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Flip Math: Pricing a Colorado Fix-and-Flip Offer

Wholesale math: fitting an assignment fee inside the cash buyer's maximum

Pricing a house the investor way · 1 study hours

Bottom line: An assignment fee must fit between the owner's lowest price and the cash buyer's maximum offer for that house; if the fee pushes the price over that ceiling, the buyer's profit shrinks or the deal fails.

Bottom line first. In wholesale, you tie up a house for a price and then pass that deal to a cash buyer for a bit more. The extra is your fee. But the fee has to fit under the most the cash buyer can pay for that house. If the fee pushes the price over that ceiling, the buyer either walks or takes less profit, and the deal is in trouble.

What wholesale is

A wholesaler signs a purchase contract with the owner, then assigns it, meaning hands the buyer's side of the contract to someone else. The someone else is the end buyer, often a cash buyer, who pays without a mortgage. The money the wholesaler earns for passing it on is the assignment fee. The wholesaler never needs to own the house or fix it. The wholesaler is paid for finding a deal, and the end buyer is paid for doing the work.

The gap between the price in the owner's contract and the price the end buyer pays is called the spread. The assignment fee comes out of that spread. Everything here is per house; one house's fee says nothing about the next.

The ceiling comes from the buyer's math

Last lesson we built the cash buyer's maximum offer on our made-up Aspen Bend Heights ranch (3 beds, 2 baths, 1,400 square feet, ARV $450,000, $45,000 target profit): a clean $280,000, with a true ceiling of about $280,365. We use $280,000. That number is the ceiling for the total the end buyer pays. The wholesaler does not get to add a fee on top of it. The fee must fit inside it.

So the order of the math is:

  1. Find the end buyer's maximum offer from the house's own numbers.
  2. Subtract the assignment fee you want.
  3. The result is the most you can agree to pay the owner.

Example with real numbers

Priya finds an owner of the Aspen Bend Heights ranch. The cash buyer's maximum offer is $280,000. Priya wants a $15,000 assignment fee.

  1. Ceiling for the end buyer: $280,000.
  2. Subtract the fee: $280,000 - $15,000 = $265,000.
  3. So Priya can contract with the owner at $265,000 or less. The end buyer then pays $265,000 + $15,000 = $280,000 and still earns $45,387 on the numbers from lessons 1 to 4, which clears the $45,000 target.

The end buyer's documentary fee (one cent per $100, or major fraction, C.R.S. 39-13-102(2)(b)) is counted on the $280,000 the buyer pays: 2,800 hundreds x $0.01 = $28.00, the same as in lesson 4.

What happens when the fee is too high

Now say the owner will not sell below $270,000. With the same $15,000 fee:

  1. The end buyer would pay $270,000 + $15,000 = $285,000.
  2. That is $285,000 - $280,000 = $5,000 over the ceiling.
  3. The buyer's profit at $285,000 is lower by more than $5,000, because the loan is 90 percent of the price. Extra points: $5,000 x 0.90 x 0.02 = $90. Extra interest for 5 months: $5,000 x 0.90 x 0.11 x 5/12 = $206.25. Extra documentary fee: $285,000 / 100 = 2,850 hundreds x $0.01 = $28.50, which is $0.50 more than $28.00. Total extra: $5,000 + $90 + $206.25 + $0.50 = $5,296.75.
  4. So the profit is $45,387 - $5,296.75 = $40,090.25, which is $4,909.75 under the $45,000 target.

The buyer who needs $45,000 says no. A buyer who accepts about $40,090 has less cushion if repairs run over (more on that in the next lesson). You have a few honest options:

  • Lower the fee. With the owner at $270,000, the biggest fee that fits is $280,000 - $270,000 = $10,000 (the true ceiling of $280,365 would allow $10,365, but we round down).
  • Negotiate the owner down. Every dollar the owner drops adds a dollar to your room.
  • Find another end buyer whose numbers for this house are different: a lower target profit, cheaper repairs or shorter holding.
  • Walk away. A deal with no room in it is not a deal.

What not to do is hide the problem. Do not inflate the ARV or understate the repairs to make the numbers appear to fit. The end buyer will check the math, and a deal that falls apart at the closing table costs everyone time. Be plain with both sides about your role. Rules about wholesale activity vary, so treat this lesson as general education and check current law before you act.

Why the fee is not a fixed number

Beginners ask, "What is a normal assignment fee?" There isn't one. A $15,000 fee fits our house when the owner takes $265,000 because the buyer's ceiling sits $15,000 above that. When the owner holds at $270,000, only $10,000 is there. On a house where the ceiling is only $5,000 above the owner's floor, $5,000 is all there is. The fee is whatever room is left between the owner's lowest price and the buyer's highest, on that house.

The same is true of the buyer's side. A buyer who sizes up the house as a rental, or who has a cheaper crew, may have a higher ceiling than the flipper in this example. That is why wholesalers find buyers by their numbers, not by their name.

Checking your own deal

  • Write the end buyer's maximum offer for this house.
  • Write the owner's lowest price.
  • Subtract: the difference is the most room you have for a fee.
  • If the difference is below what you need, the deal does not work as it stands.

General education, not financial advice. Every figure is a made-up example except the documentary fee rate, which comes from the statute.

Law cited

Key terms

Wholesale
Putting a house under contract and passing the deal to another buyer for a fee, without owning or fixing the house.
Assignment
Handing your side of a purchase contract to someone else.
Assignment fee
The money the wholesaler is paid for passing the contract on.
End buyer
The person who finally buys the house, often the one who fixes and sells it.
Cash buyer
A buyer who pays without a mortgage.
Spread
The gap between the price in the owner's contract and the price the end buyer pays.
Ceiling
The most the end buyer can pay, taken from the maximum-offer math for that house.
Maximum offer
The most a buyer can pay and still reach their target profit.
Margin
Profit as a share of the sale price.
Target profit
The profit a buyer needs for the deal to be worth it.

Flashcards

What is wholesale?

Contracting a house and passing the deal to an end buyer for a fee.

What is an assignment fee?

What the wholesaler earns for passing the contract on.

What is the spread?

The gap between the owner's contract price and the end buyer's price.

Where does the ceiling for the fee come from?

The end buyer's maximum offer on that house.

Max owner price with a $15,000 fee and $280,000 ceiling?

$265,000.

Owner at $270,000 plus $15,000 fee: over the ceiling by?

$5,000 (the buyer pays $285,000).

Buyer's profit at $285,000?

$45,387 - $5,296.75 = $40,090.25, under the $45,000 target.

Biggest fee that fits if the owner wants $270,000?

About $10,000.

Is there a normal assignment fee?

No. It is the room left on that house.

Should you inflate ARV to make a fee fit?

No. Fix the numbers, not the paperwork.

Quiz: 10 questions

Tap an answer. It shows right or wrong and opens the reason. Your score is saved in this browser and counts in the study app.

  1. An assignment fee is:

    1. A The county charge for recording a deed
    2. B The interest on the end buyer's loan
    3. C What the wholesaler is paid for passing the contract to an end buyer
    4. D The commission paid to the listing agent
    Show answer and why

    Answer: C. What the wholesaler is paid for passing the contract to an end buyer

    The assignment fee is the wholesaler's pay for handing the buyer's side of the contract to someone else. The county charge is the documentary fee; interest belongs to holding costs.

    Aspen Bend Heights example (made up)

  2. The end buyer's maximum is $280,000 and the wholesaler wants a $15,000 fee. The most the wholesaler can agree to pay the owner is:

    1. A $265,000
    2. B $295,000
    3. C $280,000
    4. D $250,000
    Show answer and why

    Answer: A. $265,000

    Subtract the fee from the ceiling: 280,000 - 15,000 = 265,000. Adding it ($295,000) puts the end buyer far over the ceiling.

    Aspen Bend Heights example (made up)

  3. The owner will not go below $270,000 and the fee is $15,000. How far over the $280,000 ceiling is the buyer's price?

    1. A $15,000
    2. B $5,000
    3. C $10,000
    4. D $285,000
    Show answer and why

    Answer: B. $5,000

    270,000 + 15,000 = 285,000, and 285,000 - 280,000 = 5,000 over. $285,000 is the price, not the overage.

    Aspen Bend Heights example (made up)

  4. The end buyer pays $285,000 instead of $280,000, with a 90 percent loan, 11 percent interest for 5 months and 2 points. Starting from a profit of $45,387, the new profit is about:

    1. A $45,387
    2. B $40,387
    3. C $35,000
    4. D $40,090
    Show answer and why

    Answer: D. $40,090

    The extra $5,000 costs $5,000 plus $90 of points, $206.25 of interest and $0.50 of documentary fee: $5,296.75. 45,387 - 5,296.75 = 40,090.25. The tempting $40,387 forgets that a bigger price means a bigger loan.

    C.R.S. 39-13-102(2)(b)

  5. What is the documentary fee on a $285,000 deed at one cent per $100 (or major fraction)?

    1. A $28.50
    2. B $285.00
    3. C $2.85
    4. D $2,850
    Show answer and why

    Answer: A. $28.50

    285,000 / 100 = 2,850 hundreds, and 2,850 x $0.01 = $28.50. The fee is cents per hundred, not dollars.

    C.R.S. 39-13-102(2)(b)

  6. The owner's floor is $270,000 and the ceiling is $280,000. The largest fee that fits is:

    1. A $15,000
    2. B $10,000
    3. C $5,000
    4. D $285,000
    Show answer and why

    Answer: B. $10,000

    280,000 - 270,000 = 10,000. The $15,000 fee Priya wanted does not fit on this owner's floor.

    Aspen Bend Heights example (made up)

  7. Which is NOT a sound way to deal with a fee that is too high?

    1. A Lower the fee
    2. B Negotiate the owner down
    3. C Find an end buyer whose numbers for the house are different
    4. D Raise the ARV on paper so the buyer's ceiling looks higher
    Show answer and why

    Answer: D. Raise the ARV on paper so the buyer's ceiling looks higher

    Inflating the ARV hides the problem and breaks when the buyer checks the math. The other three change real numbers.

    Aspen Bend Heights example (made up)

  8. Who sets the ceiling a wholesaler must fit under?

    1. A The wholesaler's own wish
    2. B The county recorder
    3. C The end buyer's own math for that house
    4. D The owner's asking price
    Show answer and why

    Answer: C. The end buyer's own math for that house

    The ceiling is the end buyer's maximum offer, built from that house's ARV, repairs, costs and the buyer's profit target.

    Aspen Bend Heights example (made up)

  9. When the price goes up by $5,000 on a 90 percent loan at 11 percent interest for 5 months with 2 points, the extra points plus interest add about:

    1. A $90
    2. B $296
    3. C $206
    4. D $5,296
    Show answer and why

    Answer: B. $296

    Points: 5,000 x 0.90 x 0.02 = $90. Interest: 5,000 x 0.90 x 0.11 x 5/12 = $206.25. Together $296.25. The $5,296 figure also includes the $5,000 of price itself.

    Aspen Bend Heights example (made up)

  10. The end buyer's profit target is $45,000 on a $450,000 sale. As a margin (profit divided by sale price) that is:

    1. A 10%
    2. B 11.1%
    3. C 15%
    4. D 1%
    Show answer and why

    Answer: A. 10%

    45,000 / 450,000 = 0.10, or 10 percent. 11.1 percent would be $50,000 of profit, which is not this house's target.

    Aspen Bend Heights example (made up)

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