FLIP QUESTION.........your profit vs profit to the investor - Posted by johnman

Real Estate Investing
1

Posted by Tyler on April 26, 1999 at 24:37:01:

Just a few more questions, Mark.

You stated:

>>20% is air!
I don’t doubt that you know the values for the areas that you do business in, and I am certain that you know the comps within a safe range. The problem with many comps are those numbers are for financed properties. For a buyer to let go of thier cash, there needs to be an incentive to do so.

Am I missing something, here? Are you saying the only way to sell a rehabbed property is to an “all cash buyer”? If so, then I’ve got good news for you. Maybe you can elaborate…

>>I don’t believe that anyone is willing to pay full price for a cash sale. 20% off of lender value is a good ballpark for an estimate with one major exeption.
If your comps are owner financed!

I’m still wondering…what are saying here?

>>If the comps you are using for the values contain a high number of owner financed properties, then the AIR value is propbabbly higher than 20%.

I do agree that an owner financed property would constitute a higher price…and this must be considered if for some reason your only comps are on owner financed props.

>>Only 5K in repairs.
More than likely a flipper or a rehabber isn’t going to be the buyer for this property. More than likely a landlord - buy and hold type investor will be the target for this property.
They are buying cash flow, not the change in values (created or otherwise).

I would buy this property in a heartbeat, and I’m not a “holder”. There is enough back end profit to make it worth buying for the increased MV only…at least my bank account thinks so! :slight_smile:

>>I don’t doubt that there are people that are willing to make less than what I would have on this same project it’s just not something that I would reccommend planning on making less.
I think for a flipper to pay too much for a property is a great way to to close up shop in a hurry.
Just in this example, if I would have bought this property using my numbers, I could easily made 20% of the after value by selling to you at your numbers. All without so much as breaking a sweat or calling my crew to the job site.

What numbers? I didn’t put any numbers in my post, did I?

>>Sure there are deals that others will buy that I will not. There are people that will make a fine living off of deals that I will pass up.
So far, I can only manage a small number of deals at one time (the better system I design the more I will be able to handle). I see no reason to starve my machine.

My opinion of your final comment is that, I think these deals are especially “system” friendly. They take MUCH less rehab, requiring considerably less coordination or holding costs.

You could whip out 2 or 3 of these, if you can find them like this at 60% of ARV with only 5% rehab costs, in the same time it takes you to do ONE major overhaul.

Not to mention the creativity you can use on the resale. I’m working one now where I won’t even have to do much rehab at all. In fact the numbers are almost exactly like this one. The difference is, I’ll put in a buyer that wants to “earn their downpayment” and do the work themselves. I will get over FMV because of the terms I am offering, and not have to worry about rehabbing or holding costs. I’ll be Leasing to tenant/buyer for one year with option to buy at the end of year. This will give them time to finish repairs, I’ll get some Option Consideration up front. At the end of the year, they finance it, and I get cashed out. In the mean time, I enjoy a small but noticeable cashflow on the spread. And what I DIDNT tell you, is that I’ll get a fat chunk of tax-free change on the loan I’m getting to buy the prop. But that’s a whole different can…

Sorry…didn’t mean to ramble on…wheeew!

Hope you will answer some of my questions, I am still really curious about the logic…

Thanks for playing, Mark. :slight_smile:

NT

2

FLIP QUESTION…your profit vs profit to the investor - Posted by johnman

Posted by johnman on April 22, 1999 at 19:44:41:

I really don’t know how to ask this question properly but I’m going to give it a shot. I know this question is very subjective but I hope someone could give me a better clue on how to deal with this.

The question is “what percentage of the profit should you receive from the investor you are flipping your contract/property to?”

Example

Property under contract for $60K
repairs about $5K
After repair value is $95K

For simplicity, total profit is $30K. If this isn’t a good example please adjust the numbers. So in this situation, would you flip it for $3K, $5K, or no more than $10K?

I understand your “flip fee” will vary from deal to deal. I’m just trying to feel what “percentage” would be best to use. I know that the investor must be comfortable with his/her profit margin to go forward with the deal.

Thanks,

Johnman

3

THANKS TO EVERYBODY - Posted by johnman

Posted by johnman on April 26, 1999 at 20:13:59:

I appreciate everyones input!

thanks,
Johnman

4

Rehabbers numbers - Posted by Mark R in KCMO

Posted by Mark R in KCMO on April 23, 1999 at 21:08:32:

Johnman,

You are getting some good info here.

Here is my basic estimates from a rehabers point of view.

Lets take your 95K price and assume that I agreed with it.

(in real life I would knock off 20% due to its really just air up there.)

95K less 6700 Realtor commission less 6K for holding costs (6 months is assumed unless marketing time would be longer) less 19K for my profit, less repair costs, (If if only needed 5K in repairs, I probably wouldn’t be looking at it as a rehab, but that is another story), less my closing costs (another 1K) less 3% of Retail for fudge factor 2850.

The bottom line would look like this

95000
6700
6000
19000
5000
1000
2850

54450

so my price would more like 50K, I could care less about what you had into it, but it still would be best if I didn’t know it…

Hope this helps

Mark R in KCMO

5

The Ron LeGrand way… - Posted by Jim Beavens

Posted by Jim Beavens on April 23, 1999 at 17:15:18:

This is what Ron LeGrand recommends:

Take 30% off of the ARV. 20% is the rehabber’s profit and the remaining 10% is for holding costs, closing costs, realtors fees, hedge factor, etc. Now subtract the repairs necessary. This is the maximum allowable offer (MAO), and what you could expect to sell it to a rehabber for. You then subtract whatever profit you would like and that is the offer you make. So in your example, you would construct your offer like this:

70% of $95K = $66K

  • repairs: -$ 5K
    MAO: $61K

Your offer: $50-55K (how lucky do you feel? ;). Keep in mind that I haven’t successfully used this yet. I’ve done 8 offers like this, and all of them were rejected (in a rather snooty way, btw…“I just got another offer in for a much higher price than yours, nyah nyah nyah”…ok, I’m paraphrasing =). So YMMV.

6

Re: FLIP QUESTION…your profit vs profit to the investor - Posted by Jackie in Dallas

Posted by Jackie in Dallas on April 23, 1999 at 09:15:46:

How much profit you make versus how much profit the investor makes is really irrelavent.

The bottom line is that on any property there is a maximum that an investor will pay - this is determined by the after repaired value of the property, the condition, and the terms (cash or seller financing).

Whatever you can negotiate the purchase contract for UNDER the maximum amount the investor will pay is YOUR profit.

In the example you gave, suppose you negotiated to buy the property for $20,000 cash and it’s worth $100,000 after repairs.

The maximum amount the investor would pay does not change just because you did a better job of negotiating - you simply made a better profit for yourself!

7

Re: FLIP QUESTION…your profit vs profit to the investor - Posted by rudy-austex

Posted by rudy-austex on April 23, 1999 at 07:22:43:

After Repair Value(From appraisal)… $95,000
Minus Aq csts, Sls Expns,… -12,000
Minus profit to rehabber… -?_
Minus repair… -5,000
Minus your profit… -?_
=Amount that you can pay

8

Re: FLIP QUESTION…your profit vs profit to the investor - Posted by JPiper

Posted by JPiper on April 22, 1999 at 23:47:24:

I think the various answers to your question show the fallacy of what you?re trying to determine.

As an example…I might offer you $62K for this deal…cash. The way I see it, I would probably want a $20K profit. But the way I arrive at my profit would be somewhat different than the others. I?m going to reflect a real estate commission, closing costs, carrying charges, repairs, and incidental expenses. I?m going to figure these conservatively. When I do this I arrive at something like $62K.

Part of this is going to revolve around whether I agree with your assessment of market value and repairs. Another part is going to depend on what I think of the area in general, and what I think the availability of contractors is. And part is going to depend on my personal assessment of the market in general. A lot of this is a judgment.

From your standpoint, it?s important to know the person you?re flipping to, and to know what the market amongst rehabbers is. Obviously you wouldn?t want to sell to me if you knew Sue, and if Sue was in the market for a property. On the other hand, if you only know me…if I?m your market, you get $2K, maybe $3K.

Rather to spend a lot of time determining what % of the total profit you should make, you?d be better served to understand how a rehabber makes his profit, and what the general market amongst rehabbers is.

9

Re: FLIP QUESTION…your profit vs profit to the investor - Posted by Stacy (AZ)

Posted by Stacy (AZ) on April 22, 1999 at 21:22:31:

Here’s my take. There’s just no way to break it down into a percent of profit. 10K is 30% of the profit in your example (forgetting holding and selling costs). But what if you got the property under contract for 50K instead of 60K? The profit potential increases for you. Just assume 15K profit is the minimal net profit a rehabber would require for houses in this price range, with little rehab needed. Subtract a couple of months of holding costs, subtract repair expenses, and you’ll come up with a good wholesale selling price.

In your case, 95K - 15K (profit) - 3K (holding & selling costs) - 5K (repair costs) = 72K. If you bought it for 60K, that’s 12K profit for you. If you bought it at 50K, that’s 22K for you (better do a simul. close for that one).

Now, keep in mind that with the higher ARV houses, rehabbers will probably need more than 15K profit. the same would probably hold true for houses that have very major repairs needed.

Good luck.

Stacy

10

Re: FLIP QUESTION…your profit vs profit to the investor - Posted by Bud Branstetter

Posted by Bud Branstetter on April 22, 1999 at 20:49:01:

I would look at from the investors view. If I could make 20K profit on this deal then what would I care what you paid for it. Many times, such as preforeclosure situations, you have to spend money to bring it current before you find someone to flip to. Why not just advertise it to the investor for what you think he will be able to pay and make his profit. If he objects, do a simultaneous close on the next one with him.

11

What I would pay… - Posted by Sue (NC)

Posted by Sue (NC) on April 22, 1999 at 20:04:54:

For me, it would probably depend on:

  1. Neigborhood comps- are they readily available so the investor doesn’t need to add a ‘fudge factor’? Do the houses sell in 3 mos or less?
    2)Is it a safe neighborhood? Can the investor expect to send crews to work in the house at any time of the day?

Assuming good comps and a safe neighborhood, I would be willing to pay someone 5K-10K. The variance would depend on how much work I had already lined up for my workforce.

12

Why? - Posted by Tyler

Posted by Tyler on April 25, 1999 at 14:45:49:

Hey, Mark.

You have obviously found a system for you that works, here, and I don’t question that. I am very curious, however, at why anyone would analyze a deal like this the way you did. If I looked at a deal this way, I would be turning away LOTS of $$!

First, you said:
>>(in real life I would knock off 20% due to its really just air up there.)

Why?? If the market value for a house is 95, it is 95. You are saying you would take off 19k…calling it “air”?? So you would only really assess the value at 76k? This I do not understand. If I really know my market well (which I obviously should), I will know that THAT house will sell, in x amount of time on average, for x amount of dollars. This should not be a guess…leaving no need for a margin of error of that size.

you also said,
>>(If if only needed 5K in repairs, I probably wouldn’t be looking at it as a rehab, but that is another story),

I have never understood this philosophy either…and, I know this is not only yours, Mark. I’ve heard LeGrande say the same kind of thing.

Here’s my take on it:

Who cares how much the repairs are!! If it pencils, it pencils. It all depends on what you can get the property for. You make your money WHEN YOU BUY. So if you buy right, who cares if it only needs a new toilet seat!

I’m only bringing up these points, Mark, because I have never understood the logic on these ways of looking at the business. I think people tend to get into a state of “tunnel vision” when it comes to looking for deals. I’ve even noticed that with some of the other local investors around my area. They all seem to be stuck in a particular “seminar” mindset, which keeps them strictly adherent to one way of thinking…leaving lots of deals behind.

Good for me, bad for them.

My only hope is that we remember that a pencil and a calculator will tell the true story every time. Even if it’s not exactly what your “RE course” told you.

I’m certainly not attacking your way of doing business, Mark…so please don’t get me wrong. I guess you just brought up two topics that I’ve always questioned, and I had this sudden urge to get it off my chest! LOL

Good luck in KC, and thanks for letting me flap!

NT

13

Re: What I would pay… - Posted by johnman

Posted by johnman on April 22, 1999 at 20:38:15:

So Sue, you are saying if everything is “OK”, I should be able to collect around 30% of the assumed profit? I’m sure this will change depending on the deal but with the example 30% (about $10K) would be fine, correct?

Johnman

14

Re: Why? - Posted by Mark R in KCMO

Posted by Mark R in KCMO on April 25, 1999 at 22:19:23:

N, Tyler,

I understand that you are asking the question wanting know the thoughts behind this info.

I didn’t take it as an attack.

Here are the reasons for the information in my post.

The original post was regarding flipping, and that is in the context that I was answering.
Determine what to value a property for a cash sale to a rehabber.

20% is air!

I don’t doubt that you know the values for the areas that you do business in, and I am certain that you know the comps within a safe range. The problem with many comps are those numbers are for financed properties. For a buyer to let go of thier cash, there needs to be an incentive to do so.

I don’t believe that anyone is willing to pay full price for a cash sale. 20% off of lender value is a good ballpark for an estimate with one major exeption.
If your comps are owner financed!

If the comps you are using for the values contain a high number of owner financed properties, then the AIR value is propbabbly higher than 20%.

Only 5K in repairs.

More than likely a flipper or a rehabber isn’t going to be the buyer for this property. More than likely a landlord - buy and hold type investor will be the target for this property.

They are buying cash flow, not the change in values (created or otherwise).

I don’t doubt that there are people that are willing to make less than what I would have on this same project it’s just not something that I would reccommend planning on making less.

I think for a flipper to pay too much for a property is a great way to to close up shop in a hurry.

Just in this example, if I would have bought this property using my numbers, I could easily made 20% of the after value by selling to you at your numbers. All without so much as breaking a sweat or calling my crew to the job site.

Sure there are deals that others will buy that I will not. There are people that will make a fine living off of deals that I will pass up.

So far, I can only manage a small number of deals at one time (the better system I design the more I will be able to handle). I see no reason to starve my machine.

Hope this helps

Mark R in KCMO

15

Re: What I would pay… - Posted by Sue(NC)

Posted by Sue(NC) on April 22, 1999 at 22:01:10:

I wouldn’t consider 10K unreasonable at all. (It would be nice if someone here in Raleigh would bring me deals like that!)

But I’m not really looking at your % vs. mine. I’m looking at what I’m paying vs. full retail. I want to pay a total price (cost + rehab + your fee) not to exceed 80%. So for a 100K house, I’ll pay up to 80K. It shouldn’t matter if you paid 60K or 30K for it. Of course, if you paid 30K for it, I’ll be trying to figure out how you did it ;).