What's your deal?

[George Moehlenhoff]

Hello everyone!

What is the formula you use to decide if a property would be worth your time to flip?

Looking for numerics, personal stories, examples, anything. How do you do it ladies and gents?

All the best

[Jon Holdman]

The simple forumla for flipping is that if rehab cost plus purchase price are 70% of ARV you will turn a profit of 10-15% of ARV.

There are several assumptions in that formula. One is that you're using hard money for the financing and that you will spend about 10% of your purchase plus rehab costs on financing. In other words, 7% of ARV goes to money. That's what you would typically pay for hard money for six months.

It assumes you will use an agent to sell. That's six percent off the back end. If you FSBO it, but get it on the MLS with a flat fee listing and pay the buyer's agent 3%, you can knock three percent off that figure.

You'll have closing costs on both ends. You'll have insurance and taxes. Be sure you understand the cost of insurance on an empty house that's being rehabbed. The last time I bought a policy like this it was about 60% of a landlord policy but was good for only three months and had very limited coverage.

Assuming your HML (hard money lender) will give you 70% of ARV, you will need to have about 10% of ARV in your own cash. There will be points and closing costs up front, along with inspections, insurance, and who knows what else. Then, you will have holding costs like utilities and interest payments to the HML. You will typically have to do the work, then get reimbursed by the HML, so you'll need cash to make payments for materials and contractors.

At the moment, retail buyers in many areas want some concessions. Figure about 3% or so in seller concessions. All together, I'd use 11% right now for the back end. That is, commissions, closing costs and concessions will amount to about 11% of the selling price.