Is this a deal? - Posted by Jeff in NY

import · July 20, 2000, 4:27am

Posted by Alex Gurevich, TX on July 20, 2000 at 18:07:27:

It only special in a sense that over the last 9 months homes have been selling in days, while over last 9 years the average market time was 3-6 months. There’s hardly any inventory. I remember helping a friend to look for a house and we toured about 20 homes in a subdivision. Today there may be only 2-3 homes on the market in the same area. Homes are selling with multiple offers and above asking price.

Other than that, there’s nothing special about it. The point was that I am not concerned with a) being able to sell a house quickly and save on holding costs, b) being able to sell the house at all. A year or 2 ago you could have a nicest house on the block sitting on the market for 6 months and still not selling because there were a lot of other choices.

If I’m in a balanced market, as opposed to Sellers’, I’d have to price the house conservatively, as the original poster suggested, not aggresively like I can do now. As a result my profit on a transaction goes down, so my buying margin has to be higher.

import · July 20, 2000, 4:27am

Is this a deal? - Posted by Jeff in NY

Posted by Jeff in NY on July 20, 2000 at 04:27:14:

Ok folks here goes!!

Recently the house next door to mine was foreclosed on. Never even had any idea. My next door neighbor was a jerk.

Here’s the information:

The banks judgement was for $174,000
The original principal was $155,000
The Market value is $183,000 - $189,000 (might even be a little higher). Two different brokers have given me market values. One is a little bit higher ($197,000), while the other is at the above values

The house is in good condition inside and out. Might need some paint inside. I am looking to make an offer of $150,000 all cash and flip the property to an investor.

As I see it I should be able to get $5,000 - $7,500

Here is my question. Is there enough in this deal to make it a deal? I realize that the margin is rather small, but for $500 earnest money does it make sense?

import · July 20, 2000, 3:09pm

A different take… - Posted by Vic

Posted by Vic on July 20, 2000 at 15:09:28:

Jeff,

If I was you & could get the house for 150K, I’d do it. BUT instead of flipping it to an investor I’d sell it retail to someone who will do the work & live in it themself. I would try & do this with a simultaneous close if possible. My guess is if it’s in a good area, you could sell it relatively quick for 165-170K, as long as you’re selling it to someone who will live in it.

Think about it, you have a buyer wanting to buy in that area - they see other houses going for 190K or so, & then they see yours, which only needs 2k of work going for 165K - 170K. That would be mighty difficult to pass up. You sell it to them for 10-15K below mkt. & let them do the work. Better make sure your comps are correct though before you do it, otherwise you could lose.

Good Luck!
Vic

import · July 20, 2000, 7:37am

Re: Is this a deal? - Posted by SCook85

Posted by SCook85 on July 20, 2000 at 07:37:12:

This could be a deal but not at $150k.

My first question to you is how did you come up with $150k? Did you pull it out of the air or is there some rhyme or reason to your methods?

Anyone you try to flip it to will have some type of formula that they use to come up with a number. That formula can be many different thigs. I’ve seen people who will buy at 90% of FMV less repairs (I’ve actually only seen one and I thought he was crazy), and most people want to buy at somewhere around 70% of FMV less repairs. Where are you in this?

Steve

import · July 20, 2000, 7:05am

This is a dud, not a deal… - Posted by HR

Posted by HR on July 20, 2000 at 07:05:56:

Jeff,

Excuse me for saying so, but this is a classic case of flipper greed… and you will be left holding the bag, ie. the house, because of it.

Who is this a good deal for? You, or your investor? If the answer ain’t both, it ain’t a deal. Rule #1: if you’re not leaving some serious fat on the back end (equity, rehab profit, etc) you will NEVER flip any deal. Let’s look at your dud more closely.

Why would an investor buy this house? To rent it? To rehab and flip it?

Let’s assume they want to rent it. Buying at 150k, 10% interest, 180 months, is $1612/month principal and interest payment. Lets assume another $1500/year (Taxes and insurance; low) and it’s another $125/month. That gives us $1737. Factor is 30% vacancy and repairs, and we need to rent it for $2480 just to break even! Is this thing the Taj Mahal? Will buyers be knocking down your investors door to rent it? We all know they won’t, and we don’t even know the particular on your market or the house. Dud.

Ok, so let’s say the rehabber is going to fix and sell. A rehabber must assume a conservative after repaired value, so as not to get burned. Let’s take 183k.

I convert my holding costs, purchase costs, sales costs, etc to a formula. All these costs = about 15% of the after repaired value of the house. Thus, if I multiply the after repaired value X .85, I get my “break even” point, before repairs even begin or I subtract my profit. On your dud, 183 X .85 = 155k. Subtract your repairs (2k?) - the investors profit (25k minimum), and we are now down to $128k. Now, if you want to make 5k, subtract that from the 128, and you are left with 123k. That’s the max I would settle on with the bank. To get the conversation going, I would maybe offer 119k.

That’s a big difference, Jeff: 119k versus 150k. And it’s the difference between a dud and a deal.

Now, if you’re going to buy it, fix it, and sell it, subtract the 2k repairs from the 155, minus your profit (15k minimum) = 138 max offer.

Might you fix it and sell it quicker than six months? Maybe. Might you get more than 183k? Maybe. Might you find a lot more than 2k worth of repairs you missed? Probably. Might you see your 15k profit dwindle to 10k or 5k? Probably. Is this an exciting deal, at your price, for an investor?

Definately not.

Negotiate a better deal, or don’t bother wasting your $500 earnest money deposit (which they woulden’t take here, by the way. A house in that price range is a minimum 1k).

Your other problem is the bank will never let it go that cheap, anyway. If it really has practically nothing wrong and only needs a paint job, it will sell at fmv with a realtor. That’s why it didn’t sell at auction. It ain’t a deal.

HR

import · July 20, 2000, 4:23pm

An end buyer flip would work, but… - Posted by HR

Posted by HR on July 20, 2000 at 16:23:34:

Vic,

an end buyer flip could work real well. I like the idea. But let’s play it out, and see if Jeff feels like he could pull it off.

Market it at fmv of 190k
For a quick sale, only 175k for good buyer.
Let’s really get those realtors drooling, Vic: 5% commission to closing agent. Must sell in 45 days.

FMV = 190 (realtor fluff talk)
Offered at 175k (a good deal for an endbuyer)
X .05 commission = $8,750
Leaving us with $166,250 - 2k closing costs = 164k.

I still maintain with practically nothing wrong with it, the bank ain’t gonna give it away (not in this market, anyway). Maybe Jeff could get it for 155k cash offer with 2k earnest money deposit and a 60 day close. This gives Jeff a month to shop it, and pull it off. If he can, though, he will make 164-155 = 9k. Not bad for never lifting a paint brush.

But, we’ve made this seem far easier than it is. Can Jeff bluff the bank into believing he will buy? They ain’t gonna let it go under contract for $500 earnest $; is Jeff willing to risk 2k for the reward of 9? Can Jeff market this well enuf, and prequalify the potential buyer, so he can feel reasonably assured of a sale? And, most important, does Jeff have a friendly, team-member closing attorney who will do the simultaneous close and not alert the end buyer’s mortgage company of the shell game?

If Jeff can pull this all off, It could be a good end buyer flip. I’d try to only put 1k down, get 60 days till act of sale, market it like mad, look to maybe just assign it to some cat for 3k, and be out. I don’t know. This could work, but it might take more work (and have more risk) than it’s worth. For me at least (and how I run my numbers)

HR

import · July 22, 2000, 7:33pm

Off the subject… - Posted by dewCO

Posted by dewCO on July 22, 2000 at 19:33:42:

Hello Steve,
This is off the subject but wanted to direct a question to you:

You stated a week or so ago that in flipping you are mostly creating a note and selling it, I’m assuming “at the table” with no seasoning?

Do your note buyer(s) only do local deals in Baltimore (I’m in Colo., could you share how to contact them?) and what kind of general guidelines are they looking for, i.e.,doesn’t the buyer have to have pretty good credit to get these sold at the table?

Thanks so much. Enjoy your answers and comments here.

import · July 20, 2000, 8:10pm

Re: Is this a deal? - Posted by Jeff in NY

Posted by Jeff in NY on July 20, 2000 at 20:10:23:

I use came up with $150K because the bank has only been holding it since March. Since the principal is $155K, I didn’t think the bank would except a bid that was to low. $150K would be 80% FMV.

I don’t want to have the bank LAUGH me out right away.

I am a newbie and was just wondering if it maybe workable.

import · July 20, 2000, 1:16pm

In my market it’s a decent buy - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on July 20, 2000 at 13:16:22:

In my market I’d jump on it at $140K, I may still make a few bucks even at $150K, although I would only tackle it if I had cheap money available.

With about $5-6K spent on cosmetics, I can make a house look brand new, better than anything else available on the market. The house in that condition in my market would sell for higher rather than lower, so I’d say $195-200K and up. Houses sell in days, not months, so my holding time would be 3 months most. Of course, there’s a chance of buyer not qualifying, we can add in another 2-3 months of holding. It’d cost me about $4K in closing costs to buy. I am only liable for 3% (6K) Buyer’s agent commissions and my closing costs on sale will be in the $4-5K range. So far I only spent about $25K including holding costs. With these numbers in mind I’ll probably make an easy $25K on a house like that.

But, we have a very special Sellers’ market, so it would not apply to other places with a more balanced market.

import · July 20, 2000, 9:51am

Re: This is a dud, not a deal… - Posted by Larry - WI

Posted by Larry - WI on July 20, 2000 at 09:51:55:

I printed this out for future reference - will be very helpful!

One question though, why do you assume 25k profit of a rehab investor, but if I do the rehab, only 15k profit? Is this just to make it more attractive to a rehabber and flip it quicker?

Thanks,

Larry
Wisconsin

import · July 20, 2000, 8:47am

Re: This is a dud, not a deal… - Posted by JBi in MD

Posted by JBi in MD on July 20, 2000 at 08:47:44:

Hal,
This was a very informative post. Thanks for taking the time to show us newbies how to reason through a deal and make a sane decision. I appreciate you effort.

Jason

import · July 21, 2000, 4:45pm

Here’s what I would do… - Posted by Vic

Posted by Vic on July 21, 2000 at 16:45:31:

Much of the success of this deal will depend on Jeff’s talents & whether or not he has the skill & expertise to get this to a close. In other words if this is going to close, it has to be because of Jeff & not in spite of him.

First I’d get it under contract with as far out a closing date as I could get (60 days would be fine - more if I could). I’d also try to get the best price I could. I’d probably go as high as 160K if I had to.

Second, I wouldn’t use an agent at all. I’d sell it FSBO. I’d put an ad in paper that says owner may finance. In all likeliehood though, I would not be able to owner finance. I would put this clause in there though because many people think they can’t get a loan when in fact they can. I’d be looking for those people & I wouldn’t want them not to call because they didnt think they couldnt get a loan. This is one area where Jeff would have to be able to recognize whether or not his people could get a loan, or have a good working relationship with a lender. I would have also included a clause in purch. agmt. giving me right to advertise.

Third I would only offer the bank 1K in earnest money, but I would go as high as 2K if need be.

Fourth, get it under contract with your buyer. I’d collect a higher deposit from my buyer than what I put up.

Fifth, just follow it through to the act of sale.

This is all much easier said than done though. As I stated above, unless Jeff has enough knowledge & skill to get it done, it probably won’t happen. But if he’s sure of his numbers & if he’s done a few deals in the past he should be able to pull this off.

Net result: let’s assume he buys for 160K, sells for 175, here’s the way I see the result. 175-160=15K gross profit. From that 15K subtract closing costs (which here in Louisiana would be no more than $700 on a flip like this) & subtract your advertising costs of let’s say $250-$300 & you should walk away with a 14K profit. Again, this whole thing hinges on well Jeff can perform.

Anway, that’s how I see it.

Vic

import · July 20, 2000, 11:31pm

But … - Posted by Redline1

Posted by Redline1 on July 20, 2000 at 23:31:23:

Isn’t it difficult to get an assignability clause past the banks these days? I’ve heard it’s near impossible.

RL

import · July 20, 2000, 8:52pm

Re: Is this a deal? - Posted by JPiper

Posted by JPiper on July 20, 2000 at 20:52:27:

What determines an offer is what pencils out…that is, what price, given the area, condition, time to sell, cost of financing, etc. that will enable you to profit.

One consideration that is completely unimportant is whether anyone “laughs” at your offer. Put it another way…buy enough bad deals at too high a price, and everyone might applaud you and think you’re a great guy…but you’ll rapidly be on your way to being out of the business.

Just make your offers based on what makes financial sense…not what someone else might approve of.

JPiper

import · July 20, 2000, 3:11pm

Very Special Sellers’ Market? - Posted by thedonald (ONT-CDN)

Posted by thedonald (ONT-CDN) on July 20, 2000 at 15:11:01:

How is your market a “very special Sellers’ market”, moreso than any other?

import · July 21, 2000, 8:30am

The laugh test… - Posted by HR

Posted by HR on July 21, 2000 at 08:30:24:

Jeff,

I once heard it said that if your offer isn’t laughable, you’ve offered too much. Now, there’s always numbers to crunch, differing circumstances, yada yada. The point is, to make money, you got to steal the deal. And that often is something bordering on zanny.

I regularly make offers to buy houses for 10k or less. Most laugh me off. I don’t care. The numbers work for my game plan (and this type house’s condition, location, rehab need, renter type and amount, etc). When they say yes, it’s deal time. Don’t make lowball, indiscriminate offers. Be discriminate, and be able to articulate and justify your offer to the seller. But never be afraid to be “laughable.” Your profits sure won’t be.

HR

import · July 20, 2000, 10:19pm

Re: Is this a deal? - Posted by Jeff in NY

Posted by Jeff in NY on July 20, 2000 at 22:19:26:

Thanks for that bit of wisdom