Deal or no deal? How’s the math look?

Question

First time getting into house flipping:

A wholesaler has a sfh he wants 272k for. ARV is 325k in Tucson, AZ 85730, comps I saw were 244 and 270 for similar rehabbed 3bd, but 4 bd with smaller sf sold at 325. Rehab estimate is 35k. I can get a 90% bridge loan plus 100% rehab for 10% and 2pts. Timeline is 4 weeks to complete. My realtor will take a 4.5% commission at sale. After loan fee of 995 and holding cost for 1 month 2334 my math looks like:

325000 arv - 276300 loan - 2303 interest - 5526 points - 30700 down payment - 383 utilities tax and insurance - 995 loan fee - 14625 sales commission - 6500 sale closing cost = -12332 profit

If the rehab is cut down to 20,000 profit could potentially be 9551, unless the house doesn’t sell for the arv and the profits will be split between someone who will jv partner on this 60/40. This is the closest thing to a deal we’ve found but doesn’t look to have enough profit potential. What do you see and am I missing anything?

Jon Anderson · Answer

If your numbers are even close - take a pass. There are better deals out there. On your first couple of homes you’ll most likely go over on budget on rehab and take longer than expected to complete. There are deals out there even though theres a lot of competition out there. You have to see what others are missing. And that’s scary on your first couple of deals.

Account Closed · Answer

Your numbers are off quite a bit. I run a construction company and can get $35,000 worth of work completed in 2 to 3 weeks, but I am betting most of your contractors and vendors will not completed whatever you need in 4 weeks. I would plan for no less than 3 to 4 months to complete all details. Especially, if any building inspectors get involved.

The time you put the property on the market until the date you close escrow is no less than one month and deals do fall through for loan reasons. I always include the costs to pay for utilities, property insurance, property taxes and keeping the property clean for no less than 6 months. Then, when the buyer brings in their inspector they always come up with a huge list of things they want corrected. I don't know why, but I sold 24 homes in Las Vegas last year and I think the inspectors drones found a cracked roof tile at every home and my cost to repair every roof was about $550. I give home inspectors a lot of credit because I am a contractor and they always find problems at my homes that I could not find before their inspections. Last year, the inspectors used their infrared cameras and found leaking drain pipes inside the walls at 3 different homes. If I had to pay a contractor for each of those homes my (your cost) would have been no less than $3500 for each home when including opening the walls, drying the structure, dealing with mold tests to satisfy the buyers, patching holes and painting. So, take that off your profit and what do you have left.

I don't look at homes to flip unless I can get them for 40%+ less than their ARV. Don't forget you have to pay income tax on your profit and if you bag $10,000 before taxes I would rather wipe table at Taco Bell rather than spend my time and take a risk when there are so many unknowns.

Theresa Harris · Answer

Are you sure you can get it done in that amount of time and for that budget?  Remember you have to do the renos, but also list it and find a buyer.  Are the numbers from your realtor or the wholesaler?  Your costs (as you listed are just over $30K.  Are the $6500 in costs for buying and selling?

You're sitting at less than $20K profit if you don't go over time or over budget and your ARV is accurate.  That isn't a lot of wiggle room if something unexpected comes up.

Guy Gimenez · Answer

If you expect a "wholesaler" to bring you a good deal, you're in for a big surprise. I get presented with about 5 "deals" per week from "wholesalers" and the numbers are always fictitious. Deals are found via marketing and meeting one on one with sellers. Not trying to be harsh, just realistic.

Jeffrey Donis · Answer

I agree with @Jon Anderson. You want to underwrite conservatively and leave some room to be safe. So, if it's too close for comfort, I would move on. Don't force a deal!

Holly Boss · Answer

Thank you all for confirming my instincts. Yea I did leave off the purchase closing cost. For some reason I was thinking because the contract would be assigned there wouldn’t be closing cost but that’s only true for the wholesaler not me; so another 5k or so in the negative. Tossed this out and going after bigger spreads. I appreciate the reality checks! My numbers are conservative but trying to adjust the rehab cost did make me nervous when arv already seemed on the high side and I don’t want the house sitting and eating profits. The timeline might be true eventually but being the first project I will plan on longer and after the systems are playing out, next I’ll focus on improving efficiency. Need to get the ball rolling first. Found another with much more spread I will look at today to hopefully jv partner on.

Momi Rapozo · Answer

@Holly Boss that seems like there isn’t enough cushion there. I’m still new but if you’re going to put the energy into it esp with everything else you have going on it seems like there may not be enough of an ROI. I am in similar situation looking for the first flip deal so I can 1031 exchange  that profit to a buy and hold. Cash flow.

I don’t know how Arizona market is but have you looked into pre foreclosures? Auctions?

Jonathan R McLaughlin · Answer

@Holly Boss every piece of this screams bad. There is only loss here no profit.

Eric James · Answer

Forget it. Estimated rehab budgets go up, not down.

Michael Plante · Answer

1 Month for reno seems extremely short

What about the time between the house is listed and closes?   Even if it sells the first day   Here we can have it take a month to close   And sometimes 2 months with all the delays as well as getting a survey

20k also seems very small. One thing goes wrong and you are losing money

For me it would be a hard pass.

Deal or no deal? How’s the math look?

Most Popular Reply