Bought at 70 percent of ARV, sold at ARV, made 46,800

This was a rental I got talked into flipping instead, and the arithmetic looked airtight on paper.

ARV 288 from three comps within a quarter mile, all closed inside 90 days. Repairs 32. So 0.70 x 288 = 201.6, minus 32 = 169.6 max purchase. I bought at 166. Under the line. Sold at 288, exactly the ARV, in 21 days.

Made 46,800, and I still think of it as a loss.

Where it went. Repairs came in at 39.8, not 32, because the LVP install found a slab crack that needed leveling compound and the bathroom vent had never been vented anywhere, so I paid to run it out the roof. That's 7.8 over. Holding was five months, not the three I planned, because I started in November and lost most of December to nobody showing up, at 2,180 a month all-in with debt service, so 10,900 instead of 6,540. Selling cost 6 percent plus title and a 2,600 buyer credit after inspection, 20,100 total. Acquisition closing 4,400.

166 + 39.8 + 10.9 + 20.1 + 4.4 = 241.2 against 288. That's 46.8 of gross, and then my own labor was roughly 240 hours of demo, painting, and hauling that I never priced. Priced at even 60 an hour that's 14,400 I never wrote down.

The error is that I treated the 70 percent rule as covering my costs when it's a screening filter for the purchase decision and nothing else. It doesn't know my carry, my rate, my season, or that I'd work for free.

What I'd do differently: build the actual dollar model before the rule, and if the dollar model and the rule disagree, the rule loses. Also don't start a flip in November.

6 replies

2priya_n21PO1C

The 240 unpriced hours is the part I keep rereading. Six weeks of full time work you never once priced, and you'd still have had the deal risk. This is the thing that puts me off the active side entirely.

2derekj19SB1B

The 2,600 buyer credit after inspection is the line I'd look at. On a cosmetic flip the inspection report is going to list the things you chose not to touch, and buyers price them. Did the report hit the slab or the vent work, or was it separate stuff? If it was separate stuff, a 400 dollar pre-listing inspection of your own would have let you either fix it for 900 or disclose it and hold your price. Disclosure requirements differ by state, so ask your agent what you're required to say once you know something.

1hannah_west29 Get yours

@sextant is right about the carry being the whole story but I'd put the cause one step earlier. 2,180 a month on a 166 purchase is a high carry number. Back into it: taxes and insurance and utilities on a vacant 288k-ARV house is maybe 700 to 900 in most places, so debt service is running 1,300 to 1,500, which on a 166 loan is hard money pricing. That rate is what made the December delay expensive.

@wren what was the money? Because if there was a cheaper option and you didn't chase it, that's a repeatable 400 a month, which over five months is more than a tenth of your profit. Confirm actual terms with a lender in writing, they move.

3tashaford30PB2APRO7

I'm planning a first purchase, and the useful line here is that the rule screens the purchase and the model decides the deal. I had those two backwards.

-1tonyv88SO4CPRO6

Don't start in November is doing a lot of work in your post and I'd defend it harder than you did. On the management side I see the same seasonal dead zone every year, roughly Thanksgiving to mid January, and it isn't only buyer traffic. Subs disappear, material deliveries stretch, and the one guy who can do your countertop template is on vacation for two weeks. If you're on a hard money clock, a November start reliably costs six weeks somewhere. Buy in November if the deal is good, but budget the calendar honestly instead of pretending January works like April.

Bought at 70 percent of ARV, sold at ARV, made 46,800

6 replies