This is a dud, not a deal… - Posted by HR
Posted by HR on July 20, 2000 at 07:05:56:
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?
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.