Hello all. Plz. bare with me as it’s my first time posting.
Here is the situation: I am a first time RE investor and have made an offer on a single family foreclosure(through my real estate agent) which has been on the market for 2 months.
Here are the numbers:
Asking Price $102,000
Offer Price $87,500
Repairs $10,000 (assuming the systems are working)
ARV $130,000
My question is: When the bank comes back with a counteroffer, what is the highest I can pay to purchase this property and come out with a profit( considering that I plan on flipping it within 1-2 months of repairing)?
According to the book Find it, Fix it, and Flip it, I should pay no more than $85k to yield a net profit of $10k. However, I met a professional flipper while I was on location. He has flipped the property right across from my property. This gentleman believes that I can pay $97k and still come out on top. HELP!!!
Just remember. The less experienced you are the more likely your estimates are wrong. I’d error on the side of caution. The numbers are what they are. If they don’t work for you then find another deal.
Assuming that your ARV is correct, and assuming that your repair numbers are correct, then using the ‘standard’ rehab formula of 70% of ARV minus repair costs your Maximum Allowable Offer (MAO) on this property would be $81,000. Using that formula, you’re already over what you need to be offering.
Here’s why it works. Newly remodeled, listed at $130K. Deduct $7K for negotiating (unless you’re in a HOT market, houses rarely sale for list price). Deduct $8K for agent fees. Deduct $5K for holding costs (6 months average, depends on market). So, now we’re at $130K minus $20K = $110K - $90K = $20K profit. Sounds good, right? But wait! Figure in about $5K in taxes and allowing for another $5K in “OOPS” money, you’ve made your net profit of $10K.
Folks,
In some hot markets, the banks and their agents are just
sitting on the properties and this 70% after ARV offer is just
not going to work. There are people snapping these up
even if they smell about 10-20k profit after fixup. Profit
based on absolute $ amount rather than percentages. The
10-20k profit will be reduced by the sales commission when
they flip. Well, atleast the buyer agent commission. I smell
speculation in terms of appreciation post fixup rather than
a pure numbers game based on current market condition.
The 70% rule is a tried and true formula. Simply put, it works.
Yes, in ‘hot’ markets or in very high priced markets, the formula makes it harder to find deals that fit. However, experienced investors seem to always do it regardless of the market and conditions.
Again, 70% is the standard number for rehabbers. I’ve seen some that wouldn’t go that high and others that allowed for more (80% for example). Whatever you choose, it simply has to work for you.
Many think that if the numbers are higher (a $200K prop compared to a $100K) then it’s easier to fudge off the 70% guideline. However, with a higher price prop, there is higher risk involved, and generally more costs, and in essense, a higher risk of making a mistake on the numbers.
Example: I purchase a $1 million (ARV) property for 80% of ARV instead of the standard 70% since $200K is a very good profit. However, since this property is larger than I normally do, I off on my rehab estimate by 10% (hey these homes have to be NICE!). And since the value of $1M properties are very subjective, I’m off on my ARV by just 10%. OOPS! Now, I’m at breakeven and I haven’t even paid my agent yet.
I agree with Roger. Everybody wants to bump up the 70% but it’s there for a very good reason. That’s about the highest you can get for a hard money loan to rehab the property so as a wholesaler, buying higher than that pretty much just guarantees you’ll be buying the property.
It is also there because that’s the highest cost acceptable given all the real numbers to rehab a property. Cutting corners is dangerous because as a rehabber you hold all the risk for several months. That deserves a big paycheck.
Those who try to cut that corner too many times usually become foreclosure statistics. Shaving profits can make a motivated investor a motivated seller. I see them everyday.