Quick Analysis Please

[Christian Belleque]

Hey Everyone,

I have a potential deal that would be a flip. The sellers are a young couple that just had a baby and are very motivated. I brought up the idea of seller financing and they were very interested. They want to move to a condo and need 20% down to do a deal. Here are what the numbers look like. They are a rough estimate but are very conservative.

House listed for $434,000

Mortgage on it for $330,000

I would give them $50,000 for the title and assume mortgage.

PITI= $2,200/month

All holding costs including PITI= $3,000/month

ARV=$450,000(very conservative)

Rehab=$40,000(a lot of room to work with)

Hold for 6 months= $18,000

Total investment=$108,000

$108,000+$320,000=$428,000

$108,000 + 10% for hard money= $10,800

$428,000+$10,800=$438,800

$450,000-$438,000= $11,200

I know it is not  whopping homerun but an $11,200 profit for a first deal isn't too bad.

Now let me have it!!! Grill me with questions please and voice your concerns.

[Jeff S.]

Sorry, but this is not a good deal, @Christian Belleque. You are paying ($330k + $50k + $40k)/$450k = 93% of ARV which, on its face, is a deal that will lose money. A good rule of thumb, widely use here, is not to exceed 70%, though we'll push it to 75% locally.

Once you take sales commissions, title & escrow, fire & hazard insurance, utilities, property taxes, recording/transfer, and finance charges into account, you will lose money.

Where will you find a hard money lender in southern California that will loan for 10%, in second position, at the LTV you're proposing? Even if you borrowed from your Aunt Edna, you will lose money (and why would you ask her to be in as dangerous a position as this). With expenses, it can cost 8% alone in sales costs.

By my calculations, which includes most expenses, if you bought the home outright, for $380k plus $40k for the rehab, and sold it for $450k, using more typical hard money in 1st position, you will lose something over $30k.

On a $450k sales price with $40k in repairs, you shouldn't pay more than $450k x 75% - $40k = $297.5k. In this case, you'll make a more reasonable $55k or so.

With experience, you can do your analyses on a rough percent basis using this rule of thumb, or by using the dollars. Preferably both. If you use the dollars however, then you must consider all expenses.