Wednesday, April 21, 2010

What's Your Flip Worth?

Flippers use a different formula for determining the value of property than landlords which are based on rent. Flippers formulas are based on the After Repair Value or ARV which is what it's going to be worth at retail...... or better yet at 10-15% below retail for a quick flip and low holding costs.

There are a number of different methods people use to determine the value of a flip. Everyone seems to have their own method or a method with variations based off an existing method.

One of the primary formulas people use today for flips is called the MAO formula. MAO stands for Maximum Allowable Offer. Please note the word "maximum". That means this rule is not to be bent. You don't add to it to get the deal. Maximum is ALL you will give. Not a dime more. Let us all remember that you never fall in love with a real estate investment. A house or commercial property is nothing more than a mathematical equation. That's all it is.

It's a mathematical equation that requires you to consider the initial buying price, rehab of it, holding costs and it's ARV.

To give you an idea where you should be with your numbers as a wholesaler selling to a flipper....... most flippers I know won't touch a property unless there is a 20K or more spread between their costs to purchase, repair and hold, VS the ARV. So when figuring this stuff out, you run the same numbers and subtract your fees that you will charge the buyer for getting it and you then know what to offer which is known as your MAO or maximum allowable offer.

Many wholesalers like to be between 65-70% of the ARV during regular times which we're not in right now. After-all, you have to factor higher holding costs these days.

Lets look at this formula based on a high 65% of the ARV. Lets say that you have found (without a doubt) that the after repair value is $100,000 and it needs $15,000 of repairs to make it worth 100K.

65% of the ARV - Cost of Repairs = MAO (maximum allowable offer. Don't forget the word maximum! Don't go over or you won't have a ROI)
65% of $100,000 - $15,000 = MAO
$65,000 - $15,000 = MAO
$50,000 = Your Maximum Allowable Offer

So this is what you buy it for as a flipper. If you are a wholesaler, you take this 50K and reduce it by the profit that you want and you have your actual offer. Lets say you want to make 10K. $50,000 - $10,000 = $40,000. So you offer the initial seller $40,000 for the house.

When you are factoring in what you want to make on a house, make sure you consider your losses from taxation and a percentage of your earnings going to a Realtor since you will likely be using one to sell it.


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