Crazy deals in Dallas and why the traditional formulas don't work

[Chad Benedict]

I know people often post deals they have closed or are currently reviewing. I thought I’d post a deal I didn’t get just to show how competitive the market is here in Dallas. Those in the Dallas / Fort Worth area and other hot markets will probably have witnessed this many times. For those of you having trouble finding deals, this is why!

This lead came through a probate mailing. The executor told me over the phone she had already received a cash offer of $200,000 for the house, which had an ARV of $230,000. I told her she should run with that as there was no way I could go higher, even though I hadn't seen it yet.

I did, however, mail her a follow up letter thanking her for her time and asking her to contact me if anything changed. That letter was returned as I accidentally sent it to the wrong address. But, I sent it again to the correct address, and a few weeks later she called me.

She said the other offer fell through at closing. Apparently the investor-buyer went on his honeymoon, stayed too long, and then came back and his “funding had fallen through.” Sounds like there’s an interesting story there.

I looked at the property with her Friday morning. There was another investor coming to look that afternoon. The house was a typical 3/2/2 with only one owner ever, located in the Brookhaven Country Club subdivision in North Dallas, which is popular.

Here’s why the “traditional” formulas most investors have learned don’t work in a hot market, especially in a place like Dallas. I know this will be familiar to many, but I thought I’d share for those who are wondering what the heck is going on.

This is a flip property, not a rental. Rent rates are around $1600-$1700 per month for the area depending on the house and square footage. Even if you paid all cash, with closing costs and rehab, that’s only maybe a 4% annual return, so I would classify it as a pure flip. No way it would cash flow if you had to use financing.

Here are the numbers according to the traditional formulas for flippers and wholesalers:

ARV: $230,000
70% of ARV: $161,000
Minus renovations: $30,000 ($25-$35K depending on the flipper)
Minus desired wholesale fee: $5,000
Maximum I should offer on this property according to the regular formula: $126,000

I offered $170,000, and I was actually pretty confident I could wholesale it for around $174,000. I was outbid by the other investor offering $180,000. He actually made that offer sight unseen, and confirmed it when he toured the house Friday. I can only assume he planned to wholesale it or flip it himself.

At $180,000, that means this house was purchased for about 91%ARV minus repairs (not including closing costs), well above the formulaic 70%ARV minus repairs. I could never make this work for me, but obviously others can. And of course the first guy whose contract fell through offered 100%ARV minus repairs.

I don't know if there's really a moral to the story. I just thought it illustrated our current environment in Dallas pretty well. I've had similar situations in other deals I've lost, but this one just seemed like the perfect example. I'd be interested in hearing others' experiences with ARV numbers. I know buy-and-hold investors are paying that much, but it seems crazy for a flip.

Best of luck to everyone trying to find deals!

Chad