Buying, fixing, and reselling homes for profit is not an exact science. However, there are some general rules of thumb that most investors can use.
Using Conventional Funds, or Cash (points for borrowing are 1 point or less, and interest rates typically less than 8%) is the focus of this article.
ARV stands for After Repair Value, or what the home will be worth after completion of repairs.
Maximum Offer = (0.70 X ARV) - Repairs
Maximum Offer = (70% X ARV) - Repairs
A house has an ARV of $100,000, but needs $35,000 of repairs in order to achieve that value.
Your highest offer should be $35,000.
($100,000 X 0.70) - $35,000 = $35,000
I understand most people cannot comprehend that a home can be acquired for $35,000 that could later sell for $100,000. I thought that 10 years ago also. Today, I realize that homes are bought and sold daily throughout the United States for much less than this formula offers.
Truth be told, for a $35,000 renovation, I would probably want to offer using 63-65% for my formula. The simple reason, I would want to make a little more profit for a slightly higher than normal renovation. Along the same lines, if the home only needs $3,000 of repairs to be worth $100,000, I may be open to offering at 72% - Repairs.
I would feel comfortable using these formulas up to $500,000 homes.
Those figures are also strictly for someone looking to acquire the property, fix it, and resell it. If you would plan on wholesaling the home, you would need to subtract $5,000-$10,000 from that maximum offer in order to allow you some extra room for your own profit, while providing the rehabber enough margin to make it worthwhile for them.
About the Author: Brandon Yeager Since 1998, Brandon Yeager has been on the buying side of over 100 real estate transactions as a principal in several different states. As the founder of http://www.FlippingMind.com Brandon is dedicated to helping others in the wonderful realm of real estate succeed and achieve their dreams through understanding and applying practical, easy, and consistent investing philosophies.
copyright 2008 Brandon Yeager, All Rights Reserved.