Putting a number on the house….continued

Hello again from Flipping Central. This is your flip master here to answer all your questions concerning RE Investing and the meaning of life. 

Sorry to have taken so long to add another episode to our story, but it’s been a crazy busy summer for us. The Long Island real estate market has been hot, hot, hot. We have sold four flips, most within a week and one in a day. Inventory here is at an all-time low and with the masses fleeing NYC due to COVID, DeBlasio and riots, everything is getting snapped up quickly.

I know you Houseketeers re-read my posts daily, but just in case there are those out there who haven’t (unthinkable), let’s review where we are in valuing a property.

So far, we have described the MO or maximum offer as the absolute limit your will offer on a property. It’s broken down into a few variables to determine it. Recall our formula: MO=ARV – Renovation – Fixed Costs – profit/. We have discussed ARV (the price you expect to get after you re-sell) and Renovation costs.

Let’s continue with Fixed Costs.

Fixed Costs:

Here is where most new investors really screw up. There are a lot of moving parts in Flipping and 85% of them have to do with fixed expenses that often are often not addressed or costed into a project. There are three categories that you need to address: Buying Costs, Holding Costs, and Selling Costs.

Buying Costs

Inspection Fee: We don’t do them, but a newbie had better.

Appraisal Fee: This is optional. I recommend a newbie doing one until you become an agent and can do accurate Comps. Aside for helping you figure out what your project will be worth, getting an appraisal will tell you what it will appraise for when you have an accepted offer, and the buyers bank appraises it. You do not want to price your house so high that if doesn’t appraise. That can kill the deal (with an FHA loan it WILL KILL THE DEAL).

Title Search: A title search must be done. It will uncover liens, unpaid prop taxes and any other title deficiencies.

Title Insurance: will pay for any title deficiencies that are missed in the search. 

Legal Fees

Holding Costs

Property Taxes

Utilities

Insurance

HOA Dues

Selling Costs

Commissions

Seller assisted Closing Costs, also known as Seller’s Concession (a rip off): This is crazy. Lenders will require you as the seller to pay for a portion of the buyer’s closing costs. This is very prevalent on FHA loans. Sometimes you can be looking at two or three percent. No seller actually pays this. We increase the sales price by the consession required and then remove it. The real problem is it increases the contracted price of the property which increase agents’ commission and could push price so high it will not appraise.

Legal Fees

Transfer tax: Usually paid by seller

Financing Costs

Closing Points

Interest Payments 

Leave these out at your peril. Do you ever watch the flipping shows on HGN? Catch one, and when they’re bragging on what a great margin they’re making, note that fixed costs aren’t in their numbers. Fixed costs can be, depending on the size of the deal, $75,000 or more, much more. 

Profit

Ok, you’re saying to yourself, self, of course I’m putting in profit. Well duh…..

What you need to do here is determine your minimum desired profit, and like MO (pop quiz, what does MO mean? I’ll wait……tic toc tic toc. Yes, you’re correct Maximum offer), you do not go below it. How do you determine your minimum profit (again with the difficult questions)? I don’t know. It has to do with your tolerance for risk. In our model, we like to make 10% of the ARV with a basement of $40,000. So as an example to those of you who flunked 3^rdgrade math, an ARV of $500,000 would give us a net profit of $50,000. An ARV $300,000 would yield $40,000 as we do not want to go under $40,000.

Do you think $40,000 is a lot of money? Given the risk in this type of investing, it isn’t. And a large unseen issue such a collapsed cesspool can turn the profit into a break-even situation or even a loss. 

Ok, so you know the secret formula of Re Investing that has been passed down through the ranks of investor for generations. Protect it with your life. 

Next subject as we work through the RE Investing Universe will be funding projects.

Here are pictures of another completed project: