Real Estate Investing 101 – What is the Real Spread?

You make your money in real estate when you buy the property and you collect it when you sell it.  Basically that means buy the right property for the right price.

I’ve been coaching a friend who is looking for single family homes to rehab and flip.  The deals he was presenting for my review just didn’t seem to have enough spread to me.  The spread is the difference between what you purchase the property for and what you sell it for after you’ve fixed it up.  To help him understand the true costs of buying, rehabbing, and then selling a property I provided him with the following synopsis so he could focus on properties with enough spread more efficiently.

The first thing you need to do is establish the After Repair Value (ARV).  The ARV is the expected price the property will sell for after the property is fixed up.  Determining the ARV is done by finding comparable sales of similar properties in the same neighborhood that have recently sold.  ARV is a critical number if you are wholesaling or flipping homes. Establishing good comparables will be an upcoming blog.

Here is a synopsis that may help you when looking at potential properties:

Purchase Price:        $  80,000

Repairs:                     $  10,000

ARV:                           $120,000

Spread:                      $  30,000

This potential deal looks great at first glance.  It is also the limited data they give you on “Flip this House” or similar TV shows.  The problem is, they ignore many of the costs associated with flipping a property to make it look more exciting.  Flipping houses is exciting however, making it exciting in the right way, with profit, means going into it with your eyes wide open.

The following is a list of some of the key items every rehabber will pay on a 3 month flip:

Spread Costs

Now your fat $30,000 spread is looking a lot more like $8,450.  So is this a deal or not?  The real spread is pretty small I generally like to see at least $20k potential profit because stuff goes wrong all the time.  However, it might be a deal if it was really clean.  By that I mean is the property is a 3 bedroom, 2 bath home that only needs some paint, carpet, and appliances and was in a good neighborhood in a hot market, I would probably go forward with it.

You can always offer less for the property, in this case my first offer on this property might be $65k cash. 

 

Twitter Digg Delicious Stumbleupon Technorati Facebook Email

No comments yet... Be the first to leave a reply!