Max Allowable Offer for Fix and Flip

[Choon Yee Dee]

What’s up everyone!? I have a question regarding max allowable offer.

(ARV x 0.70) - rehab cost = max allowable offer

Example: ($900,000 x 0.70) - $100,000 = $530,000.

My question is, why do I have to subtract the rehab cost? It seems like the spread is large enough to still profit without subtracting the rehab cost.

Maybe I’m misunderstanding this. Thank you!!

[Andrew Kiel]

Try looking at it a slightly different way with some quick math:

$900,000 sales price

$22,500 cost of purchase (appraisal, points, lender fees, title fees, etc - 2.5%)

$90,000 cost of sale (10% commissions, closing costs, buyer credits)

$64,000 carrying costs (6 months at 10%)

$25,000 additional carrying costs (6 months taxes, utilities, HOA, misc)

$100,000 rehab cost (the number used above)

$68,500 profit 

= $530,000 max allowable offer.

Some numbers may be a bit high, others may be a bit low.  Not taking any "boo-boos" into account either (even the most experienced flippers tend to come in over budget on projected rehab costs).  The formula used above is a solid rule of thumb.  Build a good spreadsheet and do your best to use conservative numbers (over estimate your expenses and costs and under estimate your resale).  There can also be some market risk - I've seen several experienced flippers get hurt badly even when the market just hiccups let alone takes a real downturn.