Market price (FMV)
- Improvement costs
- Holding costs
- Minimum Profit (say $10,000-$15,000)
= Maximum Offer on Property
Hi,
Prudent Reserve?
GR
Hi,
Sales and Marketing Cost's?
GR
Hi,
Escrow Fee's
GR
Hi,
Overhead Cost's?
GR
How’s this?
Market price (FMV)
- Improvement costs
- Buying Cost ( all applicale fees)
- Holding costs
- Cost of Money
- Selling Cost
- Minimum Profit (say $10,000-$15,000)
= Maximum Offer on Property
It works great if you’re intent is to make a teeny weeny little bit of money. However, if you want to be successful, you’ll have to do a LOT better than that. With your formula, if you include ALL the costs (you haven’t) and if none of these costs run over, then your MAXIMUM profit is $10,000 to $15,000, LESS TAXES, which can be significant on flips. With such a small profit margin, if ANYTHING goes wrong (unanticipated repairs, market declines, longer holding period, etc), then you will lose money. A much better formula is 70% of market value less all the costs (rehab, holding costs, etc). Failure to account for all the real world expenses is the NUMBER ONE reason that new businesses fail. Don’t set yourself up for failure!
Good Luck,
Mike
How’s this?
70% Fair Market Value
- Improvement costs
- Buying Cost ( all applicale fees)
- Holding costs
- Cost of Money
- Selling Cost
- Minimum Profit (say $10,000-$15,000)
= Maximum Offer on Property
Let’s say a guy is selling his house at $100k and it’s listed at 90% FMV. Now let’s assume the following:
$18,000 Improvement costs
$1,750 Buying Cost ( all applicale fees)
$1,750 Holding costs
$5,000 Cost of Money
$7,150 Selling Cost
$10,000 Minimum Profit (say $10,000-$15,000)
$2,500 Other
$43,000 = MO
- You’d need to be pretty f’n desperate to sell at that price.
- Wouldn’t this greatly limit the total amount of qualified homes to flip?
“1. You’d need to be pretty f’n desperate to sell at that price.
2. Wouldn’t this greatly limit the total amount of qualified homes to flip?”
ANSWERS:
- YES
- YES
If it was easy everyone would be doing it. The hardest part of the REI business is finding REAL deals. Anyone can find an “OK” deal that you lose money on. The old REI saying still couldn’t be more true: You make your money when you BUY".
You are looking for DESPERATE sellers and in my market area at least, they are VERY hard to find.
I recently purchased my first property in 2 years simply because I couldn’t find a good deal and I am a real “cash buyer”. Even in this bad market, my area has not been hit too hard, and REOs and short sales just don’t have enough margin for profit. I must have chased and bid on 20 properties in those 2 years but either the property is still for sale or was purchased at a price that did not leave margin for profit. I watched several investors get burned by paying too much and not being able to sell after rehab. There is only 1 of the 20 I regret not upping my bid.
My recent purchase was a beat up 3br 1.5 bath ranch in a nice neighborhood with a great school system that I bought at around 40% ARV and needs about $30K in rehab. It was an estate sale and the executor was glad to take my money.
In my opinion, you should aim to get the lowest price regardless of your exit strategy (flip or rent).
I like the idea of FMV x 70% - expenses, but how about just aiming for around 40% - 45% of FMV and don’t worry about all the other stuff? No matter what your expenses are, you usually end up buying at this price point anyway. Just my opinion.