How to determine price for investors?

Question

I have read that when you make an offer to a seller it should be between 40% and 60% of the ARV

As a general rule, what percentage will an investor pay of the ARV?  70%?  More?  Less?

Let's say there is a house with a 200K ARV and 20K in repair costs.

How do you figure 70% of that?

200K x 70%= 140K
140K - 20K = 120K

or do you do it this way?

200K - 20K = 180K
180K x 70% = 126K

So would I offer the property at 120K or 126K?

Thanks,

Chris

Chris Coughlan · Answer

That's what I thought.
I'll need to keep track of each buyers parameters.

Thanks

Jon Holdman · Answer

Every wholesaler who sends me deals lists ARVs.  Everyone who's every asked me for  my buying parameters asks about the ratio I'm looking for.

I should also say that they're ARVs are consistently optimistic, and I do check myself to see what I think.

Chris Coughlan · Answer

i plan on wholesaling.  i was under the impression that  i needed to figure out the ARV to come up with what I offer the seller and what i try to sell to the buyer for.

Eric Medemar · Answer

Are you planning on bird dogging this deal to another investor?  or are you wholesaling it?

At any rate it figuring up the end value is not for you to do, instead have your investors figure that out.

I have done dozens of wholesale deals and all I ever worry about is what is the home worth right now, because I will be selling it exactly how it is.

You have the potential to ruin alot of relationships with buyers if you try guessing the ARV for them.  You can make suggestions but do so reminding them that it is there responsibility to figure it out.

Chris Coughlan · Answer

When trying to figure out what to offer the seller, is it better to:

To figure out what your investors will pay and then subtract your assignment fee?

400K ARV w/ 20K repair costs
400K x 60% = 240K
240K - 20K = 220K

220K - 10K assignment fee
So you would offer the seller 210K

or is it better to make the offer first:

400K ARV w/ 20K repair costs
Offer them 200K (50%) of ARV

400K ARV w/ 20K repair costs
400K x 60% = 240K
240K - 20K = 220K

Then I would end up with 20K rather than 10K assignment fee.

I guess it could go either way.  You probably have to work the numbers, consider how desperate the seller is, and know what numbers your investors are looking for...

Jon Holdman · Answer

If ARV is $200K, $20K in repairs, and someone buys it for $120K (i.e., price + rehab = 70% of ARV), they certainly won't make anywhere near $80K profit.

Assume they get a hard money loan for the $140K and hold for six months.

They pay purchase closing costs around $2500.

They pay the $20K for rehab.

They pay about 10% of the loan in money costs, $14K

They pay insurance, utilities, and whatever else in holding costs, $3K (try pricing a vacant house or builders risk policy.)  Maybe have to make a tax payment if their timing is bad (no escrow on hard money.)

They sell with a realtor.  Its a retail sale, most of these are through a realtor.  These days, concessions are pretty common.  So, $20K total in sell closing costs.  Subtract out the $19.5K in buy closing costs, holding costs, and money costs.  Profit:  $20.5K.  And that's taxable at ordinary rates, plus state tax and SET.  Say 28%, 5%, and 15%.  That leaves an after tax profit of just about $11,000.

That's the real math of fix and flips.

That's about right.

Now, you need to know your buyers.  If they have their own money, they may be willing to pay a higher percentage.  Maybe they can sell it themselves and shave 3% off the selling costs.  Who knows.  Find your buyers and find out their criteria.

Net $180K on the sale.  Pay off the loan and you have $40K.

Chris Coughlan · Answer

So here's an example:

I come across a motivated seller. After getting some info from them and getting some comps I determine that the ARV is 200K with 20K in repair costs.

I offer them 100K (50% of the ARV) and they accept it.
Now I'm going to try and find a buyer for it at 60% ARV.

200K x 60% = 120K
120K - 20K = 100K

Obviously these numbers don't work since I'd be breaking even.
In order to make this deal worth while I'd either have to:

1) Offer the seller less than 50% of the ARV.
2) Try to find a buyer who will pay more than 60% ARV.

How likely is it that a seller will take less than 50% of ARV?  I guess they have to be pretty desperate?
If investors want at least 60% ARV then it sounds like wholesalers can only make money on severely undervalued homes.

Thanks.

Chris

Chris Coughlan · Answer

hmm....
at 70% ARV there is 80K to work with.  now i know that it never ends up being 80K but that still sounds like a nice profit.  even with 30K in repair costs and a quick sell they are looking at around 50K profit.

Richard Warren · Answer

At 70% the correct amount is $120k.  How much an investor will pay is determined by the local market.  It may be 70%, 60% or even less.  Here in Las Vegas I wouldnâ€™t pay 70% because I could get those deals all day long on my own as could anyone else.  So your local market will determine the price.

:cool: