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