Fix & Flip Estimated Numbers

[Kiara Harewood]

Hi BP Peeps

I have ran some numbers on a home in my area. I am a beginner investor and I want to see if I am heading if the right direction. These numbers are on the low end, I think the ARV can be a lot higher. The comps list that I've received has a sold home that's down the street from the listing I'm looking at and their $/sq ft was $412. The other comp home was sold at $297/sq ft. I estimated the $/sq ft to be $305 (extremely low end). I am planning to go with a hard money lender given that my credit isn't the best. I'm thinking this home will need a new kitchen remodel, refinishing hardwood floors, bathroom remodel, and finish the basement. I think I am overestimating on repairs, but I would rather be safe than sorry. Any advice is greatly appreciated.

ARV: $434,320

Asking Price: $295000

Repairs: $71,000

Max # of holding days: 80

Monthly Holding Cost: $1512

Agent Commission: 3%

Happy Holidays!

[Russell Gronsky]

@Kiara Harewood, as others have said, this deal is too tight. You are one surprise (like finding mold which is common in climates where it rains a lot.....like the Seattle area) to be in the red on this deal.

First, you might not be doing your comps correctly...or maybe you are but there isn't enough info for us to tell for sure. Why is one comp at $412/sq ft and the other was $297/sq ft? Also, how does your deal compare to both those comps? Remember, agents usually just throw you "comps" of houses within a half mile of your property that have a similar amount of bedrooms/bathrooms and square footage. From there, you have to analyze them to see if they truly are comps for your house or not.

So lets think about the $412/sq ft house compared to yours. What does the expensive house have? Attached 2-car garage? Does yours have that? Finished basement with LVT and a bedroom and full bath in the basement? Half bath in the basement? How many total sq ft does that place have compared to yours? Is it an open concept place and yours isn't? How is the curb appeal of the expensive place compared to yours? Is there a master suite with walk-in closets and his/hers sinks in the expensive place? Does yours have that? Does the expensive place have high ceilings and a waterfall island? Will yours have that? Is the expensive place a corner lot and yours isn't a corner lot? Is the expensive place on a quiet street? Is yours? Does yours have windows facing any undesirable things like a cemetery or close to a Church where you'll get ringing church bells every Sunday morning? Now take all of these things we just thought about and compare them to the place that sold for $297/sq ft and see if yours will get you more than that price and why you think it will.

Now once you looked at all that and decided your ARV is accurate, lets look at your true cost of getting into the property on the front end:

You said asking price is $295k. Who pays transfer taxes? How much does your hard money cost you? Is it something like 12% and 2 points? Are you going to offer a 1-year home warranty to the buyers? That's another expense you'll need to factor in. You'll need builder's risk insurance and then vacant home insurance while it sits on the market, Yup, add that in to your expenses. Will you need to pull permits for any of the work you plan to do? Will you need to have the work inspected by the city? Depending on how long it takes for an inspector to come out, this may need to be factored into your holding costs as your hold days will increase. The go ahead and take your estimated repair cost and add 10%, like others have mentioned. Is there a property tax payment coming due on this place? Got to add that to your costs as you'll have to pay that in whole and you'll get part of it back when you sell. I generally set aside 3-4% of purchase price for closing costs. Baltimore is a high tax city though so you might be able to get away with 2-3% of purchase price. 

On the sell side, plan for 5-6% commission, not 3%, that's too low. You'll also want to plan for some potential seller concessions as no matter how good you rehab a property, buyers will almost always ask for some kind of discount. 

Do you have a GC lined up to do the work already for the new kitchen/bathroom and basement? Do you have estimates already for how much the work will cost? Will you have to revise the estimates once you do a solid comps analysis and find what you need to do to actually hit the ARV you are targeting? Also, how much profit are you targeting? You need to build that into your formula for a front-end offer as well.

Mine is the long answer as to why this deal looks too tight....especially for a newbie looking to just get into the game.