Читать книгу How to Make a Million Dollars a Year Flipping Houses - Jerry Norton - Страница 4

Breaking Down the Numbers: The profit is what’s left after you sell the home and subtract all of the costs to do the deal. Here is a profit breakdown:

+ After-repair value (what it will sell for)

- Purchase price

- Repair costs

- Total closing costs (both when you buy and sell)

- Carry costs (cost of money)

= Profit

*Closing costs include commissions, pro-rated taxes, title insurance, transfer tax, recording fees, closing fees, etc. These are all the fees associated with buying and selling the property.

*Carry costs are fees for the capital you borrowed from the time you acquire the property until the time you sell the property and pay back the borrowed capital. This will be covered in greater detail later.

Fix and Flip Buy Formula: Since it would be a timely process to calculate all of these figures each time we analyze a deal, you are going to systematize it with a formula. Since closing costs, carrying costs and profit typically account for 35% of after-repair value (ARV), you are going to use the Fix and Flip 65% Formula. Take the ARV and multiply it by .65 (the same as subtracting 35%). After you multiply it by .65, subtract out repair costs and that number will equal the buy price.

(ARV x .65) – Repairs = Buy Price

**Note: Properties with an ARV of $300,000 and higher may be adjusted to a 70% Buy Formula

So there are two things that you need to know when looking at a potential deal.

1.ARV

2.Repair cost

Once you know those two numbers, you can calculate the buy formula.

Example: Let’s suppose a subject deal has an ARV of $150,000 and needs $30,000 in repairs, and the goal was to flip it in 4 months. What is the price you need to buy at to make this a viable deal?

•ARV	$150,000
•Repairs	$30,000
•Turnaround time	4 months from purchase to sale (more on this later)

(ARV x .65) – Repairs = Buy Price

Step 1: $150,000 x .65 = $97,500 (remember – the difference of 35% or $52,500 covers profit, closing costs and carrying costs)

Step 2: $97,500 – 30,000 (repairs) = $67,500 buy price.

In this example, the subject property with an ARV of $150,000 that needs $30,000 in repairs would be a deal if purchased for $67,500.

Break Down the Formula: To further illustrate how the formula works, let’s break down the numbers:

ARV	+ $150,000
Buyer’s agent (3%)	-$4,500
Listing agent (3%)	-$4,500
State transfer tax (.87%)	-$1,305
Title insurance (.05%)	-$750
Pro-rated taxes ($4,000/yr)	-$1,300
Other misc. closing fees	-$1,500
Purchase price	-$67,500
Repair costs	-$30,000
Carrying costs (4 points, 15% interest)	-$8,775
NET PROFIT	=$29,870

When you sell the property, you are going to pay commissions. Typically, you pay 3% ($4,500) to the buyer’s agent and 3% ($4,500) to the listing agent. In most states, when you sell a property, you’ve got to pay a tax, called state transfer tax (this varies from state to state). At the time of this writing, the tax in Michigan is .87% of the sales price, so that equals about $1,300. Typically, the seller pays for title insurance, which insures that the title is clean of liens and encumbrances (peace of mind for the buyer). Title insurance is approximately .05% of the sales price ($750). Property taxes are calculated by figuring out the monthly taxes multiplied by the total months you owned the property. In this example, let’s say the total annual property taxes are $4,000/year or $333/month. Total turnaround time is 4 months, so $333 multiplied by 4 months equals approximately $1,300.

With each deal, I usually factor about $1,500 to cover miscellaneous fees. You have to pay a $300–$400 closing fee as the buyer and again when you, which is covered in the miscellaneous fees. Carrying costs in this example were $8,775, which will be covered in detail later. We purchased this property for $67,500 and the renovations were $30,000. So if you subtract all of these numbers from $150,000, you’re going to have a net profit of $29,870.

Now let’s look at this a different way. The sales price is $150,000. If you take the total closing costs, which include commission fees, transfer tax, title insurance, property taxes and miscellaneous closing costs, you get a total cost of $13,855.

Buyer’s agent (3%)	$4,500
Listing agent (3%)	$4,500
State transfer tax (.87%)	$1,305
Title insurance (.05%)	$750
Pro-rated taxes ($4,000/yr)	$1,300
Other misc. closing fees	$1,500
Total Closing Costs =	$13,855 (9% of sales)

Approximately 9% of the sales price covers the closing costs. Carrying costs are $8,775, which is about 6%. Profit of $29,870 is about 20%. If you add up closing costs, carrying cost, and profit, it equals about 35%.

Closing costs =	$13,855 (9%)
Carrying costs =	$8,775 (6%)
Profit =	$29,870 (20%)
Total =	$52,500 (35%)

Remember the formula, ARV x .65 minus repairs equals our buy price.

(ARV x .65) – Repairs = Buy Price

The difference of $52,500) covers profit (20%), closing cost (9%), and carrying cost (6%). By using this formula, you avoid breaking down the numbers every time you look at a deal. The formula is a quick way to calculate the buy price.

**Note: If you don’t have a cost of capital ($8,775), you can adjust the formula by 6% less. However, I recommend you keep the 65% formula and just add another 6% ($8,775) to your bottom line. Let’s look at three examples:

Breakout Session #1:

ARV = $165,000

Repair costs = $35,000

What is the buy price? Do this exercise right now so that you make sure you understand how to break this down.

Answer: The first step is ARV x .65. So you calculate $165,000 multiplied by .65, that’s going to equal $107,250. The second step is to then subtract the repairs from that number. Take $107,250 minus $35,000, which equals $72,250. The buy price on this deal is $72,250.

($165,000 x .65) - $35,000 = $72,250 (buy price)

Now what’s the offer price? I like to go about $5,000–$8,000 less than the buy price to give room for a counter. So on this deal you might offer $65,000 to $67,000.

Breakout Session #2:

ARV = $210,000

Repair costs = $28,000

What is the buy price and what is the offer price? Stop right now and calculate this out.

Answer: First, take ARV x .65 ($210,000 x .65 = $136,500). The second step is to subtract the repairs from $136,500 ($136,500 – $28,000 = $108,500). So $108,500 is the buy price. Offer price is $100,000–$102,000 to leave room for countering.

($210,000 x .65) – $28,000 = $108,500 (buy price)

Breakout Session #3:

ARV = $380,000

Repair costs = $65,000

What is the buy price and what is the offer price? Stop right now and calculate this out.

**Note: Because the ARV is over $300,000, you may adjust the formula to “(ARV x .70) – Repairs = Buy Price.

Answer: Step 1 take $380,000 multiplied by .70, which equals $266,000. Then, take $266,000 and subtract it from the repair cost of $65,000, giving a buy price of $201,000. The offer price would probably be $190,000 to $192,000.

($380,000 x .70) - $65,000 = $201,000 (buy price)

Remember, when using the ARV 65%, approximately 20% is profit but when using ARV 70%, approximately 18% is profit. In this example, $68,400 (18%) is profit. How does that sound to you? Fix and flip a property and make a net profit of $68,000 on one deal! That is very exciting!