Opinion on Potential Property Acquisition for Fix and Flip

[Armen Zakarian]

Hello All,

I have come across a property in Los Angeles County, California.  I have been running the numbers and it seems to be pretty promising.  I was wondering if anyone would be willing to provide their opinion on this property and if it would seem to be a sound investment?  

The property is a Short Sale.

PP-$275K

ARV-$410K - $430K (most recent comp sold for $457K 2 weeks ago)

Estimated Rehab Cost - 60K (unable to walk the property until the offer is accepted) 

Holding Cost - $1200 Per Month (6 month estimated hold)

Buyers Closing Cost - 3%

Seller Closing Cost - 3%

Realtor Commission - 5%

I am looking to get the loan from a private investor and will be looking for the loan to cover purchase, rehab and holding cost.  

This is my first attempt at a purchase so any help would greatly be appreciated!

Thanks,

Armen 

[Jeff S.]

The likelihood of finding 70% properties in southern California is slim, @Armen Zakarian. It happens on occasion, but not frequently enough to run a viable flipping business if that's your goal. For higher value properties, that is those with an ARV>$250k, we use 75% of the ARV minus repairs. This will result in a profit between 10% to 12% of the ARV, which is fair for most rehabbers, and it keeps their lenders safe. I know these deals do exist, with effort.

At ($275k+$60k)/$410k=82% this deal is terrible, especially under the terms you want. And, I completely disagree that, "… it is not too far off." At best, you will roughly break even on this property.

Any money you borrow will not be free, and good luck borrowing $335k for $1200/per month. Assuming a 6 month, 100% loan for the purchase price at 11% per year plus 2 points, as well as 15% interest for the full rehab, here is an estimated P&L:

Don't mislead yourself by focusing on the spread between the purchase price and ARV, as many new to the business seem to do, ignoring all expenses. This deal is extremely thin, offering a profit of 3.5% of the ARV or $14k, which can easily be eaten up by overages on a deal this size. Everyone will make money but you, Armen. You are paying too much, over-borrowing, and over-leveraging.

A more realistic purchase price of $247.5k will result in a cost of 75% of ARV minus repairs. Even using the same loan terms, which is doubtful you'd get with no experience, you will earn a more reasonable 10.8% of the ARV. Thus:

If the bank won't accept this offer, and it's likely they won't, the only other way to make a realistic profit here is to pay cash for the property or find someone who will and split the profit with him or her. In this case, you'll split a profit of about $39k or 9.6% of the ARV.

Either way, I strongly suggest you learn how to evaluate a flip, including all expenses (which the BP spreadsheet misses), not overpay, and not try to borrow every last dime. Leverage works both ways. Also, never buy a property "to learn a lot." This is not school.  You will lose your money or that of other's.

Good luck, Armen.