Tim Bell property analysis 7

Okay, so the next component in our formula you can see is the profit. Now, when we talk about the profit again, I want to remind you, this is the fix and flip investors profit. This is not your profit as a wholesaler, if indeed you're doing a wholesale. This is our wholesale customer, our fix and flip investors profit. That's what we're talking about here. Okay? So remember, your profit is built in down at the bottom of the formula. When you subtract your wholesale fee. This profit in the middle of the formula here is our fix and flip investors profit. It's the reason they're doing the deal, and it's their profit, not our profit. And like I say, it's obviously one of the things that they're most concerned about. Now, the standard formula, as you can see, says that we should build in a 20% of after repair value profit. Again. I first learned this formula in 1977. My original mentor learned it in 1962, and it's been around forever. The thing is, though, especially in this particular portion of the formula, the world has changed because of computers, because of the Internet, because of cell phones and other technological electronic devices. Things move faster. And there are more investors in the marketplace now than there ever have been. See, when I first started investing in 1977, I knew a lot of the investors in the marketplace. I knew their name, I knew their, their face, their car, their truck. I knew what areas they worked. I knew a lot about them because it was a relatively small group. And of course, in 1977, the only people that had computers were Steve Jobs and Bill Gates. Nobody else had computers. Well, obviously that's changed. See, nowadays you're not only competing with people that are in your market, you're also competing with people worldwide who may want to invest in your market. You're competing with people in Dubai and people in Singapore and people. People in Hong Kong and people in Berlin and people in Miami and people in New York and people in Los Angeles and Chicago and Seattle. You're competing with people all over the world that may want to invest in your marketplace. As a consequence, building in a 20% of after repair value profit may not be realistic. Okay, why? Because if somebody will do it for less than the 20%, they're going to get the deal. As we can see in our formula, because our formula starts out with the after repair value and then subtract, subtract, subtracts. If we build in too much profit in that formula, that's going to lower the maximum purchase price. That's going to Lower the offer number to the seller. Well, how do you compete with someone who's willing to pay more for a property than you are by virtue of the fact that they'll do it for less profit? And the answer is you can't. Okay? So you need to make sure that your profit that you build into the transaction is very competitive with the other people in the marketplace. So rather than just using a 20% of ARV profit, I have a more realistic approach here. Let's talk about the more practical, realistic, real world market approach to profit. Here's some things to consider. What works for me as a fix and flip investor, okay? Consider my time, my effort, my energy, and my risk. Okay? So let's contrast two properties. Okay? Property number one is a nice, in a nice neighborhood. It just needs a little bit of spruce up. It's in a good area, Things are turning over quickly. It needs a little bit of paint, a little bit of flooring, a few touch ups, and boom, it's done. You can put it back on the market in two weeks. Your contractor can knock it out and make it beautiful. And, and it's in a very nice neighborhood. So it's gonna sell quickly. Okay, so let's say that we fix it in two weeks, we get it sold in two weeks, and we escrow and close it in another 30 days. So we're in that property a total of two months. Okay, here's a question. If that was the case, would you do that property for say, a 20 or $25,000 profit? The answer's yeah, you'd probably do that. 20,000. That's $10,000 a month. I mean, you can't live on that, but that's probably pretty good, right? So two months, $10,000 a month, $20,000 total profit. Would you do that? Most people say yeah, I do that. Well, wait a minute. What if the after repair value is $600,000? Well, 600,000 times 20%, that's $120,000 profit. You should build in based on the traditional formula. Well, but you just said you'd do it for 20 and so would I. Okay, so that kind of throws that 20% rule right out the window. Right. Okay, let's contrast it to another property. Let's call this property, oh, I don't know, a meth house, where they manufacture methamphetamine. Do they have those in your marketplace? Yeah, they do. They're everywhere. So let's say, I don't know if you've ever had experience with a meth house. I Hope you haven't. But if you have, you'll know that it takes a long time to do the fix. Okay, let's say that, I mean, you've got to. Typically, you've got to strip it down to the studs. You got to take all the sheetrock and the other porous surface off that property. Why? Because methamphetamine, the chemicals that are used to manufacture methamphetamine, will penetrate those porous surfaces and they'll contaminate the porous surfaces. So you got to take all the drywall, all the sheetrock down off of that property. Then you have to treat the studs with a special chemical that neutralizes the methamphetamine chemicals. And then you have to seal it with a latex sealant, like a Kils or something like that. And then you can start to put all the sheetrock, all the wallboard up and rebuild the house. Okay. As you can imagine, that can take a long time. Okay. I have a friend that did a meth house and it took him nine months to fix it up. Yeah, Nine months of work on that property to strip it all out, remediate the meth problems, and then build it all back up. Then he put it back on the market. Now, it took him six months to sell the property. Why? Well, it's either because it was a meth house, because it was in a bad neighborhood, or it was in a bad neighborhood, therefore it was a meth house. I don't know which came first, the chicken or the egg. But as a consequence of the fact that it was either a meth house in a bad neighborhood, or it was in a bad neighborhood. So it was a meth house. It took a long time to sell it. Okay, six months. And then because of some issues with the title and with the meth remediation, other things, it took him two months, 60 days to get it closed. So nine months to fix it, six months to sell it, and another two months to get it close. He was in that property 17 months. Whoo. Yeah. Now here's a question for that property. Would you sit still for a $20,000 profit on that property? There's no way. There's no way. You got to have 80 or $100,000 profit in that thing as a fix and flip investor to even come close to being worth your time, effort, energy, and risk in that property. Okay, so you got. We agree 100,000 would probably be okay. May not even be enough for profit. Right. Well, wait a minute. What if the after repair value is 200,000 on the property. Okay, well 200,000 times 20%, that's about 40,000. But you just said you wouldn't touch it for less than $100,000 profit. Okay, so all I'm saying is using an arbitrary 20% of ARV profit really is not very real world. It's not very practical. These methods are more practical. So again, number one, consider your time, effort, energy and risk that you have in that property and then adjust your profit level that you build into your formula based on that time, effort, energy and risk in the property. The second one, what will my lender want? Really? What does the lender have to do with that? Well, I will tell you that a hard money lender, for example, expects a certain amount of profit to be built into that deal. If you don't have that much profit built into the deal, the hard money lender isn't going to loan you the money. Now as we talk about funding in subsequent gatherings videos here I will show you exactly why the hard money lender wants a certain amount of profit built into your deal. Again, that could be a consideration for profit. The third one on the list. What if I make mistakes in after repair value, general cost or repair costs? Here's the thing, you will make mistakes in all three of those categories. Okay. Nobody ever gets it right the first time or any other time. Okay. You're just, you're going to make mistakes. They could be minor mistakes, but you're still going to make mistakes. You're never going to be exactly right on the after repair value, the general costs or the repair costs. You're just going to be off on those things. As a consequence, you need to build in enough profit as a fix and flip investor so that if you do make mistakes, that profit will be enough to compensate for those mistakes. Okay, all right, the last one. What do the other investors expect in my market? Really? Yeah. Again, that comes back to the other investors expectations. If the other investors are willing to take less or build in less profit into their formula than you are, then their bottom line figure their maximum offer to the seller is going to be higher than yours. How do you compete with someone who's willing to pay more money for a property than you are? The answer is you can't. So you need to make sure that you have some understanding of what the other investors in your marketplace expect in regards to profit. Now often you can go to the real estate investment club, you can talk with those people, ask them what their expectations are, things like that. Again, these are considerations of profit and these are the things you want to think about when. When you're thinking about profit in the formula that you're using for your fix and flip, or, of course, your wholesale.