REO Flip do able?

Question

Been reading a bunch on here lately and wanted to see if I am running the calculations correctly for a hypothetical flip.

Cash Outlay: $50,340

Purchase price: $160,000 (10% FannieMae Homepage Renovation Loan)
Rehab: $15,000
Buying costs: $6,600 (is this way too high?)
Selling costs: $8,600
Holding costs: $4,140
ARV (sales price): $220,000

Profit: $25,660

1) Assuming my estimates are correctly am I calculating things correctly?
2) Would any of the pros out there pursue this flip or are the margins too small?

Thanks

Matt Welch · Answer

Thanks for all the replies. The rates is 4.25% with 2.5 points. I learned today that you can't use the Fannie Mae renovation loan for a flip but you can use their regular homepath loan that is available to investors. It requires 15% down and the rate and points are as stated above. I will have to look further into the insurance carrying costs and selling costs. No Hoa's no lawn maintenance. Easy flip really just carpet, paint, some work in kitchen and a little landscaping in the backyard. And yes the deed restrictions do apply I have to hold for 90 days. I took a look at all this info and the deal looks like a no go. On to find the next one. Thanks for the help guys.

Jon Holdman · Answer

Can you really use that Fannie Mae loan for a fix and flip? I thought those were only if you're living there. ARV = $220K Purchase ($160K) + Rehab ($15K) = $175K. That's 80% of ARV. Knowing nothing more this looks like a bad deal. If you truly can get cheap financing, say at 5% with one point, you'll save a bunch of money and might turn a profit. If you were using hard money this would be a break even deal. Hard money would cost you about 10% of the amount borrowed, or about 7% of ARV. With 5% and one point you're looking at 3.5% of the amount borrowed, or only about 2.5% of ARV. So, this one might generate a profit around $10-12K. Certainly not $25K. Your selling costs is likely to be closer to $25K. That's 6% for commissions, 2% for closing costs and 3% for seller concessions. Maybe if you use a flat rate listing and do the marketing yourself you'll save the 3% listing side commission.

Matt Welch · Answer

Thanks Jon, you make a valid point there.

Jon Holdman · Answer

Something else to consider is that "easy flips" may not be the best choice. If you do just a small amount of work an appraiser may have a tough time justifying a significantly higher price when you go to sell.

J Scott · Answer

Here are most of things that go into the Fixed Costs you're asking about and should allow you to better estimate your buying and selling costs: http://www.biggerpockets.com/renewsblog/2010/03/17/calculating-fixed-costs-flip-rehab-wholesale-real-estate-deal/

Steve Babiak · Answer

You can do better than that; I have my vacant property insured on a month-to-month basis (the price is still going to be higher than for occupied rental property). Look for my post in this next link to see who I use: http://www.biggerpockets.com/forums/95/topics/45218-vacant-property-insurance-referrals http://www.biggerpockets.com/forums/48/topics/1279-how-do-you-insure-rehab-properties-

Account Closed · Answer

On my REO there is a stipulation that I cannot resell the unit above a certain price for 90 days. In addition, when you look at the insurance for carrying costs, the builders insurance (from what I have seen) is even more expensive than traditional insurance and my policy was a 6 month minimum. Just a couple of thoughts to throw in as you estimate holding costs and duration.

Scott H. · Answer

Buying costs certainly see high, but, I'm even concerned about the selling costs. Are these your estimated closing costs? Are you planning to sell on the open market or have you an investor buyer interest? Also, watch out for the deed restrictions from the seller that may prohibit you from selling the property with 90 days for a profit, even with proof of rehab and appraisals the deed restriction may hinder if you are looking for a quicker resale.

Aaron Pfeffer · Answer

Assuming your numbers are right it's not a bad deal, but not fantastic either percentage wise on your ROI. Yeah, your buying costs seem a little high. Besides closing costs and whatever it costs you to actually determine if you want to pull the trigger, why do you have buying costs so high? Not sure what state you are in, but seller pays the buying agent commission, yes?

Steve Babiak · Answer

Not enough details. What is involved in the rehab? What is the rate for your financing? What is the timeframe for rehab and sell? Some of your holding costs will be more than just funding; things like utilities, insurance (for builder's risk or vacant property can get quite expensive), property taxes, lawn care / landscape maintenance, HOA fees, etc. So you'll need to get some decent numbers for some of these extra expenses too.