Ethical pricing for a flipper -- How low is ethical?

Question

How do you ethically price houses that you are to buy and flip?

It is pretty easy to determine the maximum amount that I'll pay for a house but it is a bit harder for me to determine the minimum amount that I will pay.

For example, the maximum amount that my partner and I will pay on a property is a price that gives us a 10% return (or buffer in the event the ARV goes down). Using the 70% rule this corresponds to about 75%

However, I'm struggling a bit with how low I should go. I'm in discussions with a distressed house, (with all the sadness and issues that a distressed house has) and the owner just wants it gone at a "fair price".

How do you determine what that "fair and honest" price is when the owner just wants it done?

My initial thoughts are to buy it at the 70% rule which equals an approx return of 15%.

Any other considerations on how to set a price while also treating my fellow man properly and ethically?

Theresa Harris · Answer

Each house will be different.  At the end of the day if the owner agrees to the price and it is well under market value, that is their choice.  If you are dealing with someone who is easy to take advantage of (eg elderly person with dementia), that is another story.  In that case make sure a family member or someone is there to work with them.

Chris Seveney · Answer

@John Laney

The ethics comes into the conversation not the price. How you approach the seller, what you tell them etc. For example if a seller is distressed and behind on the home and you are telling them your only option is to sell or be foreclosed upon so you better sell to me - that’s very unethical (and untrue). But if you approach someone saying I want to buy your home, we both know it needs a lot of work and it will cost me x amount to rehab it and take the time to fix it, because of this we offer Y. Very different discussion

Chris Merchant · Answer

The lowest you should pay for a property is the lowest the seller will agree to sell it to you for if your numbers work for that price.  I mean if the seller agrees to the price and you didn't lie, intimidate or muscle them to do so in fear then I am not sure how it would be unethical.  Now I can see where if you tell the seller that you intend to flip the house so you need to be able to purchase the house for 70,000 because it is going to take 110,000 to get it to its maximum ARV of 200,000 yet you know that the house only needs 60,000 then I could see where that would be considered unethical.  If I was you I would let the seller know you are intending on buying the house to rehab and flip for a profit and that the deal will only work for you if the property is acquired by you for less than market value, then let them be the first to set a price, then you either accept knowing it is well below market value and at or under your max price you accept if not than you start the negotiation by telling them the most you can spend is X and that includes the rehab costs which you figure to be around X so subtract that from the max you can spend and that is what you can offer the seller.

Scott E. · Answer

Buy as low possible. Throw away the 70% rule or any other arbitrary rule. Just pay the lowest number that the seller will accept.

If they think $500k is fair and your numbers work at $500k, then pay $500k.

If they think $350k is fair and for you it's a home run if you paid $350k, then pay $350k.

You're running a business not a charity.

Bryant Dawson · Answer

I have been flipping houses for just over 10 years now and I always try to create a win win win situation. This to me means that the seller has to win (may not be asking price you pay and typically is not) you solve their problem.

You have to win (meeting your underwriting and you need to know what that is) Example X capital out + X time out= X return in (high and low)

Finally the end buyer has to win great house for a fair price.

In my experience time and knowing your underwriting are the largest factors to all of these.

Jackson Tyler Hunt · Answer

fair is what they accept...your a solving a problem they neglected. It's not your problem the house is in disrepair, it's theirs. Had they upkeep it, it would be a flip house. Change your mindset. Take it for the best price you can.

Eliott Elias · Answer

There should be no minimum. You should want to pay as least as possible and maximize your returns as much as possible. If you are deceiving the seller by doing this, it is un-ethical.

Vernon Watts · Answer

Shalom BP fam, I'm with Scott, 100% that 70% rule is just a starting point to average the numbers out. Real Estate is fluid. and always changing for week to week, project to project. know your criteria and your budget. Stay on course and close the deal.

Skyler Nicholas · Answer

If you can sleep at night and not feel like a bad person, that is the price that is acceptable to me.  I'm a strong proponent of don't make your problems my problems.  If I am able to help someone out of a situation, dollar amount aside that's all I really want to do at the end of the day.

John Laney · Answer

Great experience guys!  Thanks you @Jackson Tyler Hunt, @Bryant Dawson, @Chris Seveney, @Eliott Elias, @Chris Merchant and @Therasa for your wisdom and prospective.

Ethical pricing for a flipper -- How low is ethical?

Most Popular Reply