When you buy a REHAB...

Rehabbing, Fix and Flip, Rental Properties
1

When you buy a rehab property that you plan to retail,

Do you always use a formula such as: 70% ARV - repair costs = Max Offer?

Or do you figure a dollar number that you are looking for as profit, like say 20k mininum profit? So you back out the numbers and as longs as there is enough room to make the 20k (plus wiggle room), you buy it.

What do you use?

2

The 70% formula is great for certain price ranges, but I like to start with my minumum profit and back out repairs, costs, etc. to get to my purchase price.

3

thanks tom. Anyone else have input?

4

If I buy a flip for $35,000 with an ARV of $75,000 I don’t expect a $20,000 profit, I shoot for $12-15,000 and am okay if I end up making $10,000. If I buy a flip for $120,000, with an ARV of $180,000, I shoot for $20,000 +. I would say the 70% rule applies, just make sure that the ARV you are using IS CORRECT!!

5

This is the formula that I suggest my clients use:

BPO = ARV - Cost of Repairs - B/S/H fees - Investor Desired ROI

BPO = Best Possible Offer
B/S/H Fees = Buy/Sell/Hold

Hope this helps.

Regards,

Scott Miller

6

Sorry for hijacking the thread…

I like your formula EZ, I have on numerous occassions done the mistake not to include all BSH fees.

The ones I try to take in to consideration are:

Buying cost
Loan origination (Points etc)
Closing
Downpayment/Earnest Money
Survey
Inspection

Holding cost
Insurance
Interest only Payments (HML Loans)/ Mortgage Payment
Repair cost (if rehab)

Selling Costs
Realtor Fees

Do you see any that I have left out?

7

The only thing I think was left out is an estimate of how long the house should take to sell. I would look at sold comps for house just like your in the same neighborhood and see average days on the market at what average price. I would assume that my house will take a bit more time and factor that in as holding cost. If I sell it early then I am ok, if not then I have built the holding time in. In other words if the average house like yours is on the market 2 months, don’t factor in $1000/month holding, factor in the $1000 times the 3 months it will take or $3000. Add that in just like it is a cost for sheetrock or carpet.

8

Thanks Bluemoon,

Yeah I should have explained that a bit more, in Holding costs, I do include the time it takes to sell and multiply that with 1.25 (i.e. it will take 25% longer time to sell my property then I expect.)

9

DFW,

You have 99% of it covered—add estimated holding period to resale/tenancy as Bluemoon suggested and you are covered…

Regards,

Scott Miller

10

Thanks EZ

11

Also if your using a HML most only loan 65-70% of ARV so unless you plan on using your own cash don’t pay more than that.

12

You bet—good luck (and buy right)…

Regards,

Scott Miller