I am a new investor and I’m planning to do some rehabs and then retail to investors/buyers and possibly some rent to own.
Do you have a specific goal as far as a dollar amount of profit on each deal, or a target LTV that you want to wind up at when finished rehabbing? Do you always stick to it, and if it doesn’t fit, you won’t do the deal?
Just curious…
Thanks for sharing.
I have dealt with homes under the $100,000 mark to flip. My formula is to make a minimum of $12,000 per flip. I have made less, I have made more. When you get over $100,000 I would say to shoot for $20,000 or more per deal and so on. The bigger the risk the bigger the reward. :beer
thanks jared.
I was reading a book last night that said to use this formula:
ARV x 70% - repair costs = Maximum Allowable Offer
It seems like a great formula and it would keep one from getting stuck in a bad spot.
My question is, would you ever deviate from this type of formula? Maybe on a higher value property where your profit would still be good, but not be at the 70% ARV range when finished with repairs.
I saw a very interesting TV show from Australia analyzing the affect of recent crash of sub-prime mortgages in the USA, and how this affects the rest of the world in regards to banking.
The interesting thing about this show was that it included a lot of interviews with US financial analysts predicting the internal affect on the housing sector in the next 18 months. The general concensus was that we are in the 1st quarter of a 4 quarter ball game of losses and reducing housing prices. In some cases, in certain parts of the country (California, AZ, NV, FL, particularly), some areas were expecting house value losses of up to 40% based on the rapid gains in equity that these areas experienced. I suspect that’s a bit high, but we are holding off our investments for 6-12 months until this settles (mind you, I’m in AZ so we are in the thick of it).
What we are seeing here, however, is a huge increase in demand for LOW priced rental property (ie. <$700 / month), due to the large number of lower income families entering the rental market. My guess is that foreclosures are the main cause.
Consider this scenario… You offer 70% on a property that the bank values today at $100K. One month after you purchase it, the neighbor defaults on their mortgage, gets forcelosed and the bank accepts an offer by someone else to buy it at 80% of the owed amount (let’s say $70K). Now you have a $70K purchase with flip costs, on a property that will sell for no more than $70K because the comps in the area dictate this.
For me, purchase to hold/rent is the only strategy we are entertaining at the moment. Of course, your mileage may vary.
V
IF you have a good appraiser, the foreclosure’s should not affect the appraised value. Even though it may be in the same neighborhood, and a similar style home, the appraiser has good reason to pass it up and use another comp due to it’s foreclosure sale…it’s not a similar sale.
But I do agree with you that retailing may not be the best strategy for now in certain areas. We, here in IN, are not seeing depreciation…we may not be gaining value, but we are holding steady for the most part.
I too think this has a long way to go yet. But, if you can find homes that you can really steal, and I mean steal. 50% of their value, your going to make money.
What I’ve been doing is just low balling every private owner who calls. I can close in 5 days, no banks, no inspections, no conditons, leave all the crap in the house, I don’t care.
Here’s what I can pay you. $XX,XXX You can pick up your check next Wednesday. Or you can wait till the market falls even futher, it’s up to you. I look at 20 homes a week. If you don’t want to do this I’ll just move on to the next one. I have a sales agreement with me, we can sign it and I’ll drop a deposit check off at this address (my attorney) Next Wednesday you can pick up your money and be done with this.
If I can’t steal it, I don’t buy it. I’m not trading places with these people and getting stuck with this junk. I never look back. I always make the offer in person and ALWAYS have a $5000 deposit check already made out in their name. Show this to them, it’s like waving cheese in front of a rat. Very, very hard for these people to walk away from a sure thing, remember that.
In this market that is getting a LOT of people to bite.
I would agree with fdjake, that you have to buy properties at a HUGE discount these days. I still say that you should shoot for making a certain amount per deal, these numbers should not change. The numbers that should change is your purchase price and ARV.
Our latest example:
4 BR 1 BA REO property. Purchased for $45,000, rehab/closing/holding costs $15,000 ARV $85-90K. Todays market says that $85-90 ARV is actually more like $79,900 and possibly $75,000. If we are all in at $60K and we sell it for $75K we make $15K which is well within our formula. Easy as 1-2-3. LOL! :beer
1 more thing. We put out the BEST product in the price range for the lowest price in that market.
THAT, will sell ANY HOUSE, ANY TIME, in any TYPE of market.
Smart Jared, very smart!
I guess it’s like Kiyosaki and others say:
You make money when you buy, not when you sell.
I love the advice, keep it coming.
Anybody venture into the higher price ranges (although f/c will be less available), or do you pretty much just stick with the bread and butter in the 80-120 range?
Yes, you do make it when you buy… Most of my homes are around $200K ARV. Having said that, I almost always buy with this formula (regardless of price):
ARV x 50% - repair costs = Maximum Allowable Offer
In this market/economy, if you cant buy it right, be prepared to walk. Also, be prepared to make lots of offers to get one accepted.
I want to be able to either wholesale it to another investor who can use a HML or I will rehab/retail it for 85-90% for a quick flip. The only time I deviate from this is in certain markets(parts of town/neighborhoods) …i.e, I am in Jax, FL and the Beaches area has had no depreciation recently. In fact, my personal residence (brand new in 2005) appreciated 20% per the re-fi appraisal.
Anyways, I just bought and am currently rehabbing a 4/2/2 2200sf,that has a ARV of approx $385K and will spend approx $60K in rehab. My purchase price was $205K so it doesn’t fit my typical model, but I am so intimately familiar with this market, that I know I will make $120K in less than 4 months, so I will do those all year if I can.
Good luck to you!