Spreads... Am I crazy?

Rehabbing, Fix and Flip, Rental Properties
1

Alright, I am starting to wonder if I am off my rocker or if deals with this big of a spread are realistically findable. This is for fix/flip.

I’ve been running numbers so I know where I need to be when I find a deal. It just seems like I need a HUGE spread. Heres my example

250000 ARV… say this is the sales price when I sell it.

Less Expenses
146000 house purchase price (about 58.5% of ARV!)
15000 Repairs (too low for such a discounted house?)
1500 10% for overage on repairs
6500 points to HML (4pts)
11278 6 months HML mortgage payments @1879/mo
1200 utilities (electric/cooling @200/mo for 6 mos)
12500 realtor selling fees (at 5%)

56022 Gross Profit
15686 less tax on ordinary income at 28%
8403 less self employment tax at 15%

31933 Profit

I’d be happy with 20k profit but these numbers are what gets the repairs rolled into the loan.

Am I dreaming… have I been sucked into “guru thinking”… am I being too hopeful?

My market is Phx, AZ area. Most people making say 50k a year are looking in this price range for houses. So I have a HUGE base of buyers and competition :slight_smile:

2

You have certainly not bought into the guru hype. If you had, you would have said $250K sale price minus $147K purchase price minus $15K repairs = get rich quick profit of $88,000!

Instead of spewing this nonsense, you have a well thought out list of expenses even including taxes. To answer your question, yes these numbers are possible.

A significant question is what your market will do over the next six months and how long it will take to sell the house. Additionallly, I’m concerned that you asked if the $15,000 repair figure is enough for such a discounted house. Your repair budget should be set based on inspecting the house, not the price.

Aside from these two concerns, I think that you’ve got a potential winner.

Mike

3

It is possible, the deals are just few and far between. It takes diligence and moving fast when you find one.

San Diego:

Bought in October at $380K
$52K into it (repairs and quiet costs)
Sold in January $529K

Net: $61K

I agree with Property Manager, you need to base the repairs on the house itself and the neighborhood that the house is in. You need to figure out a system that works for you that allows you to come up with a ballpark figure by the time that walk out the door.

I’m also going to give you my view, that some will disagree with. On your first flip, don’t get hung up on the dollar amount of your profit.

On our first flip we netted about $7K. It took us 4 months. Many here will argue that $7K is not a good paycheck for 4 months work. But, this wasn’t our main source of income, so for a part time job it’s minimum wage. I viewed it as being a paid intern. We got paid $7k for getting an education in house flipping.

We learned so much doing that first flip. We came up with systems based on our time doing that house. Every house after that took less time and made more money.

4

Propertymanager -
This is not actually a house I have found. It is just my numbers worksheet so I know where I need to be when I do find a house. I can plug the numbers in to see if it will work.

I am working on my action plan to actually find and buy my first flipper but I just started to think I was being a little too hopeful on size of spread I could find. I was just wondering if spreads this large were even realistic to find… if buying for 146k with 15k repairs, selling for 250k would be the deal of the week, month, year, decade, century? I want to be realistic in my goals.

I would of course base the repairs on the actual house I found. Just to get my number worksheet going I am using my house as an example for repair costs. I’m doing that because the houses I am looking for will be in similar neighborhoods, similar houses, with similar amount of work. We totally redid our house including appliances for 10k. Since we did all the work ourselves, I upped it to 15k to allow for contractors to do most the work.

Common belief amongst my local real estate clubs, cashflow clubs, wholesalers, and myself is that the market here for “in town” homes will remain flat for 6-12 mos and then will get back to normal pre “gold rush” days of 03.

BobbiOh -
San Diego! You’re killing me. I’m dying to get back there. My RE career is what is going to make that happen for me. That’s a powerful motivator for me!

Thanks for the numbers on the house. I know how tight the SD market is and that’s encouraging that you got such a good spread. Congratulations! I want to plug your numbers into my worksheet to see how it would work out if I found the same deal. Could you tell me what sort of financing you used and the points/interest rate? Also, could you share what % you paid the realtor? I understand if you don’t want to divulge that but I sure would appreciate it. :slight_smile:

I need the big spread on the deals (especially the first few) to leave room for screwups, miscalculations, oh my god I didn’t think of that!! factors. And, so I can finance the repairs and hopefully points so all i need to do is pay the monthly mortgage, utilities, and front the money for repairs (which would be reimbursed through draws from escrow)

Thank you both for your help!

5

We used hard money. 13% and 3.5 points. It was based on an ARV of $573K. It’s a 1920’s spanish style bungalow in a desirable neighborhood. We do almost all of our work. (The house was UGLY, but structurally ok)

The Quiet costs were in the $56K range. About $15K in repairs. So, $73K into. (That’s what I get for posting before the first cup of coffee, brain got stuck on the quiet costs.)

We paid an MLS listing service $199 to list the house in MLS before it was completed. It was at about 75% done when we did this. It actually wasn’t finished when we got the offer. The offer was $10k less than we had listed it for, but it meant we weren’t holding the house. We paid 3% to the buyers agent.

I personally think the market here is going to tank. The number of REOs that are on the list is growing in a big way. Certain neighborhoods are already glutted. Encanto and Chula Vista are flooded with REOs. The properties are floundering. My realtor sends me 3-5 new ones every morning. And that’s just in my preferred neighborhoods.

All those folks that bought subprime ARM loans on the prospect that the market would continue going up are now getting their rates adjusted and are holding a house that has depreciated.

6

Wow, that’s awesome, 61k and not even completed with the fixes.

Thanks alot for the info on your flip. It really helps me to see the numbers of deals that actually happened. I can test my little calculator and convince myself I can do it too. The lowest rates I have found for HML were with Blazevic at 4pts and 13.88% with max arv of 65% and term of 6 mos. Your HML is a little lower than that. Could you tell me who you used?

I’m curious as to what happened to the ARV estimation. It looks like you based the deal on ARV of 573 but when all was said and done you listed it for 539 (and sold for 529). Was the original ARV off or did you go for a fire sale price? Please don’t think I’m attacking you. I don’t want it to sound that way. I just want to find out these things that happen and learn all I can.

I’m real interested in the SD market because I want to get back over there to live (moved from there to AZ 1.5 years ago… I know, BAD time to buy in AZ!) I’d have to agree that the SD market probably will drop a little more then stay stagnant for a while. The crazy apprecieation run lasted about 4 years there where AZ took only 2 (hard lesson for me about basing one markets trends on another!) I guess being that SD had a longer run of appreciation (and more people getting interest only loans) youd have a longer recovery time.

P.S. …I’m drinking my coffee right now…mmmmm! :wink:

7

The HML I use, only does Southern California. Also, keep in mind, this was our third deal with him. So, we have room to negotiate. I do have a PDF list of HMLs so if you PM me with your email address, I’ll send it to you.

ARV was $573. We took a couple of considerations into pricing the property. 1) The RE market here is depreciating, so in the 3 months that we held the house, the ARV had gone down. 2) We put the house up for sale in January. Typically, sales are slow here until about April and really heat up in the summer. So, we wanted it priced to get notice. 3) We have always slightly underpriced our houses to make sure that they get sold quickly. I’d rather get a fair price and get out, than get the best price and pay for the holding costs.