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Wednesday, December 21, 2011

Fix and Flip House #8: Negotiating on Bank Owned Properties

In the last post on House #8 I covered how I came to find House #8. Now that I had done a “good enough” inspection of the house I came up my initial price that I wanted to pay for it considering the repairs that it needed, how much I could resell it for and how much profit I wanted to get out of the deal.

I say “good enough” inspection because I would be doing a more thorough inspection later during the “due diligence” period. This is something that I put into all of my offers where basically I get a couple of days (I typically ask for 3-5) where I can back out of the contract for practically any reason I can come up with, if I want to.

The due diligence period allows me to:
  •  Bring in an inspector and/or general contractor to make sure there are no serious problems with the house that I might have missed
  • Double check my estimates from my first assessment to make sure the repairs and work I calculated are correct
  • Have time to bring in contractors to quote major items of work if I am unsure what they will cost 
Because House #8 was a larger house that I am used to working with and it had problems in areas that can be very expensive to fix (roof, plumbing, framing, termites, etc.) I had to bring several people in during the due diligence period.

Now mind you at this point I had the house under contract for $140,000 and had estimated repairs in the $35-40k range. From looking at the comparable sales I had estimated the after repair value to be in the $230k range. Add another 10% or so for holding costs, and sales expenses and potentially I could be looking at a $25-30K profit.

This is Ok but not great. Why?...

This is how I calculate how much profit I want to make in a rehab real estate deal:

After repair value
Total Repairs
Diff. Factor
Target Profit

What this little chart tells me is that based on what I am paying for the property (my cash layout) the amount of repairs needed per square foot (repair cost divided by square footage) and what I can sell it for then I should be targeting a profit of $37k…give or take.

This table is basically taking into consideration the risk in the deal. The bigger the square footage and the more money that is needed for repairs then the higher the risk in the deal therefore the larger the profit I should expect to make.

Back when I was flipping home #6, one of the reasons I accepted a lower margin and profit potential was because it was an “easy and quick” rehab.

So in light of some of the risk in the deal and some of the unknown costs for some repairs a $140,000 purchase price was not going to work on this one. The most I would be willing to pay would be $130k.

Also remember that I was buying this house through a wholesaler. It was the wholesaler that had the house under contract with the bank not me. So I told him where I needed to be in order to go through with the deal and why.

He then took the quotes that I have gathered and documentation of the damage to the house back to the bank to renegotiate a lower purchase price.

Lo and behold they agreed to the new price of $130,000 and we closed the deal a week later!

Now it was time to get to work and see if my rehab cost calculations were accurate Smiley Faces. However I was going to run this rehab differently than the ones I had done before. Since I do not have the time to be at the house daily to supervise contractors I needed to hire someone to do that.

I also want to go into more detail on buying from a wholesaler and what you should do to protect yourself and ensure a fair deal to both parties.

I’ll cover that on the next post…

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  1. How is it that you come up with your target profit? Is it a percentage of the resale price or the purchase price?

    Good info. Thanks,

  2. Good question. Yes it is, I basically take a percentage of the resale price (12%) and add the difficulty factor you see in the table. So for this house it comes out to be 16% of the after repair value which gives me $37,600 (12% x $235,000).

  3. Look for the right deal when it comes to finding a property. See to it that you settle for a fair negotiation.


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