Would you invest $325,000 cash to make $75,0000 in 90 days?

Question

Hey BP, so I'm getting ready to put an offer in for a 4b 2/1 Bath 3800sq/ft house in Chester County PA. The house only needs cosmetic work, paint, carpet and new floors. The ARV of the home is $425,000. Houses similar are selling in less than 15 days up to 110 days. Would a cash buyer put this kind of capital up to earn $75,000 in less than 90 days? I'm going to be wholesaling this deal so I want to make sure the deal is right before I get it under contract. Let me know what you think! Thanks!

Jason D. · Answer

So you're saying the purchase price is $325k, rehab is $25k, and ARV is $425k? So I don't know if I'm telling you something that you already know, but the profit on those numbers is more in the $30-35k range. You have closing costs buying and selling, plus holding costs. Not that it's a bad deal, but these are the things you'll have to consider when putting in an offer to wholesale to an investor.

Jason D. · Answer

The closing cost I'm using are buyers closing of roughly $3000 based on my experience buying in Pa. You have a 2% transfer tax (1% each buying and selling), and 6% agent fees on the sale, plus seller closing costs of roughly $2000. All in you're looking at about $38k in all plus roughly 4-5 months holding. My rough estimate is $42-45k in total costs on this deal.

Shawn Clark · Answer

It's not "less than 90 days". You have to consider 90 days before an FHA buyer can put a contract on it, and that's if it sells the first day. I assume minimum 6 months of money cost for any rehab/flip because by the time you settle, work on it, get it listed, under contract, and settled, the investor could easily be out the money for 6 months. Hopefully less, but if they need an FHA buyer it'll be at least 4 months and probably 5. Maybe this one is large enough that it'll go conventional.But definitely take all costs into effect. Assume a listing commission. Assume transfer costs. Holding costs, etc. For the investor. I looked at one recently that I thought would have $100,000 in margin, but by the time I ran all the numbers it wasn't worth it. I was surprised because it "seemed" like a slam dunk. But the math doesn't lie.

J Scott · Answer

Yes, most investors I know would be happy to invest $325K to make $75K in 90 days, assuming no major risk. That's a 17% return; 68% annualized. Very good numbers.That said, consider what Jason said above... Are you accounting for all costs? Are you confident in your ARV? Confident in your rehab costs? Also, are you confident that the house will appraise for $100K more in less than 90 days with just a paint-and-carpet rehab? In many areas, it wouldn't.

Shawn Clark · Answer

You have to nail down the ARV very well. Not exact, but like what you KNOW you can get for it at a minimum. Then nail down the repairs. Then add in the other costs and you are good. I think it's easier if you are the rehabber yourself. I'm not sure how I'm going to do it when I start wholesaling.Good job though. You got out there and made something happen. One will come.

Andrew Johnson · Answer

Justin Westmoreland I think what you’re running into in your proposed deal is a lack of stress testing. Your pro-forma is the equivalent of a seller’s agent pro-forma on an apartment complex. They are always better than the post-purchase reality. Which has nothing to do with you it’s the just nature of flips, time to sell, time to close on the sale, etc. But hey, if this is your 51st flip it’s different than if it’s your 1st flip.

David Nolan · Answer

@Justin Westmoreland Without knowing the full details of this deal and assuming you do, the answer to your questions is simple. Would an investor be happy with a $75K return in 90 days on an investment of $325K? The math is simple.A return of 23.07% in 90 days, which equates to 92.3% annualised is huge.The only question you need to ask is what is the risk. All investment returns should be assessed against the risk involved to secure those returns. High returns usually means high risk. Low returns usually means low risk. Your individual appetite to risk will determine if you are comfortable doing this deal or not.Good luck with whatever you decide to do.

Justin Westmoreland · Answer

@Jason DiClemente @Andrew Johnson @Brent Coombs @J Scott @Shawn Clark @Harry Williams @Jay Hinrichs @Brian Pulaski @Brent Coombs@Shawn Ward Updates on the property. I saw the property on Tuesday. The guy was right it was a very nice house that only needed paint and carpets. I not too confident that it would sell for full ARV of $425,000 with just those improvements though. I think if it had an updated kitchen and a couple updates in some of the bathrooms it would sell for that. The executor wanted $325,000. With the PA 2% transfer tax on both ends, realtor fees and paint and carpets, I don’t think it was worth the risk. I would of did the deal for $250,000. It was a good learning experience for me since this was my first offer. I’m committed to finding great deals for my investors and i won’t get anything under contract if there’s isn’t enough meat on the bone. I have pictures of anyone wants to see them. Thanks for the advice everyone it really helped out!

Brian Pulaski · Answer

I would put up $350k to make $75k. I wouldn't do the deal you spelled out because your $25k takes into account no other costs, and also seems very, very light on the budget (I spent $25k to rehab an 816 SF that only needed cosmetics).Does your seller know you are wholesaling it?

Jay Hinrichs · Answer

you will soon find out... for me though its marginal.it always takes longer and it always cost more.. holding cost are always more than you think