All Forum Posts by: Thomas Franklin

@Stephen Sokolow Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.

I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.

ARV - Desired Profit - Closing Costs to Buy - Repairs - 10% of Repairs - Holdings Costs - Concessions - Realtor Fees - Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).

ARV: After repaired value or what you think it will sell for once repaired.

Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable.

Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.

Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.

Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, insurance premiums, property taxes, loan payments, etc.).

Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.

Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.

Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.

This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.

@Stephen Sokolow You should also always factor and additional 10%, of your Rehab Budget, for overages, to hedge against the unexpected. For my Backend Closing Costs, I always use 10%, of the ARV as my number (6% for Realtor Fees: 3% to Buyer's Realtor, 3% to Seller's Realtor, and 4% for Title Company Fees) regardless of the market, in which the flip is located. If any of these fees/ expenses should be less, that just increases your Net Net Profit, but at least you accounted, for these just in case something goes wrong, you go beyond your projected six month Hold period, etc.

You asked me what I would consider a good Profit Margin. As a general rule, I use 20% of the ARV or $20,000 whichever is greater; however, I will tweak the 20% of the ARV, Buyer Concessions, and other areas of my MAO Formula to present a more reasonable offer, but I will never adjust my Desired Profit below $20,000.

You also asked me how I would structure a partnership. Every partnership is unique, with each partner bringing different value and skill sets, to the table. With that said, in my opinion, a partnership should be structured, to create a Win-Win Situation, for all vested parties. I am not trying to be evasive. The simple answer is there is no cookie cutter way, to structure a partnership. 

@Stephen Sokolow please do not take offense, to the following. In my opinion and given experience, this is not a deal. The numbers you provided leaves a projected profit of $27,000. What about Holding Costs (factor six months of utilities, Property Insurance, and Property Taxes, etc.)? What about the 7-10% Backend Closing Costs (typically 6% of ARV for Realtor Fees, but since you are a Realtor you may not charge your 3% and typically 4% of ARV for Title Company Fees to close). Let's assume you do not accept a Realtor Commission. If I take 7% of the ARV ($112,000), for Backend Closing Costs, this yields $7,840. Using your numbers and subtracting Backend Closing Costs from the Projected Profit ($27,000 - $7,840) yields $19,160. I have not even subtracted six months of Holding Costs. How is this a deal? The moral of what I have written is not accounting for Holding Costs, Backend Closing Costs, and other costs destroys what appears to be a reasonable profit margin.

I would be interested in partnering, on future projects, where the numbers are more sensible, but not on this project. I use a completely different formula, for determining my MAO that accounts for 99.99% of all expenses. I hope my basic number crunching and numerical analysis provided some useful insight.

Chris Beyer Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc. I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything. ARV – Desired Profit – Closing Costs to Buy – Repairs – 10% of Repairs – Holdings Costs – Concessions – Realtor Fees – Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer). ARV: After repaired value or what you think it will sell for once repaired. Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable. Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees. Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs. Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, insurance premiums, property taxes, loan payments, etc.). Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV. Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV. Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these. This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling. Please free to reach out, to me, if you feel I may be of assistance, to your Real Estate Endeavors. Much to your success!

Chris Beyer Since you are interested in fix and flips, I propose the following action plan. The first step would find an Investor Friendly Realtor assuming you do not have access, to the MLS. I would suggest that you interview several Realtors and ask them the following questions, to ascertain if they are truly Investor Friendly, or if they are throwing you a sales pitch. 1. How many investors do you currently work with and how many investors have you worked with, in the past? 2. How many transactions have you closed, with investors? 3. Do you currently own any Investment Properties? If so, what type do you own? 4. Are you a member of any REIAs? The next step would be to work with the Realtor and determine the hot markets, in your County, with the greatest number of sales over the last 90 to 120 days. Personally, I would prefer 90 days because markets are always changing. This list would contain the zip code and corresponding name of the municipality, and a breakdown of the number of SFRs. This will be your Farming Area. From this data, you can utilize a website bestplaces.net that will give you a breakdown of the percentage of homes that sold, in various price ranges, for a given zip code. You can identify the two highest retail price ranges, in greatest demand, per zip code where you can list the rehabbed property. You can use the Realtor to help you find deals and also use Wholesalers. If you acquire a property, from a Wholesaler, once the property is rehabbed and ready for the Retail Market, allow the Realtor that provided you the zip codes, to list the property for sale. This creates a WIN-WIN Situation and gives the Realtor incentive, to work harder on your behalf.

Emily Debes The post by Nathan Click is pretty much spot on. The only part that was left out of the CASH Section was you will need 6-12 months of Capital Reserves (depending on the lender) required to be of monetary equivalent of 6-12 months of Mortgage Payments and Property Taxes. In some states, lenders will also include Property Insurance as part of the Mortgage Payment. There are two types of Commercial Loans: recourse (requiring a personal guarantee) and non recourse (no personal guarantee required). For me, Plan A is to pursue Non Recourse Loans, to preserve my very strong FICO. Only as a last resort will I pursue a Recourse Loan.

Ryan D. If the property you are considering in five or more units, a Lending Institution will look at the NOI and Expenses, to determine the Debt Service Coverage Ratio (DSCR). The DSCR is the ratio of cash available for debt servicing to interest, principal and lease payments. In general, it is calculated by: DSCR = [Annual Net Income + Amortization/Depreciation + other non-cash and discretionary items (such as non-contractual management bonuses)] / [Principal Repayment + Interest payments + Lease payments]. For the majority of Lending Institutions, they are seeking a DSCR of 1.25. I hope this information helps you.

@Chris Martino If you can be more specific regarding your REI Objectives, you will receive better feedback. With that said, welcome to the community, of BiggerPockets! Be sure to check out the forums, the blogs, podcasts as well as other parts of this amazing website and like minded community. The people here have a vast amount of knowledge and are more than willing to share their experience and provide sound insight and advice. Do not hesitate, to post questions and bounce ideas around in applicable forums. Please free to reach out, to me, if you feel I may be of assistance, to your Real Estate Endeavors. Much to your success!

@Vincent C. Welcome to the community, of BiggerPockets! Be sure to check out the forums, the blogs, podcasts as well as other parts of this amazing website and like minded community. The people here have a vast amount of knowledge and are more than willing to share their experience and provide sound insight and advice. Do not hesitate, to post questions and bounce ideas around in applicable forums. Please free to reach out, to me, if you feel I may be of assistance, to your Real Estate Endeavors. Much to your success!

@Thomas Barksdale I am not a fan of purchasing a Residential Multifamily Property known as "House Hacking." If you are looking to owner occupy, you may want to consider starting out, with buying a Duplex, TriPlex, or a Four Plex. Many Realtors will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. If the property requires rehab, the Realtor and/ or Mortgage Broker will suggest applying, for a 203k Loan. A 203k Loan is where the purchase price and rehab costs are rolled into a single loan.

Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). You live in one unit and let your tenants pay the mortgage and other property expenses. This will give you experience as both a Landlord and Property Manager. The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.

If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.

If you think you will go FHA, Conventional, 203k, etc. and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.

Many Realtors and/ or Mortgage Brokers will not tell you this information. Many, but not ALL are only focused on the commissions he/ she will earn and not focused, on your best interests. You may be asking yourself what can I do? Locate a Motivated Seller that will consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.