Buying, fixing, and reselling homes for can be extremely profitable. When cash is tight, and your only source of financing is expensive private lenders, or Hard Money rates, there are some general rules of thumb that most investors can use.
Using Hard Money Lender (points for borrowing 6 point, and interest rates around 15%)
ARV stands for After Repair Value, or what the home will be worth upon completion of repairs.
Maximum Offer = (0.63 X ARV) - Repairs
Or
Maximum Offer = (63% X ARV) - Repairs
Example:
A house has an ARV of $100,000, but needs $35,000 in order to achieve that value.
Your highest offer should be:
($100,000 X 0.63) - $35,000 = $28,000
Purchasing a home for $28,000 that could later sell for $100,000 may sound like a daunting task. I realize that homes are bought and sold daily throughout the United States for much less than the formula offers.
Truth be told, for a $35,000 renovation, I would probably want to offer using 58-60% 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 offer at 67% - Repairs.
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.
Sidenote: I know most people cringe when they hear 6 points and 15% interest terms offered by Hard Money Lenders. You have a choice you can make. You can sit back and do nothing, and keep living a life full of trials and despair, or you can make $17,000 versus $25,000 on a rehab. It's completely your choice.
Visit my sites at www.MindOfAnInvestor.com and www.FlippingMind.com for more information.
Have a great night !
Brandon
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