Deal Analysis- What to Look Out For When You're New

[Paul Strauss]

This is an example of a deal I saw right here on BP, and the person that posted it should be embarrassed. Don't worry- I'm not going to name names or provide details-- but here are the numbers:

$32K asking price
$10K estimated rehab costs
$55K ARV (After Repair Value)

ASSUMING (and we all know what happens when you assume) that the rehab costs are spot on, and there are no carrying costs (carrying costs: mortage payments, utilities, non-owner occupied property insurance, property taxes, etc) because you rehab and sell it in less than 30 days...AND ASSUMING you sell it yourself and there are no realty commissions because miraculously you found a buyer in 30 days or less who is going to pay FULL ASKING PRICE in cash, and naturally this unicorn doesn't have closing costs, either- oh, and ALSO not using a broker, your AMAZING pre-tax profit would be:

$55K sales price - $42K = $13K

Since we're assuming things, let's talk about what you can REALLY assume:

Assume your rehab costs run $12,000 (don't think an estimate can reasonably be off by 20%? think again).

Now your costs are $44K

Let's say that realistically your buyer offers $45K and you end up setting on $49K:

Your profit is down to $5K

Assume have at least a buyers broker in this deal and you get a discount so you pay 2% - $980

Your profit is down to $4K

Assume you have $200 in utilities, 2% of the deal in closing costs- another $980, and other ancillary costs-- call 'em $1000--

You're now under $2K

My prediction: You'll lose money on this deal.

And if you're new, you will see DOZENS of deals with numbers like this, or worse.

And they're bad deals. How do I know? Because I buy these properties from lenders, and at the tax sales after "investors" screw themselves into the ground trying to wring a profit out of them.