What's A Reasonable Profit Margin When "Flipping"?
Hello all,
This is a reprint of my post from another TCI Forum, if anyone has suggestions please let me know.
ladyb
Freshman Investor
Joined on: 05/23/2003
Post: 8
Chicago, IL
Posted: 22:26 on 12-30-2003
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Hi Jeff,
As you mentioned in your post, turning a profit in a tight market is tough, and this is where I would like to request some advice/strategies. In my area Southern Cook County, Illinois there are many worthwile foreclosures, or properties that are below market, usually the properties in the areas that i know re-sell (retail) for approximately $30,000.00 over the REO selling price. An example of what I mean is, this past summer I looked at a very nice REO that was in very good shape, only cosmetics and cleaning. It sold after about 30 days for $115,000. and recently in the last 10 days been listed in the MLS for $145,000, which is a very good representative figure in this area for this type of home. My problem is, when I approach potential investors to inquire about their interest in a wholesale deal they all say "if I buy a house for $100K to $$110K and put a few thousand in to it for repairs, the retail value isn't enough", meaning the $30,000 or so as in the example. I have approached investors who buy cash and they don't get excited for this type of return. They want - I bought at $100K and spent $50K rehabbing and sold it for $300k or at least this type of double your money scenario. One house I have tried to wholesale is currently REO, but not yet listed in the MLS, the Seller/Bank doesn't have possession yet, because there was a Section 8 tenant in place (the Courts allowed her to stay until after the holidays) and she would like to stay ongoing and hoped an investor with a holding strategy would buy the place, but none of the investors I've contacted will look at the $30,000 as worth their time. Considering the bank bought the house at the court sale at $102K and will want that much from their judgement of $132,000, which somewhat substantiates the value of $130K + with repair costs around $5,000. The neighborhood is great, not declining and the properties recently sold are all $135k+. Maybe it's just my approach, thats wrong, but I keep reading stories of investors that were happy to learn of deals that would return about $25K to $30K, but where can I find them? They don't buy in my areas. Also, I know in investing this is considered a bad thing, but I feel really badly that I havn't been able to locate a buyer for this property and help this woman and her children stay in their home. I guess my question is more how much should be considered reasonable from an investor's point of view. Any suggestions are greatly appreciated?
Thanks much.
check my response in the other post.
http://www.thecreativeinvestor.com/ViewTopic18743-34-5.html[ Edited by jeff12002 on Date 12/30/2003 ]
If I had a total investment of 30k, I would want to make at least 20k. One thing to consider when trying to make more, is really try to meet people who can do the fix up for reasonable. My partner and I use a guy that lives in one of his units. If he nets out about $7-8 per hour he is happy. We both teach him some stuff, and he has a bunch of brothers and cousins that trim trees,tile,fences,paint, etc.
don't be greedy, and look for a return that makes sense to you. Do those people that turn 150k into 300k live in 1 million dollar homes? If not, be skeptical.
Remember...Pigs get slaughtered
[addsig]
The generic formula is:
ARV X .70 = MAO
ARV = After Repair Value
MAO = Maximum Allowable Offer
(formula courtesy of LeGrand)
In your example:
Quote: An example of what I mean is, this past summer I looked at a very nice REO that was in very good shape, only cosmetics and cleaning. It sold after about 30 days for $115,000. and recently in the last 10 days been listed in the MLS for $145,000,
ARV = $145,000
Assuming that the home needs absolutly no work, the most that an investor would buy it from you for would be $101,500. Obviously the lower the better. Many investors shoot for 60-65%, with 70% being their top dollar price.
Pretend that you are the investor and consider these things. Let's assume you bought that house for $100K, and buy and sell conventionally.
How are you going to buy it???
Relativly cheap hard money is about 3 points and 14% interest.
($1,166 interest)
($3,000 points)
You sell it at .95 cents on the dollar to unload it fast and minimize holding costs(price $137,000)
Buy it through a realtor (REO's Included)
$6000 commission.
Closing costs when you buy
$1000
Sell it through a realtor at 6%
$8220
Closing costs
$1000
Those are the major costs. (add your own if I oversaw some important ones...afterall, I'm not a house flipper)
Other costs include appraisals, utilities, taxes, insurance while holding. You also need to have margins bigger in case you hold it longer than you expected to, have unforseen expenses, etc.
It's not hard to get upside down in a deal if you buy it wrong, don't do your due dilligence, and are overly optimistic.
Now, let's say you picked up that house for $85K. You could pick up a $10K assignment fee, and everyone walks away happy.[ Edited by hibby76 on Date 12/31/2003 ]
Quote:
On 2003-12-31 00:23, hibby76 wrote:
The generic formula is:
ARV X .70 = MAO
ARV = After Repair Value
MAO = Maximum Allowable Offer
(formula courtesy of LeGrand)
I have a small correction to your formula.
It's ARV x .70 - repairs = MAO
The MAO would be the limit a wholesaler would sell to a rehabber. Whatever price the wholesaler would buy the house below the MAO would be their profit.
Typically, a rehabber (retailer) should aim to net at least 20k on a deal.
Wholesalers should aim for 10k a deal.
If either can't reach that goal, then, according to Ron, "You've paid too much."
Quote:
On 2003-12-31 21:27, asmiley wrote:
Quote:
On 2003-12-31 00:23, hibby76 wrote:
The generic formula is:
ARV X .70 = MAO
ARV = After Repair Value
MAO = Maximum Allowable Offer
(formula courtesy of LeGrand)
I have a small correction to your formula.
It's ARV x .70 - repairs = MAO
The MAO would be the limit a wholesaler would sell to a rehabber. Whatever price the wholesaler would buy the house below the MAO would be their profit.
Typically, a rehabber (retailer) should aim to net at least 20k on a deal.
Wholesalers should aim for 10k a deal.
If either can't reach that goal, then, according to Ron, "You've paid too much." <IMG SRC="images/forum/smilies/icon_wink.gif">
Thanks for the input and replies. This is exactly what I meant from my example, is $30,000. a reasonable expectation of profit to the invetor who sells retail.
Thank you for the insight on the inclusion of fees and incidental costs.
Just a thought but the 70 percent discount is a good guide but how about risk management, will you pay more for a deal that does not tie up credit or capital as well is in a sexy part of town, like wise how about a deal in the hood all cash at the clerks office? How about when all the deals on the table have been at 50 percent or everything is comming in at 80 percent and you need to land some cash as it is costing you to have it sit, yea i know I am going on but I never did get that 70 percent thing as a rule. Again just my $.02
70% is a good starting point. If you can buy at that or below and you have a HML who will lend 70% of the ARV then you can come in with no cash out of your pocket.
But it is not a law. I don't even look at war zones I don't care how cheap. I don't have the time to deal with them and in my area they are low dollar so it is not worth my time.
Yesterday yes New Years morning I made an offer on a REO. It will go in this morning. It is above the 70% rule. But it is in a very nice area and needs a clean up and not a rehab.
Since it is not a rehab I can get a regular mortgage on the place.
If I get it I will put about $3000 into it and it will be a nice rental cash flowing about $400 per month.
lacashman,
If it's a rehab then you can't get a mortgage for it? Why not?
On a rehab I need to make 20% or 20k after all holding and rehab expenses. Course I am doing three at a time .
Quote:
On 2004-01-04 10:01, seekingwriter wrote:
lacashman,
If it's a rehab then you can't get a mortgage for it? Why not?
The short answer to this question is conventional lenders provide mortgages based on the CURRENT appraised value of a property and not on the "ARV" or (after-repaired-value). Typically traditional lenders do not take into consideration future value when making mortgage decisions, but HML or (hard money lenders) do.
Also, another reason is the average mortgage is designed with the mortgagee as the resident, hence "owner-occupied," and the average individual consumer is protected from purchasing a property that is not worth their investment, or the lenders investment.
Lastly, I believe in theory this is in part because, traditionally banks provide mortgages from depostied funds, and although when investing one is subject to risk, but when an investment is securitized by real property - this limits the exposure to risk, and to invest in the unrealized value of something (ARV)increases risk exposure, in essence they don't gamble "all or nothing" or at 100% with their client's money.
...suppose this is not really a short answer maybe an experienced creative investor will elaborate...
Again, thanks for the input.
Quote:
On 2004-01-01 22:54, rickomarsh wrote:
Just a thought but the 70 percent discount is a good guide but how about risk management, will you pay more for a deal that does not tie up credit or capital as well is in a sexy part of town, like wise how about a deal in the hood all cash at the clerks office? How about when all the deals on the table have been at 50 percent or everything is comming in at 80 percent and you need to land some cash as it is costing you to have it sit, yea i know I am going on but I never did get that 70 percent thing as a rule. Again just my $.02 <IMG SRC="images/forum/smilies/icon_cool.gif">
Rick I'm with you, 30%, $20,000 and up sounds like a great return when you didn't need to survive a war zone to make it.
Appreciate the supportive reply.
How does a hard money lender assess the ARV? Comps, other methods or a combination of everything?
I've approached a hard money lender and one company said they will only deal with 'experienced' investor.
the 70% rule is there for a reason. So is buying in an area where people want to live. Stay out of the Hood/Ghetto/War Zones, etc..
If all of the offers are coming in at 80%, and I'm so low that I'll never get the deal, then the rehab market isn't good enough in my area, or I'm looking at the wrong houses, and need to look at other methods to find houses, or I'll concentrate on something else, like foreclosures, or sub2.
If I can make 20-25k on sub2's or foreclosures, with much less effort than rehabs, I'm probably better off spending my time there than I am cutting corners on my rehabs, trying to squeeze out the extra buck on a sub-standard rehab. (just to make it profitable).
If all of the other guys are over bidding, that doesn't mean that I should too. I'm in it for the long haul, and no deal is worth losing money on just so I can say "I'm rehabbing a house".
The 70% rule helps to ensure that you're spending your time and money on the RIGHT deals.
Wait until the guy that's buying on the 80% rule gets into trouble, and sells one to you that's 1/2 done for the same price he paid for it, or less, just to stop the fiscal bleeding that he's got going.
Jeff
Jeff is correct, the 70% rule is there for a reason. It covers the closing costs, extra holding costs, selling costs, and all the little things that crop up that you couldn't possibly have planned against. If you incorrectly do you figures, you could still lose money using the 70% rule, however, sticking to it will greatly lessen the blow (unless you're absolutely terrible at calculating costs, in which case, rehabbing probably isn't right for you anyway ).
On strict rehabs, I've seen investors use a 75-80% guide. These guys have been in business for years, though, and really know the area market and costs well. It takes that kind of knowledge before you should decide for a slimmer cut.
The main problem with the 70% rule is that many new investors try to apply it to other methods of investing, besides rehabbing. While it's great if you can get it, knocking 30+% off of a reasonably well maintained home is difficult to do.
As far as wholesaling goes, remember that the 70% rule is what the rehabber should be willing to pay you. You will have to get a better deal than that if you want to sell to them. Someone above mentioned a $10K minimum for the wholesaler. Again, while it's good if it's there, those deals will be more difficult to get. Take an ARV house of $100K. You'd have to get it for $60K MINUS the repair, holding, etc costs to make $10K. Probably around $45-50K.
A wholesaler makes money by dealing in volume. They turn properties quick, and alot of them. In the above example, you'd likely get beat out by other wholesalers willing to take $5K or less profit.
Roger
Thanks to all ..I 'm new and after reading "ladyb"s question and the replies I can see I " shot " myself in the foot on a purchase I completed .
The ..ARV x .70= MAO - repairs..well I did'nt come close !
I see I have alot to study , and I need to study the right material.. yet ..i've got my feet wet ..I'm enjoying myself and this way of life !
Looking forward to a " better "..win/win transaction
Thanks again
actually it should be ARV X .70 Minus repairs = MAO
It doesn't matter what the profit is. You can make 100k wholesaling a house as long as their is room in it for the investor.
Anything below 70% of market value is a wholesale deal with reasonable fix-up.
If you steal a house and wholesale it to someone who doesnt have all the cash for you wholesale fee, collect some on the front-end and put a second trust deed on the property for the remaining balance to be collected on the back end.
Best Riches
Quote:
On 2004-01-06 15:43, mcldavid wrote:
Thanks to all ..I 'm new and after reading "ladyb"s question and the replies I can see I " shot " myself in the foot on a purchase I completed .
The ..ARV x .70= MAO - repairs..well I did'nt come close !
I see I have alot to study , and I need to study the right material.. yet ..i've got my feet wet ..I'm enjoying myself and this way of life !
Looking forward to a " better "..win/win transaction
Thanks again
I know excactly how you must feel. However intersting and potentially rewarding the pursuit of real estate investing, it is certainly a "learning process".
We have all gained much insight, from having the benefit of the TCI website. Personally, I am truly greatful to have such an informative resource available at this stage of my investing career.
Thanks TCI!
~LadyB~
Quote:
On 2003-12-31 21:27, asmiley wrote:
Quote:
On 2003-12-31 00:23, hibby76 wrote:
The generic formula is:
ARV X .70 = MAO
ARV = After Repair Value
MAO = Maximum Allowable Offer
(formula courtesy of LeGrand)
I have a small correction to your formula.
It's ARV x .70 - repairs = MAO
The MAO would be the limit a wholesaler would sell to a rehabber. Whatever price the wholesaler would buy the house below the MAO would be their profit.
Typically, a rehabber (retailer) should aim to net at least 20k on a deal.
Wholesalers should aim for 10k a deal.
If either can't reach that goal, then, according to Ron, "You've paid too much." <IMG SRC="images/forum/smilies/icon_wink.gif">
ARV x .70 - repairs = MAO ???
I need to take my car and visit the jungle, somewhere in the middle of Idaho...Because in Florida, nobody will accept that formula.
I'm happy to flip a $250K property and make $5k or $10K...and very lucky...
Finally, and thank you for stating what I've been thinking! Although I'm sure there are many here , probably most who will TOTALLY DISAGREE with this type of investment strategy, am I right ?
An investor's personal strategy is his or her own, however, in the absence of personal resources or a when there are limitations on the amount of time one can devote to pursuing prospects this appears to be a workable solution to being in the real estate investment arena. meaning accepting less of a margain and getting a deal done.
All the best 2U!
Our number is simple: We need to net $10,000 per every $100,000 of house, worst case scenario.
Dear Rodger, the Lodger
Do you still think little children come from god, you sod
Here in the present instant they are really going much too close and then coming in sans permits and try to jam the work thru.
Big time investor buyer wanted imediate possession but wanted to hold back all payment til close of escrow. So Demsy Lou, lady contractor slipped the Seller $2,000 right now and got the key and the deal, and was working on the property within 15 minutes. We did the inspect on the property and everything is OK, except the original builder forgot to attach the house to the foundation. That can be done for $800 and a kiss.
Her take according to my calculations is a mere 10%. I am going to Escrow it for $400 and the sale has no Broker involved.
I told her much too close, but her feeling is that at this stage she would work for wages of $12 an hour. So why not at least she is performing in her proper MOS oop Military Occupational Specialty.
She worries me that in her need to work and keep some cash flow trickeling she is much much too close.
Lets wait and see. Property values still outrageous but the volumne decends
fluky Lucius [ Edited by Lufos on Date 01/09/2004 ]
Ladyb,
I agree with you that 10k is probably not a very realistic goal for wholesaling. It may happen on occasion, but in my experience in the Phoenix market, that would be very rare. Lots of nice, although modest, almost new homes here still for 110k to 130k. (That's the market)
On a rehab, the rehabber should use the 70% rule, which doesn't hapen here much either, the wholesaler needs to come in below that. The wholesaler has very little risk, and very little cash tied up in the deal. 2-3k is probably more the norm here for wholesalers.[ Edited by jeff12002 on Date 01/10/2004 ]
[quote]
On 2004-01-09 20:54, alubeck wrote:
Our number is simple: We need to net $10,000 per every $100,000 of house, worst case scenario.
[/quot]
Our numbers??...YOUR numbers...
I flipped 13 contracts with profits anywhere from $2K to $8K.
I can't afford to pass on the $53K profit i made just because it was not 10% minimum...If tomorrow i can make one thousand dollars, i will....
Wholesales should expect a modest fee of 3% to 4% of the purchase price. Trying to get $10,000 in my opinion is not realistic.
Yhagood
You get what you can get. When I rehab I look at what I can make off of a property. My min is 20k net or 20% of the money I have invested, whichever is higher, after all expenses. If a wholesaler can bring me a deal that meets my criteria I really don't care what they make on the deal.
[addsig]
I use the 70% rule too, but sometimes I can't get it that cheap, but still can make a profit. An agent/investor gave me another formula to use as well.
I add my rehab costs, closing costs, "risk" & holding room (5K), and 10K minimum profit and I subtract that number from the FMV (ARV) of the property. This is the highest I'll pay and usually on a REO, it comes in at a decent range of what their asking.
I low ball too, but the above formula works for me fine and I make 10K (minimum) per deal. And since I owner finance on some deals, I can up the price about 3%. Also, I get more deals instead making 30 offers week and only getting one if I'm lucky.
Dee
Quote:
On 2004-01-12 01:38, DeeLewis wrote:
I use the 70% rule too, but sometimes I can't get it that cheap, but still can make a profit. An agent/investor gave me another formula to use as well.
I add my rehab costs, closing costs, "risk" & holding room (5K), and 10K minimum profit and I subtract that number from the FMV (ARV) of the property. This is the highest I'll pay and usually on a REO, it comes in at a decent range of what their asking.
I low ball too, but the above formula works for me fine and I make 10K (minimum) per deal. And since I owner finance on some deals, I can up the price about 3%. Also, I get more deals instead making 30 offers week and only getting one if I'm lucky.
Dee
I totally agree with all you have said!!
REO's are my interest - I am curious to know if you use a HML or your personal funds?. Aslo will you elaborate on any major pitfals of REO investing?
This has turned into a really, really informtive thread, thanks very much to all who are contributing.
Are there any experienced REO investors in Chicagoland that can share any local wisdom?
~LadyB~
[[/quote]
income neighborhoods too. What I've found is many people in these neighborhoods are comfortable and don't want to leave, but just want to own their own home.
I totally agree with all you have said!!
REO's are my interest - I am curious to know if you use a HML or your personal funds?. Aslo will you elaborate on any major pitfals of REO investing?
This has turned into a really, really informtive thread, thanks very much to all who are contributing.
Are there any experienced REO investors in Chicagoland that can share any local wisdom?
~LadyB~
[/quote]
Well, with REOs there are some drawbacks (as to any type of RE). The main one being the earnest money required. REOs require between 500-1000 in earnest money. And sometimes they will subtract that amount from the asking price which sucks b/c you may need the 1K for a downpayment if you have to bring money to the table. But if you tell them how you want the funds handle upon closing, most are pretty accomodating. Also, you can't "flip" in the traditional way. LLC's is the latest way I've heard of to do this.
I have a hard money lender, but only use them on cheap homes (20K). I have two private lenders, one with 100% and the other 95% but if I already have a buyer, I don't bring anything to the table, my end buyer does.
The 100% is mainly for back up or rentals.
REOs are pretty safe way to go b/c you can get in the house and look at it, and the banks are not emotionally attached to the home (which can work for or against you). It is very competitive, but I don't compete. I just go for the deals that work best for my pocket.
Also, location is EXTREMELY important, HOWEVER, middle class neighborhoods are NOT the only to go. I invested in lower (not "low"
Find a nice house on nice block and offer it on terms, your phone will ring off the hook plus make a real nice profit.
Many times, these are homes that other investors pass on b/c they don't know the area and think it's too rough. Luckily for me, I use to live in this area so I know it's NOT the "hood." Just a mix of working and low income people - with a nice return on my money.
Dee