Posted by jasonrei on October 31, 2003 at 09:07:40:
The 70% - repair is a good general rule.
I’m a rehabber, this is my formula:
ARV - repairs - holding costs - sales costs - desired profit = what I’ll pay
Holding costs: I plug in for 6 mos holding. That’s assuming I’ll pay 18% annualized interest on all money in the deal. There’s also 6 mos taxes, utilities, insurance, and maintenance. If there’s something about the house that is different from my typical house (weird floor plan, over $100k, under $55k) I will plug in an additional 3 mos holding costs.
Sales costs: $500 advertising, 3-4% buyer’s agent commission, title and closing costs (these are standard for me and depend on the sales price), and maybe a little for buyer’s closing costs (I have a feel for what kind of buyer and financing I’ll be dealing with based on the neighborhood). I also know the condition of my properties after repair. The buyer may want a couple of addtl repairs done, and I’ll either say no, add that to the sales price, or eat it.
Desired profit: Depends on where my money is. If I’m cash heavy (meaning I have heavy excess above my rehab and administrative reserves) I require less profit. If I’m cash poor I’ll either pass or shoot for bigger profits. It also depends on the money I’ll be using(private lender or hard money).
If the total invested in a house will be under $40k, I shoot for $8000-15000.
If investment is $40k-$75k, I shoot for $10000-25000.
Truth is your example is on the kind of home I have yet to deal with. $40k-$50k spread wouldn’t be enough for me. I’d figure at least $16000 in interest, thousands in taxes, and a hefty agt commission.
Here’s what would be required to make just a $20k profit on this deal:
An agent finds a buyer for me within 2 months, $224000 sales price, I’m not asked to make any addtl repairs or pay any buyer closing costs, loan closes within 1 month. That’s with private lender money. Every dollar the home sells for under $224000 is money off my profit. Every month the sale goes beyond 3 months is $3k-$4k out of my profit. Every dollar I spend for addtl repairs or buyer closing is out of my pocket. As you can see, it wouldn’t take much to be in the hole on this deal. Lost money = much stress.
I know a $132k price would be hard to come by. I don’t know how tough because I don’t buy those kinds of houses.