The Reality of Rehabbing

Reality shows most often than not are not reality and that rings true for real estate reality shows like Flip This House from A&E.

By now you have probably heard about the trouble's A&E is having with one of it's flippers (or is it floppers?), Sam Mr. Leccima . It has been alleged that Mr. Leccima has not been as honest as he has been portrayed. According to Fox News Atlanta, Mr. Leccima and A&E have duped the public into thinking the homes that were featured were actually fixed and sold in less that 4 weeks. A&E has dropped Mr. Leccima from the show and now features one of his former team members, Angela Wilford. If memory serves me correctly Angela slapped some "sold signs" on some of the house, so she might not entirely be squeaky clean. Read more of this story here and here.

But enough of that. the purpose of this post is to show you a quick guide that your clients can read before they embark on a flip or as it used to be called a rehab. I'll use the acronym S.A.M.M.M.M. to show the different stages of reality flipping.

SEEK

The first thing your client or your self must do is find a property that is pretty much to the point of being uninhabitable. Why? Because your client needs to have enough room to make a decent profit. Your goal is to get your client to find a home that he can purchase for around 65% of the after rehab value or ARV. For the purposes of this quick guide let's assume you find a home whose ARV is $200,000. Please note that the ARV of the home can never be higher than the the highest comparable.

ACQUIRE

Based on what I said above, your client can acquire this home for around $130,000 right? Not quite. The offer needs to be around $110,000. You would think this is too small of an offer, but bear with me. The numbers will tell the story. Your client can acquire the property quickly by using sources such as a self-directed IRA or a hard money lender. If your client does use private financing or hard-money financing, be sure to add financing costs as part of the acquisition costs. Let's assume the acquisition costs are $5000.

For the purposes of this quick lesson, I won't go into much detail, but you can do the research yourself by going to websites like www.reiclub.com or www.creonline.com.

TOTAL ACQUISITION COSTS ARE $5,000

MEND

Before your client acquires the property he must have a good idea of what it would take to bring the property up to par. You need to advice him or her to use an experienced property inspector or contractor. Let's assume that he has received an estimate that the property will take $30,000 to fix. Add another $10,000 to this estimate, because trust me when I say to expect the unexpected.

TOTAL CONSTRUCTION COSTS ARE $40,000

MAINTAIN

In this stage you must take into consideration ALL holding costs. This includes taxes, interim mortgage payments, transaction costs, loan fees and whatever other holdings costs that may come up. Depending on the market plan on anywhere from 4 to 8 months of holding time. Let's assume this costs i $10,000

TOTAL HOLDING COSTS ARE $10,000

MARKET

You need to get paid don't you? And so does any other professional involved in the selling of this home. You client needs to move the property quickly, so I would offer up to 8% commission in this type of market to ensure you get as many agents as possible showing your home. You may also throw in the costs of a good staging company so that the home looks pristine. Assume you pay 7% in commission and $1000 to a staging company.

TOTAL MARKETING COSTS $15,000.

MOLLAH

This is where your client gets paid. Assume that he or she wants $20,000 out of this deal.

Now let's do the math.

$200,000-$20,000-$15,000-$10,000-$40,000-$5,000=$110,000.

The $110K is the maximum your client can offer. Heck, I would start even lower than that to give you a bit of room to negotiate.

Does this make sense? I hope so because this is reality and not a show like Flip This House. I am only giving you the basics here. There are things that I haven't covered here here like the tax ramifications in holding and selling a property less than a year, but I hope this post gives you a sense of what it really takes to "Flip a House"

Happy selling...