ARV? Wheres my profit?

Question

So i have a question about working with rehabbers. Im looking to wholesale REO's to rehabbers via simotaneous and double closing. They will fund my A-B transaction and the B-C. BUT WHERES MY PROFIT?

if they want 70% ARV does my profit have to be within that 70%? And what about closing costs? I cant find a thread on here that talks about this.

I contacted a rehabber he said he will buy what i can get at 70% ARV. So if it was $100K ARV then $70K - 10K repairs = $60K is what he would buy from me at?

So then would i have to have it under contract at $50K to make $10K? or do they pay you on TOP of the 70% and pay closing costs too? For this example if they paid on top but I had it under contract at $60K, it would be $70K + my profit + closing costs= say $85K so they have a 15% profit potential? That would show they dont get that 30% profit margin, thats to pay all othe stuff and just incase repairs cost more right?

David MacGown · Answer

First of all you should know what investors are paying for properties in your market place...what % of a discount are they looking for from the ARV.  The 70 % formula is just a general rule of thumb and is based on selling to cash buyers, it does not take into account the cost of hard money or the commision to sell the property if using a top gun realtor (which you should) so...to take into consideration some of your buyers will be using hard money to finance the purchase and they will be selling the finished product through a realtor -make you offers at 65% of the ARV rather than the standard 70%.  Calculating the ARV in today's market is another article for another day.

Jon Holdman · Answer

Selling FSBO doesn't mean no commissions.  It just means you don't have a listing agent commission.  Most retail buyers are going to use their own buyer's agent, and a seller will still need to pay them a commission.

There is ALWAYS a cost for money, even if you're using you own.  You could always just put that cash into a bank CD and earn a risk free return.  Or, you could loan it out as hard money.  So, if a rehabber is using their own money, they're going to want a return on the deal for both the deal itself and the money.  If they could do the deal with hard money and make 10% of ARV, then if they're using ther own money, they would want 15% or 20% or ARV as the profit.

Jon Holdman · Answer

In your example, they would pay you $60K.  They would have closing costs on top of that, but that's their problem.

With a double close, you will have purchase closing costs on your buy transaction and selling closing costs on your sell transaction.   Some will get cancelled out.   For example, you would normally have to give a credit for the property taxes when you sell.  That's for the part of the year (Jan 1 to the sale date) that hasn't yet had the taxes paid.  However, you'll get a similar credit on your buy transaction, so this should wash out.

Others, like recording fees, and a slew of other small fees, will have to be paid.

Speak with the title company about the title insurance and how they will handle that.  Normally, on a purchase transaction you have to pay for a "lenders title policy" for your lender.  On a sale transaction you have to pay for a "owners title policy" for the new buyer.  So, worst case, you would have to buy both of these policies.  A good title company, though, should be able to cut you a break, since there's not twice as much work required on their part.

But to go back to your example, if you have it under contract at $50K, and sell it at $60K, you will have a number of costs that will come out of your $10K profit.  That's also taxable at short term capital gains rates.

Making a $10K gross profit on a $50K property would be pretty astounding.  Making a $3-4K profit would be more realistic.

If the rehabber buys and rehabs for 70% of ARV, their profit after all their costs will be closer to 10-15% of ARV, not 30%.

Anthony E Russell · Answer

David,

I couldn't agree with you more. Unless you grab properties before they hit the MLS you're going to be doing some serious digging before you hit paydirt in my market.

Scott R. · Answer

ok as for the return on their own money, if i was to use that formula i show you aboue and put a percentage in there and say it came to like $5,000. If it was their own money, and were smart, from the scenario i put above they would calculate that INTO their expenses and offer me $82,000. They could even do reserve for replacement costs too just incase they had to rent the place out because they couldnt sell to make sure they are covered ALL the way around?

So if i did that work and calculated it up like that, then they would probably really appreciate it and REALLy love working with me probably right?

Interesting! Well i lost this deal so far anyway because the lady that was suppose to buy it decided to take the assignment of contract before i could get anything under contract. I didnt know what kind of close i was going to do was all. He has a partner that splits profit 50/50 on a JV contract. i want to do a JV contract with them of some sort on the next deal so i can make it easier instead of this double assignment, double close crap on these types of deals. The only JV contract i saw had some 50/50 split thing in it too. Cant i just specify an amount they would pay me if i brought the buyer in? The title company said they can pay me a finders fee of some sort and pay me out through a 10-99 but i want to make sure i have it under contract BEFORE closing so that way i dont show up expecting the title company to work with me and im on no paper work at all. How would you do it?

Scott R. · Answer

OK so i have a deal im working on. Me an another wholesaler are trying to get ahold of the title company and figure out how the pay would work in different scenarios.
          
          I emailed about 5 of my buyers on the deal because some want places at 70-80%ARV some at 10-15% profit and other wont touch unless there is $20K profit. Im seeing if anyone is interested. Funny because the numbers are similar to our example. I have been looking at your numbers Jon and im clear on it alot more but let me give you what i sent my wholesalers to see if the numbers were ok for them. They dont know yet i can get it at $75K but that doesnt leave me a profit at 70% ARV. 
          
          $75 PP---$143K lower side of ARV and $25K in repairs. So if they were 70% ARV that leaves me out cause i would have to give it to them at my price. NOW alot of these guys are using their own money and no HML so there will be no intrest. I even put the closing costs at 5% so they can close on this end and on the back end when they rehab and sell. Now they all like to do FSBO and dont use an agent so they wont have that commission to pay unless they change their minds. Im saying they do holding costs for 6 months and these are the numbers i came up with. Let me know if this is what it would come out to be.
          
          Variables Fair Market Value: $143,000 
          Profit Required: 15% 
          Cost of Repairs: $25,000 
          Annual Property Tax: $1,000 
          Annual Insurance: $800 
          Annual Utilities: $1800 
          Cost of Money: 0% 
          Closing Costs: 5% 
          
          THIS LEAVES THE FOLLOWING AFTER 6 Mo.
          
          Profit: $21,450
          Repairs: $25,000
          Closing costs: $ 7,150
          Holding Costs: $1,800
          interest: $0
          Commission: $0
          Concession: ??
          
          Totals $55,400 
          
          Sell price $143,000 - $55,400 = offer price of $87, 600
          
          Now that included closing for both transactions. So basically this would mean if they were looking for a 15% profit or $20K they could pay up to this amount right? So if one of them bites at this and does not list it with an agent and sell they should be ok? That would mean they really get more than a 15% ROI not much more but more.

Jon Holdman · Answer

That example is all OK except for the rehabber profit.  Lets assume they use hard money at 4 points and 15%, it takes six months between their purchase and their sale, and they have to give 3% is seller concessions.  Their purchase price from you is $86,500.  Their hard money loan amount is $101,500
          
          Their purchase closing costs 2%: $1,750
          Points: $4,100
          Interest: $7,600
          Insurance: $1000 (empty house policy for six months)
          Taxes: $900
          Utilities: $600
          Sale closing costs: $2,900
          Commissions: $8,700
          Concessions: $4,350
          
          Total costs: $31,900
          
          Sales price: $145,000
          Less costs: $113,100
          Loan payoff: $101,500
          Profit: $11,600

That 2% I'm allocating for the rehabber's closing costs when they buy are the normal closing costs.  They don't include the ones the seller typically pays.  If you shove those onto the rehabber, their profit will be correspondingly less.

There's nothing wrong with you taking a large cut like this, if you have rehabbers who will buy at 70% like this, and you can get the property cheap enough.  Just don't think the rehabber's making a ton of money.

Scott R. · Answer

Ok so like this,
          145K ARV (x) .70 
          (-) 15K work 
          (-) 10k FEE 
          - 3% closing cost (to play safe)
          = $72,150 is what i need it under contract at. 
          
          The 3% closing cost can help me if i need to pay any closing its in the contract for me. I can have in th contract the the end buyer pays closing right? and in the bank contract that they pay closing? 
          
          I just dont want to think "Yay, i got $10,000 coming" then all the sudden its like, "ok so after this fee this fee that fee, totals tooo.... $3...."

At that example it still leave the wholesaler $43,500 being the 30% left. So that means after they list it, sell it, close on it if the repair costs were right, then they end up with like $30K?

Scott R. · Answer

So then to see the rehabers side of the story i have a formula spreadsheet similar to what you just said that an investor sent me. It calculates like this below except i couldnt fit all 6 mo of holding on this forum. So then from here i can look at the offer amount on the bottom and and minus off what i want out of the deal and basically that would be what i want it under contract then right? This way i can offer for 4 or 5 mo out on the sheet so i have it built into my offer to the bank FOR the flipper and if they offer me more then what i expected then all the cash worked into the deal, becomes mine at closing. So on the numbers below they might offer me $112K and in that case, im just even better off because the difference come back to me at closing. I could have it under contract at $95K so whether they are really good and offer me right on at 107 or 109 or they figure there is less work and can offer 112, im making money. So i just have to remember the closing cost between me and the bank for my half.
                                                  
                                                  Variables	Fair Market Value:	$145,000
                                                  	Profit Required:	10%
                                                  	Cost of Repairs:	$15,000
                                                  	Annual Property Tax:	$1,000
                                                  	Annual Insurance:	$450
                                                  	Annual Utilities:	$900
                                                  	Cost of Money:	18.0%
                                                  	Closing Costs:	3%

Transaction Period (months) 1------	     2
                                                  	
                                                  Fair Market Value-----     $145,000	$145,000
                                                  Profit-----------------------                         $14,500-----	$14,500
                                                  Cost of Repairs--------          $15,000-----	$15,000
                                                  Closing costs--------------             $4,350-----	$4,350
                                                  Holding costs----------------                 $196-----	$392
                                                  Interest*---------------------                     $1,631-----	$3,263
                                                  Net Exp. (incl. profit)--   $35,677---	$37,504
                                                  	
                                                  Offer Amount----------            $109,323	$107,496
                                                  
                              Sorry comes out weird its on excel

Valerie Pedigo · Answer

Jon beat me to it.

ARV? Wheres my profit?

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