You heard that proverb. The profit is made when you buy the property.
It is simple yet powerful. Unfortunately investors forget that lesson and pay too much for property.
If I rehabilitate the property and are going to invest the project, it is important to know the correct price to pay.
The expressions I have been using since the first day are as follows.
ARV - Rehabilitation - BSH - Profit = MPO
ARV = value after repair
BSH = purchase, sale, hold cost
MPO = (maximum profit offer)
To determine ARV is more than science art. Of course, I will look for a seller and focus on the property that is closest to my object and most similar in bed / bus composition. Area; age; location, and overall design. The expert witness may be getting sales for one year from one mile away, but I have sell it in the last 6 months.
My next step is to find online selling listings for Comp. Often there are plentiful pictures of those houses to judge how it looks with the interior. Specifically I will examine if other houses are using laminates with granite or other hard surface counter taps in the kitchen. Is there an upgraded appliance? Did they use carpet, laminate flooring, or hardwood? They used the manufactured shower / tab enclosure or tile; the bathroom floor tiles or laminates. Also check the exterior to see if the convenience store has a garage, carport, or roadway. Are they brick, shackles, vinyl siding?
At this point, I gained a good grasp of the level of rehabilitation needed to reach equivalent price and same price range. Next, I will review the properties of the subjects than comps for what my home may be disadvantageous to the buyer. As some examples, there may be houses close to the railroad roads and noisy roads. It is sitting on a busy road. It is adjacent to something less preferred than the next house (cemetery; parking lot; retail store). If you have any of these, I need to significantly lower ARV.
How much you adjust ARV is big text calling. I will try to think like a potential buyer looking at two very similar houses. One is sitting in a quiet place with neighbors on each side. Other houses are sitting on a busy road. How much discount is needed to give incentives to buyers to shop on busy roads? Certainly more than a discount of 5 to 10,000 dollars. I may also consider whether there is extra amenities that can be offered at my house that is not available at comp. This will also help you to scale, but it will cost additional rehab.
The last test I do before locking to ARV is to check the properties currently listed. By the way, I am not a real estate agent and I can not access MLS - you will do all of this research online using the same tools you are accessing. The listed properties tell me two things: (1) the price is retained and the seller does not drop the price. (2) How does a house like me look directly competitive?
Determining the amount of rehabilitation is based on what is necessary to update the subject property to make it look like a comp. Please be careful here. Remodeling to a much greater level than the compass may not be much at added price, but it greatly increases the cost of rehabilitation. On the other hand, if you do not upgrade adequately, you may be more disadvantageous to buyers than competitive houses.
BSH can easily be calculated as a percentage of ARV. I saw it move from as little as 12% of ARV up to 20%. Most come in about 15% -18%. The big factor is whether the agent is in use and the cost of money. It is a good idea to analyze your actual BSH cost in more detail until you see how far your percentage falls. A list of the most common expenses that make up this category is here.
- Exit Cost - Purchase
- Loan origination fee (points)
- Loan interest
- Hazard · Insurance
- Property tax
- Utility
- Marketing Cost
- Home security
- Settlement cost - sale (paid on behalf of the buyer)
- RE Agent's Committee
Rapid acid test for profit is the purchase price plus cost of rehabilitation. Your profit must equal at least 15% of the total.
Example:
MPO $ 90,000
Rehabilitation $ 30,000
Total $ 120,000
X 15%
Profit $ 18,000
Therefore, in this example, I would like to earn a profit of at least $ 18,000 (I will round it to $ 20,000). Otherwise it may not be worth buying this property.
Once we have determined all these numbers, we finally run mathematics to determine MPO or MAXIMUM Profitable Offer. In other words - most of the absolute amount I will pay for property. That is not the price I would like, but the best price to pay. My goal in negotiations is to purchase assets that is far below the MPO wherever possible. Remember, all 1 dollar purchases below the MPO are additional benefits of the contract.
The point that I want you to leave is that you need to consider in determining the right price to pay, rather than just gathering some numbers. You need to study smart and market and competition. Advance sale, you purchase properly, immediately sell rehabilitation, realize a big profit.
I require that each of my private mentoring students perform this investigation and analysis before signing off with some offer. I will not do it to give them extra work or to make points. I want it to be beneficial for all transactions. Please follow my tips as I want the same for you.
