Before I begin, "flip" is the new dirty word in the lending industry. Banks are more and more unwilling to give you a loan in order to flip a house (buy a fixer-upper and sell it for a profit). That being said, many people need cash or hard money lenders (high interest short term loans) to be able to flip something.
Below is the promised formula and some terms that are needed to complete it:
ARV = After repaired value - What the house is worth after you fix it based on comparable properties sold in the last 6 months in the same area.
CS - Cost of Selling - this is the amount of money you have to pay a Realtor (because the seller is responsible for paying the full commission)
CF - Cost of Financing - The interest you will have to pay someone to use their money.
R - Repairs - How much will it cost to fix/update the house.
X - Cost to buy the house
P - Profit - The most important variable. How much do you expect to make?
--------------------------------------------------------------------------------
Here is where following the formula is very important. You need to start with an accurate ARV based on comps. Let's say $250,000 is what your comps support, and you buy the house for $160,000.
1. ARV - X = $90,000
2. $90,000 - CS (6% of $250,000 = $15,000) = $75,000
3. $75,000 - CF = Let's say you have $50,000 in cash so you only need a loan for $200,000. 10% per year is a cheap rate on hard money and you only plan to hold the flip for 3 months. 10% of $200,000 divided by 4 (3 months at 10%) is $5,000.
CF = $5,000 so now we have $75,000 - $5,000 = $70,000 left
4. Repairs - Repairs can vary greatly but on something this expensive with a large gap between ARV and X I imagine you will need $40,000 - $50,000 in repair money. Let's use $50,000. Now we have $70,000-$50,000 = $20,000
5. Profit. $20,000 is the profit you expect to make and any money you save by spending less on repairs or selling the house quickly adds to the profit. Any extra costs such as a lower offer, more repair costs, or longer than 3 months to sell will come off the profit.
The formula is just a little more complicated but MUCH more accurate in determining whether something fits in the FLIP category.
No comments:
Post a Comment