Hey guys how is it going? I have a question about making an offer to the seller and the criteria you used to make the offer . Whenever you estimate your offer to a seller do you factor in closing costs for your buyer? For example after repair value - repairs - around 6-9% for closing costs and miscellaneous - purchase price - wholesale fee? Look forward to hearing your responses. Thanks!
Most buyers look for 70% of ARV minus repairs to allow for profit and other costs involved with flipping (financing, sales cost, ect.)
This isn't always the case but just a "Rule Of Thumb".
So when you determine your MAO as a wholesaler it would be ARV x 0.70 - Repairs - Your Wholesale Fee = Your MAO.
So say you have a house with an ARV of $200K but needs $50k in repairs/updates to get it there and you want to make $10k on the deal. It would be $200K x 0.70 - $50,000 - $10,000 = $80,000 MAO. Your end buyer will be all in around $140K (acquisition and rehab) leaving a gross profit of $60K (lower net profit after all other expenses).
Not every deal follows this "rule", bottom line is if the numbers work for an end buyer then you'll move it. If it's not a deal you'll know because you won't have any interest in it.
Exactly what @Justin Lenk said.
Yes, Justin has a right on answer.
Specifically, in determining MAO
Mao=ARV -repairs- investor profit-wholesale profit -(buy/sell/hold costs)
As a rough estimate many will do a quick check:
- ARV(.70-.75) -REPAIRS - WHOLESALE FEE= MAO (some very successful investors in my area use ARV X .75...but please note, that that is MY area) This quick check doesn't always hold true..it depends on the ARV/area of investing.. etc...but you definitely get a feel for what your investors are looking for with a little more experience. As long as you are making a good effort to try to come up with a good offer, then your investors will work with you...and you can learn from them, in finding out what their rules of thumb may be. But like Justin said, if it is a good deal, you'll know it, because your investors are going to let you know immediately! It's a virtual no-brainer. :)))
awesome stuff guys.thanks for the responses!
@Vincent Herrera the simple answer is YES and much more.
The bottom line is it has to be a good deal for you buyer or they won't buy. For a rehab to be profitable the buyer must figure in
- cost to purchase
- cost to hold
- costs to sell in
All of these area in addition to cost of repairs.
The 70% rule that @Justin Lenk mentioned is a quick and dirty rule to figure what a rehabber can pay. Some investors like @J Scott prefer to work with actual numbers for those costs then subtract what he wants as a profit margin to figure his offer.
thank you guys for the great information