Whenever we are presented with a range of (presumably) credible numbers as a sales price, we always use the lowest since, realistically, that could be the best you get for the property. Anything more is great, but nothing you can rely on.
If you paid $110k for the property, plus an additional $60k to rehab it, you would have invested $170k, or full value. Why wouldn't you just buy one of the $170k comps and eliminate the rehab? In fact, you would lose a considerable amount here since the rehab cost doesn't include buying and selling costs, property taxes, insurance, HML charges, utilities, etc., etc., etc.
This is not how you value a flip, @Jordan Forbes.
@William Sing wrote:
“The 70% Rule - Aim to pay no more than 70% of the properties ARV. If the ARV is $200k then you'd want to get it under contract for 140k (200 x 0.7).”
For the same reason, this is incorrect. The 70% rule of thumb (it’s not a rule and it’s only for flips) states you should not pay more than 70% of the ARV minus repairs. In this case, you can’t pay more than (.70 x $170k) - $60k = $59k. What’s the chance of that?
Thinking of it differently, if you add the Purchase price to the Rehab cost, the total can't be more than 70% of the ARV. Thus, ($60k purchase + $59k Rehab)/$170k = 70% of ARV
The remaining 30% of ARV goes to HML costs, purchase and sale fees to the realtor/broker/attorney/title, property taxes, insurance, utilities, and so on. These will typically be approximately 15% to 20% of the ARV, leaving you with a profit of 10% to 15% of the ARV. Or $17k to $25.5k in gross profit (before taxes).
Is this appealing to you? It's the reason most flippers prefer higher dollar ARV's. FYI, for an ARV over about $250k you will earn the same percent of the ARV (10% to 15%) using 75% instead of 70%. Same percent of ARV profit, same work, more dollars.
Ask your local friendly private/hard money lender to share the spreadsheet most use to evaluate the deals they lend on. Or, if you’re ambitious, you could write your own to account for all the expenses.
Best of luck to you, Jordan.
