 390,000 I might be able to flip for $410,000. The contractor I am working with said he needs to make an $80-$100K profit for him to be interested. Even if he bought it from me at $450,000 it would still meet his criteria!!! I def think these % needs to be adjusted depending on the market. This area exploded after the towers went down on 911 as People fled NYC. I believe every market in our country is unique and no 2 areas are ever the same. 

I'm no guru, but I think I have a pretty good grasp on the math....here's my process:

The 70% rule of thumb is great for giving any deal the "eyeball test". But like @Account Closed  said, that "rule" has a lot of assumptions.  Let's look at the numbers a little more closely.....using specific profit/wholesale fee targets for you and your buying investor.

ARV = Somewhere less than 665,000 i would guess. I haven't seen your comps, but I never set my ARV higher than midpoint between the highest and lowest comps. So let's call it $640K, just to stay under that midpoint.

Investor's desired profit is probably going to be in the 10-15% of ARV range. Let's assume 15% of ARV to increase your chances of finding that investor. $96K based on $640K ARV

Your wholesale Fee:  I'm assuming you're looking for at least $10K on a deal this size?

Investor's Purchase Costs: Call it 1% or 6,500 (This may be a little or a lot high, I don't know customary closing costs on this price point)

Rehab: $60K

Investor's Holding Costs: I would plan for 6 months on a property with this scope of rehab and price point. I haven't seen your comps or CDOM so I'm eduguessing here. Probably $1000/month holding costs, including yard maintenance, insurance, taxes while the investor owns it, and all utilities & HOA fees if any. $6K

Investor's Selling Costs: Figure 8% of ARV. That's 6% to the agents on both sides, and another 2% for closing costs and concessions. $51,200

So the math looks like this:

Max Offer = ARV - Flipper Profit - Your Fee - Purchase Costs - Rehab - Holding Costs - Selling Costs

Max Offer = 640K - 96K - 10K - 6,500 - $60K - $6K - $51,200

Max Offer = $410,300

Not knowing what your purchase closing costs are, my number may be low, but the rest of them are pretty reasonable I think. This also doesn't take into account your TF costs, so include those as well, which comes right off your wholesale fee. Now that you've seen the long form, you can usually safely estimate your fixed costs at 9% of ARV, simplifies the formula to:

Max Offer = ARV - Flipper Profit Target (15% ARV) - Your Fee (Fill in the blank here) - Rehab - Holding Costs - Fixed Costs (9% ARV)

Hope this helps.

Shane Woods, Real Estate Agent in TX (#0660315)

Not really.  I just used @J Scott 's formula.  I didn't create the math or the context. :)

Some people get too bogged down with the rules of thumb.  Sometimes you have to just do the math based on what stuff costs and what you want to make.

Shane Woods, Real Estate Agent in TX (#0660315)

@Shane Woods  

Exactly I know an investor that purchased a home at $272,000 and is dropping $56,000 into it with a ARV of $415,000 in this market. He is making $87,000 (Estimate) it is all subjective to the market

@Shane Woods   Thanks for the excellent explanation of what the % formula is made up of. In your explanation I did not see an accounting for hard money costs. Don't most investors use hard money on a fix n flip deal? I know this is part of holding costs.. But didn't see it in your list. 

Hi @Account Closed  These numbers are pretty safe for an all cash purchase.  Everyone pays for their deals differently, so I don't personally account for financing costs when I determine what to offer for a wholesale deal. 

Shane Woods, Real Estate Agent in TX (#0660315)

@Angelo Mart  

Good read on this potential deal - any update?

- Tom