How to comp and know its a deal

Question

Im very new and would like to know if im doing the math rite. I realize that this is just the basics and there are many different scenarios and areas that mite change this math and make it improper to use, but am i even getting the basic math down on searching for deals. This is what i have been taught so far on how to find deals to make an average 20k profit from each deal. Im searching for 3/2 SFR's and am finding 5 good comps at least 3. Once i think i have found my comp sales price i multiply 11.25% of my comped price for closing cost, sales commissions, marketing, and escrow fees. Subtract that number from my comped price. Take a look at the place and estimate or get estimates on rehab. Then subtract this number from (comped price * 11.25%) and if i don't have a 20k spread there or profit margin i readjust my offer or walk away. Is my math wrong here keep in mind this is just the basics. I also understand that you guys may get better deals / fees waived ect. but im very new and don't get those cheaper commissions or fees waived yet. Any help here or advice on a different way or how you do it would be really great. Thnx for your time.

Ibrahim Hughes · Answer

In addition to James' use of mls sold comps, I also look at the actives to give me a better idea as to where I am with my ARV. I also like to look at the lowest comps to see where investors purchased at (these are usually the cash, 'as-is' deals).  I like to buy at least 20% below their number as I deal with private sellers and look to get deals better than what's on the mls.

Manny Cirino · Answer

70% minus repairs etc is what most look for but as I have learn it is not usual in many areas. In my area investors are buying very close to retail to beat competition early. Do the foot work and see what investors are buying at in your area see what they look for in repairs. I am seeing the same investors adding value using high end materials to up value.

Steve Babiak · Answer

Your original post neglected to account for holding costs.  Here is a post you should read for more insight:

http://www.biggerpockets.com/forums/67/topics/38490-do-you-know-all-the-expenses-associated-with-a-house-flip-

Chris Gawlik · Answer

I'm starting to understand there is no exact science or math equation here. I'm doing my best to feel out if there is a proper spread in a deal or not. The math helps a bit on the initial search for the deals.

Being so new and not knowing rehab cost's is a bit of a disadvantage, but there are a lot of people willing to help me and give me good advice that i have been networking with.

Walking the properties is fun and the more deals i do the more experienced i will become.

I'm trying to learn from other people's mistakes. I know I will make my own mistakes on my way to financial independence ( i hate my freakin job ) but all i can do is learn from those mistakes, try not to make them again and move on to the next deal.

Yes Jon what is a hold open? Thnx for the input guys.

Jon Holdman · Answer

When you or the seller buy the owner's title policy on the property you're going to fix-and-flip, ask the title company that issues the policy to do a "hold open".  That means you're intending to sell the property in a relatively short time.  Then, when you sell, use the same title company when you buy the owner's policy for your end buyer.  The title company has to do less work than usual since its already done a search on the property and issued one title policy.  They will usually charge you a smaller fee, based on the difference between the price you paid and the price you're getting when you sell.

Now, this won't work if the buyer insists on using a different title company.  But usually buyer's don't really care.  If they do, you can always say you'll only pay for part of the policy or that the buyer has to pay for it themselves.  This is typically what banks do when you buy a REO.  If you use their title company, they pay for the policy.  If not, they don't.  I assume (though I don't know for a fact) the bank is doing the same "hold open" from when they acquired the property.

Justin Silverio · Answer

Jon - what's a "hold open"

Jon Holdman · Answer

If you're selling retail, you'll have RE commissions (6%), concessions (typical 3%), and closing costs (1-2%, depending on area).  That's 10-11%, so 11.5% sees a little on the high side.  Also, when you buy, have the title company do a "hold open" on the title insurance if you're planning to sell soon. That will significantly reduce the cost of the owner's title policy you buy for your buyer when you sell.

You probably want to look at both the percentages and the absolute number.  Making $20K, 20%, on a $100K ARV house would be a very good deal.  Squeezing $20K real profit out of $100K would be a challenge.  OTOH, making $20K, 4%, on a $500K house wouldn't be such a good deal.  Lots of things can go wrong and eat up 4% in a heartbeat.

Luis A. · Answer

Where did you get the 11.25% price from? I am just curious so as to see if it makes sense (sounds high to me).

It sounds like it's a good start though. It also depends on what you want to do with the house. It sounds like you want to flip it. I have been finding, now that I have done several flips (see link in signature), that buying in the 47-53% of ARV seems to yield a good profit.

The big question mark in this market is the comps you are using. You might pick comps that are retail sales but the appraiser for your buyers loan might use foreclosures in the comps if there are many of them nearby.

For some deals a $20k profit would not ge a good deal either, IMHO. If the house needs a lot of work and all the risk factors are higher then I would like to see more than a $20k profit potential. You would be surprised at how quickly that $20k spread can go away  :roll:

Chris Gawlik · Answer

Thank you guys for your quick reply's. I have been pushing my real estate business really hard. Its amazing how much help there is out there from people you hardly know. Thanks for the advice guys.

The 65% of ARV makes a lot of sense and will help me out big time analyzing these deals.

My wife will have her real estate license by next week, so we will have MLS access soon.

I have really been hitting the streets hard and have been making multiple offers on deals. Seem kind of strange to not know the basic math, but i think hitting the streets and making offers is more important than reading books. Its probably best to do both.

Any way i just closed escrow on my first deal its a tri plex in Apple Valley that i picked up for 93k. Im nervous and excited. I have been making offers on property's daily and know i will score my next deal soon.

Thanks for all your help guys good luck on your investing.

Justin Silverio · Answer

Instead of using percentages, I would advise you to know what the actual costs are for purchasing, holding and selling.  You will have a better idea of the costs in the future and the math won't be anymore difficult.  Actually it will be easier because you will subtract the costs from the ARV rather than working with percentages.  :)  Also, when using percentages, your calculations will become more skewed as your ARV value changes.
ie.:
65% of $100k = $65k - spread of $35k
65% of $500k = $325k - spread of $175k