An understanding of our costs, risks and rewards in the home rehab business helps answer this question: What price should we pay for a $100,000 house?
First, let’s look at the typical costs involved to buy, rehab and sell the home:
| Cost of buying | 1-5% |
| Cost to insure | ½% |
| Cost of property taxes | ½% |
| Cost of interest | 5% (1% per month) |
| Cost to repair | 10% (say, $10 per foot) |
| Cost to sell | 10-12% (listed and with FHA buyer) |
| Overhead | 3% |
| Total Cost | 30%-36% |
So, if we pay $70,000 for the house, we barely break even on our cost of doing business. But we don’t work for free, any more than the Realtor does. In fact the Realtor is paid 6% for laying out very little expense and taking no risk. Realtors don’t make payments, they don’t supervise contractors, and they don’t face making a loss.
We definitely deserve more than 6% for our effort and our risk. In fact we try to make a minimum of 12%. If we can’t see earning that amount of profit margin, it’s not worth our while to participate. Especially considering that we also deserve to be rewarded for:
In fact, we are no different than a builder/developer undertaking a project or bidding to build a house. We consider the costs involved and then add in our overhead and profit. It's strictly business. If we come across a rehab opportunity but can not see a way to make a profit, we pass.
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