Minimum Profit Margin for a Flip

[Joseph Hernandez]

If you purchased a 1,300 sq. foot SFR that needed cosmetic repairs, how much $$$ below FMV would you pay? Also, if you really needed to flip a property, would you ever pay FMV? Thanks!

[Doug Smith]

Our formula is pretty straight forward when you think about it. Start with pulling comps from the area to come up with the value after it is brought up to snuff...the ARV (as repaired value). Then we back into the number by subtracting out our required return, the cost of capital/carrying costs, closing costs on both the buy and sell side, real estate commissions, the scope of work cost from the contractor, and then we build in about a 10% contingency reserve for issues that might unexpectedly pop up. That gives us our "Strike Price", which is the highest we will pay for a property. Remember not to get emotional. This is just math. If you can't get it for the strike price or less...move on. Don't get mushy about a property because you really like something about it. Remember...it's just math. To answer your question, there is no "amount to pay below FMV'. That doesn't take into account the differing rehab and carrying costs. It all depends on the math.