My Process

[Kevin Keene]

Hello, again!  I have been saving my questions for weekends, so that's why you are seeing more than one post from me today.  Sorry if I am flooding!  I am trying to perform good research and not to ask questions that have already been answered.

Anyway, if you have read my intro post, then you know I am not an agent or an investor... yet :)  I am trying to learn as much as I can and execute one good flip within the next couple of years to learn the process.  In the meantime, I have been reading a ton of BP forums and blog posts.  However, I have also been performing the following actions.  I was wondering if someone with experience could tell me if I am doing anything right or what I can do to improve my learning.

First, I have been looking at residential foreclosures on Zillow and Redfin in random cities and neighborhoods.  Honestly, I just pick a state and look at a cluster of dots, then zoom in and review a property's, description, pictures, tax history, and sale history.

Then, I have been using recently sold property data from Zillow and MLS (whatever meager access I have to it) to figure comps and ARV in the local area around my selected foreclosure. Oh, I've been comparing my concluded ARV to the "Zestimate" to see if I am close... not that I know what I am doing...

After I determine my ARV, I start flat out guessing my repair costs. I have had a contractor perform work in my home before and I watch a ton of rehab shows (I know... I know...). So, I estimate kitchen guts at $20K, bathroom guts at $15K, and miscellaneous at $10K. Basically, I start with the $10K. If the pictures make the kitchen or bathroom look bad, then I add those costs. Then, after I get my repair total, I add 50% for fudge factors.

Then, I estimate my holding costs at 6 months.  I use tax data for property taxes.  I use the foreclosure data to estimate mortgage payments and interest 15%.  Then, I add $500 per month for power, gas, and insurance.

Then, I plug this into the 70% rule to reverse determine my ARV to see if it could be a good deal. For example:

Foreclosure cost is $150K.  Repair cost is $30K for a kitchen gut and other miscellaneous.  Add $15K to repair for fudge, and repairs are a total of $45K.  Monthly holding costs will be $800 for the loan and $500 for the utilities.  That is $7800 total over 6 months.

Now, if I learned the 70% rule well enough, the holding costs shouldn't be greater than one-third of the 30%. I will account for this in a second. The 70% rule focuses on ARV and repair costs. The math is as follows: (ARV * .7) - Repair = max buy-it line.

Therefore, ARV = (max + repair) / .7 => ARV = (150K + 45K) / .7 => ARV = $278.5K

I have to have ARV of $278.5K or greater for this to be a good deal. Now, to check my holding costs, 30% or $278.5K is $83,500. One-third of 83,500 is $27,555. Subtracting my estimated holding costs of $7800 from that leaves nearly $20K in flexible repair costs and about $55K in profit.

My question to all of you is, am I doing anything wrong?  I don't want to learn bad habits early, so what can I do to improve my learning process?  Please keep in mind that I am nowhere near ready to buy a property yet... I am just trying to learn the language and get the eye for a deal.  Thanks!

-Kevin

[Brett Russell]

@Kevin Keene , 

Here are my thoughts:

First off, you should definitely NOT be relying at all on Zestimate for values.

Secondly, it took me a bit to figure out what you were doing with the ARV calculator formula. Yes, you could rearrange the formula they way you did and it makes mathematical sense, but I think it messes with the psychology.  If you say, "I can get the house for $150K so the ARV better be $278.5K to make it work" I worry you would end up fudging numbers a bit to make it work because it seems a bit more committed already. 

Instead, you should approach it the way the formula is stated. Find ARV (again, not from Zestimates), estimate repairs and then determine max allowable offer. The property has to be purchasable at that price, or you don't do that deal.

I know it seems like semantics because, yes, you can rearrange the formula but if you have the foregone conclusion of what the purchase price is, you could be tempted to fudge repairs or choose slightly better comps to make it work, but if the comps and repairs are figured out objectively, then you can't argue with the MAO.

Hope you follow my thinking.