Yep, 70% is the rule of thumb. If buy plus rehab is 70% of the eventual selling price (BE CONSERVATIVE, not optimistic), you use hard money to fund the deal, and sell within six months, you'll net a profit of about 15% of the selling price. If you're at 77%, its more like 8%. When things go wrong, as they always do, your profit takes a hit. Now, with conventional financing and some of your own money, your money costs are less. With hard money, I'd assume about 7% of ARV goes to the money. With a conventional loan at 6% plus one point, this is more like 4% of the amount borrowed. Don't let the lender get wind you're planning to flip, though. They don't like it when you sell after only a few months. Fix and flips will work better if there is more work to do. If you're just doing carpet and paint, its tougher for the appraiser on your sale to justify a big jump in value. Sounds like you're trying to buy off the MLS. Me too. Its a TON of work. I consider literally 100's of houses, look at 75, and make 25 offers to buy one.

The "gap" should be at least 30%, and more if your market is slow for the type of house you're buying (winter is coming, and tends to slow the market too).

That's an awful rental. Read in the Rental Property forum about rental expenses. Put it this way. I have one rented for $950 a month. I have an $80K note on it and about $10K of my own cash in it. I think its a bad rental. $116K plus $8K in work puts you at 77.5% of the value. That's not really low enough for a flip. If you have to use hard money to fund the flip, you might make $5-10 grand. More if you have your own cash. If you have some not-too-bright buyers on your list, you might be able to wholesale it. When you say you have it under contract, do you mean Chase has approved it? Because a contract with the owner means absolutely nothing. Sorry.

I agree with Jon that rule of thumb is 70%. You still have to go further than that if you're looking to make money off this deal. In my estimation, $116K is a very high offer to the bank if you need $8k for repairs and an ARV of $160K. Generally, I'll follow the following rule: Best Allowable Offer = 0.70ARV - Holding Costs ( Repairs, cost of funds, holding charges etc). Therefore, you will agreee that your best offer would have been $104k - $110k all other things being equal. It doesn't look good...good luck on this one!

Jon, Thanks for the response. Chase and the seller have picked our contract over several others, but it is still early in the process. I plan on putting 20% down and pursue a conventional mortgage for the rest. I have been looking for months and not been able to find anything with a bigger gap between price and value. What % is standard to look for in a flip?

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Updated over 14 years ago, 05/09/2010

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Steve HuckePoster

Real Estate Deal Analysis & Advice

Now what?

Steve HuckePoster

Posted November 17, 2009 11:21

Ok, I have a short sale under contract. My initial thought was to always use it as a rental for a while until the market really turns around and then sell it. I think I am buying significantly under market as I have offered 116000 and I believe the value is 160000. It is under contract in my name, not an llc or not transferable to. I should be able to rent it out for 950 a month and mortgage would be about 840 PITI. It would need about 3000-8000 in work depending on how ambitious I want to be to get it in sales shape. Lien holder is CHASE. It is a cute SFR close to my home in a good area of St. Louis. What can you share about ideas or expectations on the short sale. Thanks in advance.

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