BILL BYRD, REALTOR

my view

STEP BY STEP

In this step by step outline, I will give you the basic formula for estimating a fix-and-flip property, so that you understand clearly how I view all of the different costs involved when helping you to purchase real estate and renovate it to resell for a profit.

​

One cost people forget is capital gains tax on the profits of your investment! But don’t worry we’ll cover it all in this chapter.

If you’d like to learn how to estimate rehab costs, check out this resource.

​

THE FORMULA

​

After Repair Value of the Home You Can Sell For $135,000
Profit You Expect to Earn on the Flip ($25,000)
Closing Costs during the Purchase ($5,000)
Closing Costs during the Sale ($5,000)
Commissions to Real Estate Agent on the Sale (6%) ($8,100)
Holding Costs (Utilities, Loan Payments, Etc.) ($10,000)
Renovation Budget aka Rehab Cost ($25,000)
Max Purchase Price You Should Offer $57,000

​

STEP 1: DETERMINE THE AFTER-REPAIR-VALUE (ARV)

 

You want to start with a bottom up approach and determine the end selling price of the home first. You need to know what the house can sell for in order to know if there will be any room for profits once you’ve factored in all your expenses. 

 

The after repair value is what the home will be worth once it is all fixed up and in nice condition again. You judge the value based on comparable sales of other similar homes nearby. You’ll want to have your realtor, me, to run sales comparables for you using the MLS, which I have access to as a licensed agent. We can quickly type in the features of your investment home such as the number of bedrooms, number of bathrooms, the square footage, whether it is one story or two story, and then find homes that have recently sold in the last 6 months or less with similar features. Then you’ll need to tour these homes if possible to see the level of finish so that you don’t over-do or under-do the rehab like putting in way too nice of kitchen counters and cabinets that cost a fortune.

 

If you can’t tour a nearby home that recently sold, no worries.  got this covered. You know the market price you can expect to get for your property so you’ll be able to judge the level of finish needed to stay within budget and make a profit. And if the rehab needs exceed this budget, then the property isn’t going to work out and you’ll have to move on to look for another investment property. Let the math guide you in your decision making. Don’t try to force something that isn’t there thinking you’ll make the flip work.

 

Resource: How to Buy Your First Investment Property + Bonuses

 

STEP 2: FACTOR IN YOUR PROFIT EXPECTATION

 

The next most important cost to factor in is your expected profit. If a deal won’t yield the profit you determine necessary for the risk involved with the investment, then why bother investing in it when there are better deals out there? I wouldn’t tie up my time and resources for a deal that’s going to pay out $10,000 when we could be getting $30,000 instead elsewhere. Opportunity cost or as some call it “cost of equity” is important when analyzing investments so stick in your required profit early into the formula to make sure whether the deal will work or not for you.

 

It’s likely that this profit will differ as you may over estimate your expenses and end up with more profit or under estimate and end up with less profit.

This is why I recommend giving yourself a cushion when determining the profit you’d be happy with so that if things go wrong and unexpected expenses come up, you’ll still make a $5,000 or $10,000 profit instead of breaking even.

​

STEP 3: CLOSING COSTS AT PURCHASE
 

You’ll be required to bring in money to closing usually to cover any expenses that your loan isn’t covering if you’re using leverage.

Otherwise you’ll be bringing in all cash anyway if you’re not using a loan. Closing costs vary but typically might include:

A loan origination fee – which lenders charge for processing the loan paperwork for you.
 

Attorney’s fees.
A fee for running your credit report.
Pest inspection fee – Charges for any inspection required or requested by the lender or you.
Discount points – which are fees you pay in exchange for a lower interest rate.
Appraisal fee.
Survey fee – which covers the cost of verifying property lines.
Title insurance – which protects the lender in case the title isn’t clean.
Title search fees – which pay for a background check on the title to make sure there aren’t things such as unpaid mortgages or tax liens on the property.
Escrow deposit – which may pay for a couple months’ property taxes and private mortgage insurance.
Recording fee – which is paid to a city or county in exchange for recording the new land records.
Underwriting fee – which covers the cost of evaluating a mortgage loan application.
 

A good rule of thumb to use is $3,000 to $5,000 in closing costs but again, it will vary so don’t count on this as a hard number. Once you’ve done a deal or two you’ll be able to see your HUD statement and get a rough estimate of all the closing costs and how much they total up to.

 

STEP 4: CLOSING COSTS AT SALE

Once you’ve decided to sell your investment property or your rental home, you’ll have several expenses to pay. The obvious and most well-known expense you pay is the real estate agent commission which will run you about 6% of the sales price. If you sell the house yourself you can save this expense but hiring me as your realtor to sell your home has many benefits including speeding up the sales time, marketing, access to my network of potential buyers, legal work and paperwork knowledge, and much more. You’ll also have to pay for title work to make sure the property title is clear and ready to be transferred to the next owner without any defects. This way there are no disputes down the road about who owns the property legally. It can get messy when heirs leave property to several of their family members in their wills. Or maybe the county made a recording error during one of the previous sales of the property that wasn’t caught. Here are several of the expenses to expect:

 

Potential Seller Costs:

Real estate brokerage commission (3% to 7%)
Attorney or closing agent fees for preparing the deed and other documents
Documentary stamp taxes, where required
Recording fees for the certificate of satisfaction of the seller’s mortgage

Potential Shared Costs:

Pro-ration of Property Expenses
Taxes
Rental Income already collected ahead of time by seller
Costs of other contracts that exist and can’t be cancelled yet
Mortgage assumption costs beings transferred to the buyer from seller

STEP 5: COMMISSIONS TO REAL ESTATE AGENT

I touched on this already above, but to reiterate, you will likely use a realtor to sell your investment property for all the benefits provided. You may also decide to get a license yourself if you’re going to be doing several investment deals over your investment career. For example, someone buying 4 properties per year may consider getting his or her license so that they can earn a commission each time they purchase the house and save themselves the expense each time they sell the house. If you become a realtor, you’ll have several fees to pay though which is why it only makes sense to those who will be doing enough deals to cover the costs of being an agent and leave profit thereafter.

 

I cannot stress enough that partnering with an experienced agent, not only has benefits in the sale of the property, but also in the finding of new investments. As a certified foreclosure, short sale, probate and estate, REO and BPO agent, I am constantly at the front lines of great deals for fix and flips, and I currently have over 20 investors that I work with to transact these deals. Let me tell you, finding the deals and avoiding the lemons or money pits is half the battle in making money in fix and flips.

 

STEP 6: HOLDING COSTS

This is an expense category investors often forget to factor in. When you are doing a flip, you have to pay for utilities such as electric, gas, water, sewer, waste removal, and property taxes. These expenses will add up if you’re flip is taking several months to complete, for example, you may have the renovations done in 60 days (2 months) but then the property sits on the market for sale for another 60 days, bringing the total flip time to 120 days (4 months). During this time you’ll also have to pay mortgage interest, if you took out a loan.

​

You’ll also have property taxes and insurance which may or may not have been pre-paid for and prorated at closing.

Overall, don’t forget about taxes, insurance, utilities, and debt interest as well as any other holding costs you may incur when budgeting for your max purchase price to offer on a flip.

 

STEP 7: THE REHAB BUDGET
 

When estimating repairs it’s always wise to make sure you are conservative in your estimates. By giving yourself a cushion when estimating, you’ll make sure the deal works out still because unexpected expenses do arise and can be devastating to your bottom line profits if you didn’t give yourself a conservative cushion. On the bright side, your profits will be larger if everything goes as planned or you save more money than you thought on the flip. Learn how to estimate rehab costs.

​

STEP 8: MAX PURCHASE PRICE
 

What is the 70% rule in house flipping? When determining the maximum price you should consider paying for a property, the 70% Rule of real estate investing dictates that you should pay no more than 70% of the after repair value (ARV), minus repair costs.

​

Once you’ve determined your ARV (After Repair Value) and subtracted out all of the expenses discussed above, you should be left with a number that represents the max amount that you should offer to buy the property. In other words, in order for the deal to work in your favor and come close to producing the profits you are estimating, you have to purchase the property at no more than this price. If the max purchase price seems ridiculous and there is no way you see the seller accepting such a low offer, then the property is likely not going to work out and you’ll have to pass. I recommend submitting your low offer still and seeing what happens because you never know. The seller may be pretty motivated to sell and accept your offer.

​

Typically, you’ll have to find properties that look old and outdated as well as distressed in order to get off to a good start with the low offer process. You can use this as leverage when negotiating with the seller, letting them know how much the property needs to be updated to be worth market value and therefore why you are proposing an offer lower than their asking price. They may say no but the important takeaway is at least you took action and didn’t pass up an opportunity because of a false assumption. Maybe they would have said yes but you didn’t offer because you assumed you’re price was too low. Don’t assume, go talk to them.

​

WHAT INVESTORS ARE SAYING ABOUT BILL'S PHILOSOPHY

​

"Dear Bill, I have done business with you for well over six years and I have bought and sold numerous properties. It is time to let you know how much I appreciate all that you do. Although I deal with many agents, you are always my first choice. Your professionalism, hootspa and solution orientated mentality shines through all your hard work. I’ve never seen an offer you weren’t able to write, keep up the good work." - Loel Wardlaw, Real Estate Investor, Novato CA - 5 Star Rating

​