Re: Equity in a flip - Posted by Stacy (AZ)
Posted by Stacy (AZ) on February 19, 1999 at 12:52:47:
The flipping we usually refer to on this site are wholesale flips. This is where you act as a middle-man of sorts, passing properties that need to be repaired to another investor who does rehabs. You need to get the property under contract at a low enough price so that your profit, the rehabbers profit, the fixup costs, and the holding costs can all be recovered when the property is sold at it’s FMV.
Suppose the ARV (after repair value) of a house is $100K. This is the retail price to a person wanting to buy and live in the house after it’s been fixed-up.
Suppose the house currently needs about $15K to fix it up before it will sell for retail. Suppose the rehabber needs to get $10K profit before he feels it’s worth his time and effort to take on the project. Also, suppose this property will take 3 months to fix and resell, with approximate holding costs during this time of about $3K. Finally, suppose the profit you want for flipping this house is $5K.
Let’s add it up. $100K - (15K + 10K + 3K + 5K) = $67K. So, the minimum you could buy this house for is $67K. If the owner still owes $90K on this house, you will not be able to buy it for $67K since there is not enough equity. If he owes $50K, he can sell it for $67K and still see some profit.
This is a simplified example. Hope it helps.