This looks like an awesome deal but formula says otherwise!

[Angelo Mart]

Case Study:

I found a property located in a very wealthy area (Red Bank) that is an estate sale with highly motivated sellers that is being sold in "AS IS" condition. The sellers (of estate) need to push this property fast and just reduced the price from $520,000 down to $405,000 and wont really budge as they have to pay a REVERSE mortgage off. I have reviewed and verified three recently closed homes on the same street that were completely renovated but were similar in terms of size (within 200 Sq.Ft.) room count and lot size (as per city assessor) to this property. One sale was at $590,000, $625,000, $700,000 and the house next door sold at $665,000. My estimated cost to cure/repairs is estimated at $60,000. I am going to utilize transactional funding for this deal as it seems the best solution for wholesaling. I offered $360,000 and they laughed at me!!! What is the most I Should pay for this property as I want to make a minimum of $12,000 on the deal. If I estimated the house at $665,000 (most similar comp) and use the formula of 65% of that would be $432,250 - $60,000 - $12,000 = $360,250. However, an investor (rehabber) friend of mine in the area says that his company does not do a deal unless they make a minimum of $90,000. In this case they could make ALMOST $150,000-$200,000 even it if pay full price of $405,000 as the formula does not appear to be consistent in this high end market. Somebody PLEASE help me to structure this deal, I don't want lose it. THANKS BP

[Shane Woods]

I'm no guru, but I think I have a pretty good grasp on the math....here's my process:

The 70% rule of thumb is great for giving any deal the "eyeball test". But like @Account Closed said, that "rule" has a lot of assumptions.  Let's look at the numbers a little more closely.....using specific profit/wholesale fee targets for you and your buying investor.

ARV = Somewhere less than 665,000 i would guess. I haven't seen your comps, but I never set my ARV higher than midpoint between the highest and lowest comps. So let's call it $640K, just to stay under that midpoint.

Investor's desired profit is probably going to be in the 10-15% of ARV range. Let's assume 15% of ARV to increase your chances of finding that investor. $96K based on $640K ARV

Your wholesale Fee:  I'm assuming you're looking for at least $10K on a deal this size?

Investor's Purchase Costs: Call it 1% or 6,500 (This may be a little or a lot high, I don't know customary closing costs on this price point)

Rehab: $60K

Investor's Holding Costs: I would plan for 6 months on a property with this scope of rehab and price point. I haven't seen your comps or CDOM so I'm eduguessing here. Probably $1000/month holding costs, including yard maintenance, insurance, taxes while the investor owns it, and all utilities & HOA fees if any. $6K

Investor's Selling Costs: Figure 8% of ARV. That's 6% to the agents on both sides, and another 2% for closing costs and concessions. $51,200

So the math looks like this:

Max Offer = ARV - Flipper Profit - Your Fee - Purchase Costs - Rehab - Holding Costs - Selling Costs

Max Offer = 640K - 96K - 10K - 6,500 - $60K - $6K - $51,200

Max Offer = $410,300

Not knowing what your purchase closing costs are, my number may be low, but the rest of them are pretty reasonable I think. This also doesn't take into account your TF costs, so include those as well, which comes right off your wholesale fee. Now that you've seen the long form, you can usually safely estimate your fixed costs at 9% of ARV, simplifies the formula to:

Max Offer = ARV - Flipper Profit Target (15% ARV) - Your Fee (Fill in the blank here) - Rehab - Holding Costs - Fixed Costs (9% ARV)

Hope this helps.