Sale Inventory: The other thing that is important to gauge is the bank-owned (REO) and the short sale inventory. I like to watch how many REOs and short sales are on the market on a daily, weekly and monthly basis. Remember supply and demand? If there is a high supply of REOs or short sales on the market, what’s going to happen to price? It’s going to drop. If the short sale and REO inventory dry up, what happens to price? It goes up.
Fix and Flip Time Line: Fix and flip is the process of buying a property below value, making improvements and then re-selling it. Let’s look at a timeline of a typical deal:
The first thing you’re going to do is to look at a potential deal, which takes one day. Then you’re going to make an offer, which should take one day. The offer gets accepted which, with negotiations, let’s say it takes three days. Once an offer is accepted, the next step is to close on the purchase. Typically this takes 30 days. It could be less or it could be more, but on average, it’s about 30 days. After closing on the purchase, you immediately start making improvements to the property. This varies depending on the size and magnitude of the renovation, but on average it takes 45 days. Once the rehab is done, you’re going to market for a buyer (I’ll show you later how to get a buyer in 30 days or less). Once a buyer comes forward it usually takes three days to negotiate and enter into a contract. Once the buyer is under contract, it typically takes 45 days to close.
Snapshot of Average Timeline:
| •Look at a potential deal | 1 day |
| •Make offer | 1 day |
| •Offer accepted to buy | 3 day |
| •Close on purchase | 30 days |
| •Make improvements | 45 days |
| •Market for a buyer | 30 days |
| •Offer accepted to sell | 3 days |
| •Close on sale | 45 days |
| •Total time | 158 days |
This entire process from looking at a deal to selling the deal (making a profit) takes about 158 days. If you look from when you purchase the property to when you sell the property, it’s about 123 days.
Four Areas of Focus: Now when you consider each aspect of the fix and flip model, you really have four areas of focus that I call the “pipeline.”
•Finding
•Managing (renovations)
•Marketing and selling
•Funding (raising capital)
I’ll be discussing all four areas throughout this book. In order to maximize your efforts you want to focus on all four areas simultaneously (keeping the pipeline full).
Chapter 2:
Fix and Flip Buy Formula
Breaking Down the Numbers: The profit is what’s left after you sell the home and subtract all of the costs to do the deal. Here is a profit breakdown:
+ After-repair value (what it will sell for)
- Purchase price
- Repair costs
- Total closing costs (both when you buy and sell)
- Carry costs (cost of money)
= Profit
*Closing costs include commissions, pro-rated taxes, title insurance, transfer tax, recording fees, closing fees, etc. These are all the fees associated with buying and selling the property.
*Carry costs are fees for the capital you borrowed from the time you acquire the property until the time you sell the property and pay back the borrowed capital. This will be covered in greater detail later.
Fix and Flip Buy Formula: Since it would be a timely process to calculate all of these figures each time we analyze a deal, you are going to systematize it with a formula. Since closing costs, carrying costs and profit typically account for 35% of after-repair value (ARV), you are going to use the Fix and Flip 65% Formula. Take the ARV and multiply it by .65 (the same as subtracting 35%). After you multiply it by .65, subtract out repair costs and that number will equal the buy price.
(ARV x .65) – Repairs = Buy Price
**Note: Properties with an ARV of $300,000 and higher may be adjusted to a 70% Buy Formula
So there are two things that you need to know when looking at a potential deal.
1.ARV
2.Repair cost
Once you know those two numbers, you can calculate the buy formula.
Example: Let’s suppose a subject deal has an ARV of $150,000 and needs $30,000 in repairs, and the goal was to flip it in 4 months. What is the price you need to buy at to make this a viable deal?
| •ARV | $150,000 |
| •Repairs | $30,000 |
| •Turnaround time | 4 months from purchase to sale (more on this later) |
(ARV x .65) – Repairs = Buy Price
Step 1: $150,000 x .65 = $97,500 (remember – the difference of 35% or $52,500 covers profit, closing costs and carrying costs)
Step 2: $97,500 – 30,000 (repairs) = $67,500 buy price.
In this example, the subject property with an ARV of $150,000 that needs $30,000 in repairs would be a deal if purchased for $67,500.
Break Down the Formula: To further illustrate how the formula works, let’s break down the numbers:
| ARV | + $150,000 |
| Buyer’s agent (3%) | -$4,500 |
| Listing agent (3%) | -$4,500 |
| State transfer tax (.87%) | -$1,305 |
| Title insurance (.05%) | -$750 |
| Pro-rated taxes ($4,000/yr) | -$1,300 |
| Other misc. closing fees | -$1,500 |
| Purchase price | -$67,500 |
| Repair costs | -$30,000 |
| Carrying costs (4 points, 15% interest) | -$8,775 |
| NET PROFIT | =$29,870 |
When
