How much are you buying on the dollar?

[Jonathan Guerrero]

So everyone knows CA has a hot market. What are wholesalers and rehabbers buying on the dollar? I just listened to Tim Gordon's podcast and he said his buyers are paying up to 80% of arv and that was about a year ago. What are you buying at?

[Jeff S.]

Originally posted by @Jonathan Guerrero:

I just listened to Tim Gordon's podcast and he said his buyers are paying up to 80% of arv ...

For what purpose? Buy and hold or flipping?

I don't know who Tim Gordon is but if I were in the business of selling properties, I would want everyone to believe that sensible buyers are overpaying as well. Consider the source.

No flipper in their right mind should pay 80% of ARV. Do the math. If you assume rehab costs in the 10% to 12% of ARV ballpark, you're really paying over 90% of ARV. This doesn't include sales commissions, insurance, HML fees, utilities, etc. That is, you will lose money paying 80% of ARV. Instead of relying on percentages, you should always estimate the actual numbers. Since they are related though, it's easy to talk in percentages.

Realistically, in the southern California, you'll gross about 12% to 15% of ARV if you limit your project cost (Purchase price plus Rehab cost) to about 75% of ARV.  Once your project cost reaches 80%, your gross return will be less than 10% and closer to 5% for lower priced properties. No one can predict costs and values that close and small variations will kill you. At a project cost (not purchase price) that's 90% of ARV, you will lose money.

None of this is to say we don't get requests to fund 83 to 90% deals multiple times each week. When I give these (normally new) rehabbers a cost breakdown showing how little, if anything, they will make, they often get mad at me for bursting their bubble, as if it's my fault.

I understand the frustration with not finding viable properties. The goal is to make money Jonathan, not to buy homes.