brianb_cobbres
01-09-2007, 04:01 AM
During a recent chat session we were discussing the merits of a members potential deal. Several of us recommened a much lower offer price but did not really get a chance to explain our the reasons for the offer or to back that up with hard figures. I decided to take a few minutes and break down the numbers of a typical rehab project as I see it.
When evaluating a possible rehab project we need to start with 2 primary figures, the ARV (after repair value or FMV) and the rehab estimate. And no, we really do not care about the ask price at this point. We will look at it later as more of a sanity check to guage how well our offer will be accepted. For the purpose of this post I am going to use an ARV of $150,000 and a rehab budget of $10,000.
But first a few words about the ARV. Be conservative and dont over estimate the value. It is very easy to look at the comps and jump right to the top number. If you estimate the value between $150,000 and $160,000 you will proabably want to use the lower number when evaluating the deal. As for the rehab budget. Take your best guess and double it unless you are an experienced estimator or contractor. Better yet get an experienced contractor, or three, to give you an estimate. But be careful, contractors tend to underestimate the price and hit you for more in the end but that is a discussion for another time.
So now that we know the ARV and the Rehab budget we need to determine our hold time. I typically use a 6 month timeline. We use this to calculate all time based costs such as mortgage payments and utilities. You will also need to know your loan rates and closing costs. Not sure, then call a couple lenders, lay out a fake deal, and ask them to send you a good faith estimate. That will give you a good idea of how much the money is going to cost. Err on the side of caution and round up a bit to be safe.
For this exercise we are going to use a rate of 8%, 2 points, $3,000 in closing costs, and 6 months hold time.
So where does that money go. Numbers rounded to protect the innocent and my brain.
Right off the bat we know the following
ARV $150,000
Rehab -$10,000
Interest -$4,000
Points - $3,000 ( Will be based on total loan but I use the ARV to avoid circular reference errors in Excel)
Closing -$3,000
Thats $20,000 in expenses already.
Then we we have to allow for
Carrying $3,000 or 2% of ARV for insurance, and utilities, etc....
Realtor $10,500 if you plan on selling with a realtor. You can expect to spend this amount or close to it if you FSBO and protect the buyers agent.
Closing $4,000 you can expect the buyer to ask for some form of closing assistance so you should budget either as a hard number or an allowance from profit.
So that is another $17,500 for a total of $37,500 in known expenses. So you best, break even offer is $113,500 but I am guessing you would like to make a little something for your time. What are you comfortable with? Lets use 15% just for sake of argument. You need to deduct and additional $22,500 from your offer bringing your net offer down to $91,000. You may want to offer $97,000 with $6,000 in closing assistance to avoid any cash due at closing and still maintain a net of 91k.
This is the only time will look at the ask price and that is simply to see how far we are asking the seller to go. In the chat I think the ask price was $139,000 with the realtor saying they could get it for $120,000. We have to look at the actual ask. In this example you are offering 65% of ask price or right around 60% of ARV. That 65% may be a bit to much for the average REO but again, that does not matter. All you can afford to offer is $91,000 or less.
The Risks
Sounds simple, right? Thats and easy $22,500 profit. Lets hope your right but keep in mind you have monthly expenses of $1200-$1500 for every month over 6. You may get dinged for additional points if you are using hard money, and your repair estimates may have been low. That $22,500 can go away very fast. Trust me, I know.
Then again, FSBO to save a few thousand, save a bit on the rehab, and rehab and sell in much less time and that 22k can jump to 30k. It can go either way.
One last thought
Get this. Want to make it even easier? ARV*.7-rehab=$95,000 ( in this example) which is close enough for a quick review to see if it is worth doing a more detailed analysis. Go figure.
Let the flame war begin.....
When evaluating a possible rehab project we need to start with 2 primary figures, the ARV (after repair value or FMV) and the rehab estimate. And no, we really do not care about the ask price at this point. We will look at it later as more of a sanity check to guage how well our offer will be accepted. For the purpose of this post I am going to use an ARV of $150,000 and a rehab budget of $10,000.
But first a few words about the ARV. Be conservative and dont over estimate the value. It is very easy to look at the comps and jump right to the top number. If you estimate the value between $150,000 and $160,000 you will proabably want to use the lower number when evaluating the deal. As for the rehab budget. Take your best guess and double it unless you are an experienced estimator or contractor. Better yet get an experienced contractor, or three, to give you an estimate. But be careful, contractors tend to underestimate the price and hit you for more in the end but that is a discussion for another time.
So now that we know the ARV and the Rehab budget we need to determine our hold time. I typically use a 6 month timeline. We use this to calculate all time based costs such as mortgage payments and utilities. You will also need to know your loan rates and closing costs. Not sure, then call a couple lenders, lay out a fake deal, and ask them to send you a good faith estimate. That will give you a good idea of how much the money is going to cost. Err on the side of caution and round up a bit to be safe.
For this exercise we are going to use a rate of 8%, 2 points, $3,000 in closing costs, and 6 months hold time.
So where does that money go. Numbers rounded to protect the innocent and my brain.
Right off the bat we know the following
ARV $150,000
Rehab -$10,000
Interest -$4,000
Points - $3,000 ( Will be based on total loan but I use the ARV to avoid circular reference errors in Excel)
Closing -$3,000
Thats $20,000 in expenses already.
Then we we have to allow for
Carrying $3,000 or 2% of ARV for insurance, and utilities, etc....
Realtor $10,500 if you plan on selling with a realtor. You can expect to spend this amount or close to it if you FSBO and protect the buyers agent.
Closing $4,000 you can expect the buyer to ask for some form of closing assistance so you should budget either as a hard number or an allowance from profit.
So that is another $17,500 for a total of $37,500 in known expenses. So you best, break even offer is $113,500 but I am guessing you would like to make a little something for your time. What are you comfortable with? Lets use 15% just for sake of argument. You need to deduct and additional $22,500 from your offer bringing your net offer down to $91,000. You may want to offer $97,000 with $6,000 in closing assistance to avoid any cash due at closing and still maintain a net of 91k.
This is the only time will look at the ask price and that is simply to see how far we are asking the seller to go. In the chat I think the ask price was $139,000 with the realtor saying they could get it for $120,000. We have to look at the actual ask. In this example you are offering 65% of ask price or right around 60% of ARV. That 65% may be a bit to much for the average REO but again, that does not matter. All you can afford to offer is $91,000 or less.
The Risks
Sounds simple, right? Thats and easy $22,500 profit. Lets hope your right but keep in mind you have monthly expenses of $1200-$1500 for every month over 6. You may get dinged for additional points if you are using hard money, and your repair estimates may have been low. That $22,500 can go away very fast. Trust me, I know.
Then again, FSBO to save a few thousand, save a bit on the rehab, and rehab and sell in much less time and that 22k can jump to 30k. It can go either way.
One last thought
Get this. Want to make it even easier? ARV*.7-rehab=$95,000 ( in this example) which is close enough for a quick review to see if it is worth doing a more detailed analysis. Go figure.
Let the flame war begin.....