What’s worse than not getting any deals and struggling to buy houses? The answer is buying the wrong house. You see, many investors take an early exit from this business because they overpay for a property or because they don’t understand the correct formulas to use when evaluating a deal.
Today, I want to break down a deal that was emailed to me recently. It’s a single family house that another investor is trying to wholesale. Here are the numbers:
Address: Woodbridge, VA 22193
ARV: $195,000
Repairs:$15,000
Asking Price:$128,000
Close Date: 7/27/09
Deposit: $6000
So how much would you pay for this property?
Now, break down this deal on your own first. Would you pay $128,000 for it? (Let’s assume that the $195,000 comps are correct and that $15,000 in repairs is also correct).
Well, if you would pay $128,000 for the property you just cost yourself $21,000… just on one deal. You do that on five deals and you just cost yourself a quick six figures.
So, how much should you pay for this deal? If I’m paying cash for a property these days the most I want to buy it for is 65 cents on the dollar. So, I would take the $195,000 after repair value and multiple it by .65 and I would get $126,750. But, we’re not done yet. Next, I take the $126,750 and subtract the $15,000 in needed repairs and I would get $111,750. And that is the absolute most I would want to pay for this deal… pay no more than $111,750.
Now you know that you would not pay $128,000 for the above house… maybe the person who offered the deal built in $16,000 of negotiating room. It is always smart to “pad” your asking price because people love to haggle and feel they’re getting a deal.
Another great reason to “pad” is because some investor could come along and pay you the asking price of $128,000 and you just made an extra $16,000 you didn’t think you were going to get (If people don’t know how to evaluate a deal that’s not your problem. Always get as much money as you can for a property).
What if you were the one wholesaling this deal?
So let’s quickly reverse it. What if this was YOUR deal that you were sending out to people. Well, once again, assuming your numbers were correct, I hope that you would have this property under contract for at the most, $101,000. That way when you got knocked down to around $111,000 you could make a $10,000 wholesaling fee and at the worst case scenario $5,000…which happens to be my minimum. As in, if I can’t make at least $5,000 off a deal, then it’s not worth my time.
Make sure you fully understand your numbers and formulas. It will both save you, and make you, a heck of a lot more money.
Photo Credit: Phil Scoville
Article Author:
Jason HansonJason has written 75 articles for us.
Visit Jason's Website: http://www.PrimoCoach.com
Jason R. Hanson is the founder of National Real Estate Investor Month and the author of “How to Build a Real Estate Empire”. Jason specializes in purchasing properties “subject-to” and has purchased millions of dollars worth of property using none of his own cash or credit.
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{ 8 comments… read them below or add one }
Jason,
The headline mentions paying $21,000 too much for this deal. However, your math in the article indicates that it is overpriced by $16,250. Am I missing something?
I really don’t understand this post either… the 65% is a great rule for a starting point. But running the data we use based on actual numbers and a hard money loan (3% points, 12% interest, 5 mos hold-time) we would make about 25,000 flipping it. I have some padding for misc expenses, we do list our own properties for sale (so usually end up paying only 2.5% of commission).
Can you explain your numbers…
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Rich, you are correct. When I wrote this I was working on several deals, and must have somehow pulled the “$21,000″ from somewhere else… so yes, you are correct the savings is about $16,000.
I’ve gone ahead and corrected the title to show $16,000. I must have missed it myself when I reviewed it late last night.
Thanks Rich!
BTW – Ironic mistake for us to make, Jason, considering the title of the article.
Hey, thanks for this article, its very enlightening.
We are considering a property and would never have worked out your 65 cents to $1 figure, or minusing the repairs off, great tips!
This numbers seem a little off to me.I am assuming you are getting a $195,000 net purchase. (no closing cost paid by the seller)
Here’s how I see it.
Net sales price = $195,000
Cost to sell 8% = $15,600
Holding costs = $0 (cash)
Rehab = $15,000
Minimum profit = $30,000
Closing cost on purchase 2% = $2,700
Max offer = $131,700
Are you looking for a larger profit. I’d buy it for $131,700 all day long.
Stephen, your numbers make sense to me. Although, I would probably factor in some cost of money. As your 30,000 profit requires a ~150k investment. How is it helpful to put a percentage as a guideline but not provide some backup?
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