Do these investor returns look right?

Question

I am about to make an offer on my first flip with an investor / partner. I found a deal where the total purchase price and reno totals $450k. I am using my partner's cash, no bank at any point, so plan on closing fast and getting it back on the market in 3 months (so probably 6). I am offering my partner an 8% preferred rate of return ($36k) plus 50% of the net profit defined as;

(Sale price) - (their initial investment, commissions and their preferred rate.)

With conservative assumptions on the ARV, they are poised to make a total of 30% return (I am getting in LOW…fingers crossed).

Does this look right? Am I bleeding money on this deal? I would really appreciate any feedback. Thanks BP!!!

Steven J. · Answer

It being your first flip, and an expensive one at that, I would hang onto that partner as long as they have flip experience under their belt. I agree that they are getting a lot of money, but at the same time its a great learning experience. I sure wouldn't be upset about 100k in my pocket for 3 months of hard manual labor the 3 months(possibly) of trying to sell. Like @Jason Eyerly brings up a good point about holding costs. I'm assuming a home that expensive has some good taxes on it. But since you're not paying for the money until the deal is over it is probably quite manageable with that much spread. My only other suggestion is to increase your reno budget. Being your first deal give yourself a conservative start. If you overestimate your budget then great! You just make more money!

Aaron Cunningham · Answer

If I had the ability and this deal was as good as your showing then I would look outside a "partner" investor and try to find some hard money...your giving up a lot of profit for the use of someone's cash.

Chris McClure · Answer

Hey Wayne, thanks for the note. I misspoke, it's not an mls short sale. The owner owes 200k to the bank and is about to lose it. I've seen the place and have projected my reno numbers based on the walk though, I've done a dozen full renos and have a pretty good handle on anything that doesn't require adding additional square feet. I've never worked with an investor and am asking if the offer to them is on par.

Wayne Brooks · Answer

Not trying to rain on any parades, but you say you're making an offer on a short sale. Even if the seller accepts this number, which wouldn't be smart for him, the shorted lender has to approve the short sale. They will do their own valuation, come up with same comp.s as you, and will Not discount the price for cosmetics and updates. Therefore, it is highly unlikely they would ever approve the short sale at 50-60% of their FMV. What is the asking price, and how long has it been on the market, and what feedback do you have from the listing agent on any past offers/contracts. Edit: forget all that, for some reason I had short sale in there.

Jason Eyerly · Answer

Look really good if you ask me, but I'm no pro. You're getting this home basically at 50% off. That's assuming everything is right and proper here. Where did you get your ARV and comps from? On a deal this good I'd prefer to see the MLS information myself. Also, have you walked through with a contractor and had any bids on what the work should really total? One thing I've read a lot is that beginners and first time flippers tend to underestimate rehab. You seem to have a nice spread so you'd still be profitable if your renovations costs doubled, but this is something to consider. Keep us updated and let us know if you seal the deal! Jason Eyerly EDIT: Now that I think about it, have you calculated your buying or selling expenses into this deal? How about holding costs? While they should be minimal since you have a private investor, they should still be factored in. You should check out some of the awesome spreadsheets on biggerpockets.com for a bigger breakdown and more detailed analysis of the deal. They're found here:

Chris McClure · Answer

Thanks Greg, here are the numbers: Purchase: $375,000 (short sale) Reno budget $75,000 Comps on finished homes in the neighborhood are $700-850k and I have the ARV at $710k conservatively as the square footage of the house is on the lower end, but the lot is large. I have the profit under these assumptions broken down like: Sale Price : $710,000 Initial Investment : $450,000 Gross profit : $260,000 Buyer agent 3% (we have our license to sell) : $21,300 Investor PRR: $36,000 Net profit : $202,700 50% to Investor : $101,350 50% to Me : $101,350 Total to investor : $137,350 Total investor ROI : 30%

Greg B. · Answer

Just to let you know, they are going to need you to break down the numbers and a lot more details to give you their best answer. Good luck. Hope it works out for you.