70% ARV Assumption -- Not with Transfer/Recordation Tax (MD)!?

Question

Hello All,My computer processor has been completely exhausted trying to help me determine whether my conclusion is valid in regards to investing in Maryland (Montgomery, Prince George's, Anne Arundel, Baltimore Counties, etc). I'm finding that: An All-Cash Offer in Maryland is basically equivalent to a Financed Offer in most other states? Due to Maryland's hefty Transfer/Recordation taxes, which totals 2.4% of Purchase Price (Buyer Expense on REO properties), I'm finding my potential Buyer's Costs to be 4% of PP, even with All Cash Even on standard/non-reo deals, I'm looking at 2.68% Buyer Costs, which is far and above my past investments in CaliforniaMy essential questions are: (1) In Maryland, are investors finding deals below the 70% ARV figure to compensate for the high taxes/transfer costs?(2) How are investors who utilize financing/hard money lenders able to make this area work, seeing that a loan would add another 2%-3% to the Fixed Costs? I know that in order to hit my profit metrics I need to further reduce the [% Discount ARV] figure, but ideally would like to get some feedback from others in the area who are dealing with these county/state costs - and how they adapt to profit.Thank you all for your wisdom!!------------------------------------------------------------------------------------------------------------Assumptions:1) Purchase Price (PP): $150,000 (just over 70% ARV Rule)2) Financing: Interest-Only Loan - All Project Costs3) ARV: $300,0004) Rehab Cost: $65,0005) Fixed Costs: $52,284 (17.41% of ARV) Buying Costs: $5,951 - (4.0% of PP, or 1.98% of ARV) Inspection: $400Settlement Charge: $900[Transfer/Recordation Tax: $3,675][Government Recording Charge: $60]Survey: $195Owner's Title Policy: $721Holding Costs: $11,148 - (3.7% of ARV) Assuming 8-Month Hold Period Loan Payments: $6,532Property Taxes: $1,896Utilities: $1,600Insurance: $720Maintenance: $400Selling Costs: $35,185 - (11.73% of ARV) 6% Commissions: $18,000Home Warranty: $400Settlement Charge: $425 [3% Seller Concession (standard for area): $9,000][Transfer/Recordation Tax: $7,200][Government Recording Charge: $60]Termite Report: $1006) Total Costs: $117,2847) Profit: $32,7168) ROI: ~14% (21% Annually) Not very attractive in my opinion

Russell Brazil · Answer

At the price point you are looking at, $30k is the standard profit people are seeing in the DC area. Transfer and recordation taxes are also split evenly between buyer and seller except in REOs or new construction, and the REO you can typically get a seller subsidy for the amount of the extra transfer taxes.

Richard Carlton · Answer

Yes, in Maryland average profits, at least in my personal experience with my flips, is in the $30,000.00 range. There are other variables to take into account and by my experiences some of your estimated costs are low. At least as the Realtor for my own flips, I can set my commission so I can make up for some numbers at time of sale by up to 2%. As a rough number in calculations on the resale side of the transaction, I use 12.5% for sellers costs at settlement. Due to the current competitiveness of the local market the 70% rule is a hopeful number that is a rough guide and not written in stone. I walk away from more potential flips than I purchase due to deals that on the computer look great but when viewing the property in person more expensive repairs are often found. In Southern Maryland, in a lot of instances, there are hidden costs of a well or septic system replacement that also needs to be accounted for when running numbers on potential purchases.

Ned Carey · Answer

@Richard F. I don't give a second though to the transfer taxes. Since all my deals have been in MD, it is the norm for me. Yes MD transfer taxes are high, that is only one cost to a very complex transaction. My guess is Nobody tries to get better than 70% ARV simply because of transfer taxes. You repair estimate, holdings costs or selling price can all easily vary by a few percent. Lots of people try to get better than 70%. Keep in mind that the formula is ARV X 70% - repairs = MAO. In that formula MAO means Maximum Allowable Offer. MAXIMUM ! That means 70% should not be your typical deal, that should be the worst deal you would consider. While the 70% rule works, what you have done is much better, running actual numbers. Frankly $32K profit for a flip I think is in the normal range. Now I bet you can probably get the commission down to 5%. That makes up for the high recording costs.

Shawn Clark · Answer

Agent commission could easily be 5%. I've done them for 4% for serious sellers or friends. Otherwise, your numbers look pretty decent to me.I look for minimum $20,000 profit on a flip, but on your price range I would definitely raise it to at least $30,000. Not so much for the profit but to cover the risk at the higher price range. Plus, keep in mind, I always price flips to sell quickly, which means I'm probably dropping the end price by $10,000 just to be super competitive. You want to be the NEXT house to sell, not the last. Time is money, especially if you are using hard money.

Gabriel G. · Answer

@Richard F. what are you comparing the 23.25% or 15.5% to? Comparing it with the stock market, bonds, CDs, etc, it seems like a home run. If you have another location or investment type that offers better than that, then I'd love to hear more about it. I think most of us Marylanders are used to those type of numbers.

Richard F. · Answer

Made a mistake. Accidentally included 100% of Transfer/Recordation taxes in Selling Costs. That number should be reduced by 50% (buyer/seller split). I can't edit the post, but the new final tally would be:Selling Costs: $31,585 - (10.52% of ARV)Change --> [Transfer/Recordation Tax: $3,600]6) Total Costs: $113,6847) Profit: $36,3168) ROI: ~15.5% (23.25% Annually)

70% ARV Assumption --> Not with Transfer/Recordation Tax (MD)!?