Flipping first property... Couple questions!

[Ben Ballinger]

I am partnering with a mentor on a home flip but his expertise is more on the contracting side than the financing side so I figured this would be a better place to ask. The home isn't on the Mls, it's not even technically for sale but my mentor knows the owner personally and has convinced them to sell us the property for a great price (about $55k below ARV). The home needs 25k renovations which will take 4 weeks, so we're looking at 30k to split for 4 weeks of work. 1. My wife is a realtor and we want to save on the realtor fees as much as possible. But, I also want the house to sell quickly and not sit on the market. So is it better to list via MLS for more eyes and payout the buyer fee/agency fee and keep her split to 0% or is there a way to even cut out buyer/agency commissions as well? Or should we just do FSBO and rely on word of mouth and other non MLS marketing? 2. Financing. Is conventional financing out of the question for a project that needs to move this quickly? I feel like by the time the loan closes we would have pushed back the process a whole month already. I don't have my own cash on hand for 100% of the purchase price. What other financing should I consider? This is happening in Palos Hills Chicago area btw (for keyword alerts)

[Thomas Franklin]

Ben Ballinger Regarding your first question: Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.

I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.

ARV – Desired Profit – Closing Costs to Buy – Repairs – 10% of Repairs – Holdings Costs – Concessions – Realtor Fees – Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).

ARV: After repaired value or what you think it will sell for once repaired.

Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be.

Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.

Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.

Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, insurance premiums, property taxes, loan payments, etc.).

Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.

Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.

Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.

This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.

To answer your second question, there are alternative funding options. There is Hard Money, loans from Family Members, Private Money where people have a 401k that may want to earn a better return, etc. Funding payments you will factor into your Holding Costs.

In conclusion, it is all about the numbers. What may seem like a nice profit, on the surface, may turn into a loss or a break even situation, if you do not account for all expenses.