Contract Signed – Looking for Buyers

Comments 6

1. 
   Sharon Vornholt

   July 31, 2013 at 8:22 am

   Congrats Scotty! It looks like a great deal. You shouldn’t have any trouble getting that one sold.

   Sharon

   Reply
   1. Post
      Author
      Scott Costello

      July 31, 2013 at 8:27 am

      Thanks Sharon!

      Reply
2. 
   Jessica Sala

   July 31, 2013 at 4:19 pm

   Congrats! Cute place and love the porch! 🙂

   Reply
   1. Post
      Author
      Scott Costello

      August 1, 2013 at 8:26 am

      Thanks Jessica!

      Reply
3. 
   David

   August 5, 2013 at 6:06 pm

   Hi Scott,

   I am new to house flipping biz and certainly greatly appreciate sites like yours. It is without a doubt one of my most favorite.
   This said, I have a question about this deal. Sharon said in her comment above that this is “a great deal, and will be sold without any trouble”. I do not want to ruffle anyone’s feathers here, but will respectfully disagree, or at least make a correction and say – not for everyone.

   Let’s look at the numbers:

   1. Wholesale asking price: $90K
   2. Estimated Repairs: $50K
   3. Total wholesale cost to fix-and-flipper: $140K = 72% of estimated ARV *(see additional note below)
   4. ARV: $195K

   So we have $55K of spread to work with here. Great? Let’s see… Here is what is most likely to happen in a real life:

   Additional costs for fix-and-flipper (your buyer rehabber) to close the wholesale deal, to repair, and to sell the retail deal (assuming private money lender (PML) and RE agents are involved on the way out):

   a) Closing Costs (CC) to buy the wholesale deal (not knowing how you structured it, I assume all CC are paid by your buyer): 3% of $90K = $2,700
   b) Repair estimates are often low (wholesalers are known to underestimate, and rehabbers are known to overspend), so let’s add 10% = $5K
   c) Cost of private money ($147,700) to acquire and repair: 1 point to originate + 10% APR x 6 months (time to buy, repair, list, and sell) = $8,862 *Note: many PMLs do not lend more than 70% ARV, and those who do will charge points to go above. So add accordingly as you wish on this 76% of ARV deal (147,700 / 195,000 = 76%).
   d) Not sure what is going on in NJ, but there seems to be a temporary slowdown in retail buying activity in my area (Southeastern Virginia) due to rapidly escalating mortgage interest rates, so let’s cut your ARV by 5%, not an unheard of discount to sell quicker = $9,750
   e) RE agents: 6% of adjusted sales price ($185,250) = $11,115
   f) Assistance with 1/2 of buyer’s CC (to move the deal before winter) + seller side CC = roughly 3% of $185,250 = $5,558
   TOTAL fix-and-flipper’s additional costs (thus eating into the original spread): $42,985

   And this does not even include extra costs to carry the property for 6 months, and possible misc. expenses like staging the property for retail sale, and any other contingency repairs the retail buyers may require through their home inspection.

   So this is how the “great deal” looks like now: original spread of $55,000 – additional costs of $42,985 = $12,015 Ouch!!

   Does not look like a great deal after all, does it? BTW, using a hard money lender would further reduce the profit. I guess if flipper takes PML out of this deal and uses his/her own cash, the end profit to flipper would be $20,877 (before carrying, staging, and any buyer inspection contingency repairs). Do you know many rehabbers with multiple $150K own-cash jobs going on simultaneously? I don’t… Once you take out the agents to sell the retail deal, you could get to a profit of $31,992. Do most fix-and-flippers sell through FSBO? Nope… Guys who do it for a living (and have multiple rehabs going on at the same time) use a realtor to sell to retail, at least in my area. I guess with no buyer CC assistance you could have the profit approaching $35K. But we do not live in a fantasy land!!
   I do not know what happens in NJ nowadays, feel free to enlighten me. Once again, I did not do this lengthy breakdown to mock you and/or Sharon; I am simply a student and ask questions…

   I would be delighted to have you put endless and enormous holes into my theory. I really mean it…
   I also realize that your buyer may end up reading my comment and may no longer be rejoicing after seeing my breakdown and asking for a hefty reduction of the asking price. So you are welcome to answer through email, if you wish. zdqv1@yahoo.com

   Thanks,

   David

   Reply
   1. Post
      Author
      Scott Costello

      August 7, 2013 at 12:21 pm

      David,

      I have no problems with your point of view on the deal we got under contract. Every buyer is different in how they get their money, rehab the property and such so while your points and numbers make sense and are surely true for some it doesn’t say that the buyer for this property will not be different.

      a) In our past deals and this one, our offer (and signed contract) with the seller does not include us, or our buyer, paying closing costs. This is on the seller.

      b) Repair estimates can be low, but the rehabber should have a “fudge factor” line in his/her repair estimate to handle issues that come up. An experienced rehabber estimate will be pretty accurate. Sure there are times when the fudge factor isn’t enough, but really, if you want to be 100% sure about everything no deal will be cheap enough.

      c) I don’t know where my buyers get their money from and how expensive it is. For sure they take that into consideration when they tell us what they can buy the house for. Heck, sometimes the money is “Free” because the rehabber has the cash right?

      d) Retail buyer activity has actually been picking up quite a bit over the past 12 months here compared to last year. There seems to be many multiple offer situations and houses are selling much faster.

      e) Again I’m sure the agent commissions are factored into the offer we will get for the house. Everything is negotiable so it’s not always certain who will be paying the 6% or even if it is 6%

      I will say you are making a lot of assumptions, some may be right and some might be wrong. It all comes down to the individual rehabber and how they do business. All of the houses we have gotten under contract have been with the same “formula” and our buyers seem to make quite a bit of money when they sell. They always ask us if we have any more houses.

      I really appreciate you analyzing our deal like you did. It is great for people who read my blog to see how someone breaks down the costs and to promote a discussion about it. Hopefully some other people will chime in with their opinions.

      Reply