Flips - Calculation offer price

[Kyle S.]

Hello,

Sorry totally newbie question:

I know most people do: (ARV X 65-75%) - Rehab Cost = Offer Price.

But where does closing costs come into this equation? 

Thanks,

Kyle

[David Robertson]

There are 2 formulas you can use to determine the Maximum Purchase Price you should offer for a flip:  

- The 70% Rule Formula

- Maximum Purchase Price Formula

The one you are using is the 70% Rule formula which should really only be used as quick rule of thumb to quickly evaluate a deal.

In the 70% rule you are discounting the ARV by 30%. The 30% discount roughly includes 15% for profit, and an additional 15% for "Fixed Costs" like buying, holding, selling & financing costs.

Once a property looks like it's going to be a good deal using the 70% rule, you should use the Maximum Purchase Price Formula to refine your numbers and calculate an exact offer price.

Maximum Purchase Price = After Repair Value - Repair Costs - Buying Costs - Holding Costs - Selling Costs - Financing Costs - Desired Profit

The Maximum Purchase Price formula is the most accurate calculation, because it requires you to think about, consider & calculate every single project cost on the project.