This is a brief guide to rehabbing real estate by the numbers. It’s not inclusive so contact me if you have questions or would like to discuss this.
The government (i.e. HUD), banks, or a seller that has recorded the property on the Multiple Listing Service (MLS) is hoping to get an offer close to asking price. Looking for properties previously estimated in your estimated range.
Real Estate Vocabulary:
ERC: estimated repair costs
ARV: after repair value
A pretty good guideline that many people looking for properties apply is the 70% rule.
- Determine the ARV based on comps
- Multiply the ARV by 70%
- Subtract estimated repair costs (ERC) (20-25%, depending on property)
- Difference equals discounted range for on-the-market properties
That is the estimated range the Realtor® or real estate agent needs to know in order to find properties that meet the investor’s rehab criteria.
The Math:
The formula itself is fairly straightforward. When you have determined the ARV and ERC, you essentially plug in the numbers. For this example we will use a house that has an ARV of $100,000 and requires $20,000 in rehab work. The last factor to figure out is what discount you need to buy at.
For this illustration we will use the customary 70% guideline, so we will plug in .7.
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WHOLESALING
Now, that is a rule many investors who rehab or flip homes use, but it will vary depending on your local market.
What is missing though is your profit. You’ll need to subtract whatever you want to make on the deal at closing If you to make a net profit of $5,000, you need to put the property under contract for $45,000.
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