Michigan is .87% of the sales price, so that equals about $1,300. Typically, the seller pays for title insurance, which insures that the title is clean of liens and encumbrances (peace of mind for the buyer). Title insurance is approximately .05% of the sales price ($750). Property taxes are calculated by figuring out the monthly taxes multiplied by the total months you owned the property. In this example, let’s say the total annual property taxes are $4,000/year or $333/month. Total turnaround time is 4 months, so $333 multiplied by 4 months equals approximately $1,300.
With each deal, I usually factor about $1,500 to cover miscellaneous fees. You have to pay a $300–$400 closing fee as the buyer and again when you, which is covered in the miscellaneous fees. Carrying costs in this example were $8,775, which will be covered in detail later. We purchased this property for $67,500 and the renovations were $30,000. So if you subtract all of these numbers from $150,000, you’re going to have a net profit of $29,870.
Now let’s look at this a different way. The sales price is $150,000. If you take the total closing costs, which include commission fees, transfer tax, title insurance, property taxes and miscellaneous closing costs, you get a total cost of $13,855.
| 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 |
| Total Closing Costs = | $13,855 (9% of sales) |
Approximately 9% of the sales price covers the closing costs. Carrying costs are $8,775, which is about 6%. Profit of $29,870 is about 20%. If you add up closing costs, carrying cost, and profit, it equals about 35%.
| Closing costs = | $13,855 (9%) |
| Carrying costs = | $8,775 (6%) |
| Profit = | $29,870 (20%) |
| Total = | $52,500 (35%) |
Remember the formula, ARV x .65 minus repairs equals our buy price.
(ARV x .65) – Repairs = Buy Price
The difference of $52,500) covers profit (20%), closing cost (9%), and carrying cost (6%). By using this formula, you avoid breaking down the numbers every time you look at a deal. The formula is a quick way to calculate the buy price.
**Note: If you don’t have a cost of capital ($8,775), you can adjust the formula by 6% less. However, I recommend you keep the 65% formula and just add another 6% ($8,775) to your bottom line. Let’s look at three examples:
Breakout Session #1:
ARV = $165,000
Repair costs = $35,000
What is the buy price? Do this exercise right now so that you make sure you understand how to break this down.
Answer: The first step is ARV x .65. So you calculate $165,000 multiplied by .65, that’s going to equal $107,250. The second step is to then subtract the repairs from that number. Take $107,250 minus $35,000, which equals $72,250. The buy price on this deal is $72,250.
($165,000 x .65) - $35,000 = $72,250 (buy price)
Now what’s the offer price? I like to go about $5,000–$8,000 less than the buy price to give room for a counter. So on this deal you might offer $65,000 to $67,000.
Breakout Session #2:
ARV = $210,000
Repair costs = $28,000
What is the buy price and what is the offer price? Stop right now and calculate this out.
Answer: First, take ARV x .65 ($210,000 x .65 = $136,500). The second step is to subtract the repairs from $136,500 ($136,500 – $28,000 = $108,500). So $108,500 is the buy price. Offer price is $100,000–$102,000 to leave room for countering.
($210,000 x .65) – $28,000 = $108,500 (buy price)
Breakout Session #3:
ARV = $380,000
Repair costs = $65,000
What is the buy price and what is the offer price? Stop right now and calculate this out.
**Note: Because the ARV is over $300,000, you may adjust the formula to “(ARV x .70) – Repairs = Buy Price.
Answer: Step 1 take $380,000 multiplied by .70, which equals $266,000. Then, take $266,000 and subtract it from the repair cost of $65,000, giving a buy price of $201,000. The offer price would probably be $190,000 to $192,000.
($380,000 x .70) - $65,000 = $201,000 (buy price)
Remember, when using the ARV 65%, approximately 20% is profit but when using ARV 70%, approximately 18% is profit. In this example, $68,400 (18%) is profit. How does that sound to you? Fix and flip a property and make a net profit of $68,000 on one deal! That is very exciting!
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