How to figure Percentages and Cents on the Dollar

Question

This may seem elementary to a lot here but I continue to see my students writing frantically to get it down so, I thought I'd post it. [size=18][/size]When you first look at a potential deal, how do you determine the equity percentage and/or figure out how many cents on the dollar it will cost? [size=12][/size]This is a very simple thing to do and knowing it will greatly assist in walking away from a potentially bad deal. Example: A house will cost you $65,000 to buy and has an After Repair Value (ARV) of $100,000 (The ARV is what the SOLD comps in the area say your house "should" sell for). Drop the zero's or the last three numbers (000) off and take YOUR purchase price and DIVIDE it by the ARV/Retail price. This is the breakdown: [b]65 DIVIDED by 100 = .65 (cents on the dollar)[/b] So you now know it is 65 cents on the dollar but what is the percentage of equity? Take the maximum amount of equity you can have, which is 100% and minus the cents on the dollar figure you just got. [b]100 percent equity MINUS 65 = 35% equity.[/b] The number I have to be at or below for me to consider a deal (unless there are other factors brought to my attention) is .70 cents on the dollar or LESS. OR in percentages, 30% equity. One final note: DO NOT FALL IN LOVE WITH PEOPLE SELLING "GREAT DEALS" that have (example) $45,000 in equity! Do the math: Cost: $130,000 ARV: $175,000 $45,000 profit.... right? WRONG! 130 Divided by 175 = .74 cents on the dollar OR 26% equity. I pass! Hope this little formula helps save some from a bad deal disguised with big numbers. -Jim Watkins

Ryan Webber · Answer

When you actually factor ALL of your closing costs for buying and selling, initial financing costs, your holding costs for fix up time and sell time, realtor/advertizing fees, and unexpected repair costs, you will be sitting somewhere between 12-18% of ARV on expenses. If you only have 20% factored below ARV not including anticipated repairs then you will put yourself in a very tight position.

The number one mistake a new investor makes is buying a property for too much. Experienced investors preach the 70% equity formula because it will make you money on a property versus losing money. I have personally learned this formula the hard way.

I would highly recommend that any new investor follow this formula. It has been proven to protect you and ensure that you actually make an adequate profit for your risk. 70% of ARV minus repairs for purchase price will give you roughly 12-18% profit on a rehab deal. This amount of profit margin will make you a respectable profit if everything goes well and will still protect you if everything goes wrong. Things go wrong, and if you do enough deals you will find out that the only way to adequately protect yourself from unexpected issues is to buffer your investment with enough profit margin.

Going with 80% of ARV minus repairs may work if everything goes perfect. If it only takes you two weeks to fix up the property, and there aren't any unexpected repairs, and you stay in budget on your rehab, and it only takes 2 months to sell and close it For Sale By Owner. The problem is that most newbies factor their rehab on these pretenses and then get the shock of a lifetime when it doesn't work out that way. Being realistic and actually conservative is the best method when factoring a rehab or any investment.

Atleast 70% equity (equity does not include repairs as Jim pointed out) is the wisest financial decision you can make on buying a rehab. When you push those numbers, you are putting yourself into a financially risky position. Unless you have a low equity exit strategy (lease optioning, carrying the note, or long term rental) or you are in a HIGHLY appreciating market, I would follow the pros advice on this one.

N/A N/A · Answer

This site is a great resource to learn about the RE business. I'm too busy with work to get out and get my feet wet, but I'm learning a whole bunch while on the sidelines.

Ken Hicks · Answer

are you sure that theory would work with properties over $140,000? what if you have a $200,000 home $10,000 in repairs. would you make your offer at $130,000? I always used my figures on ROI meaning I invest $80,000 sell for $100,000 I make a 20% ROI and hope that it sells within a year.

Jim Watkins · Answer

I would suggest that you back away from making an offer just yet.

The questions you are asking are basic questions that should be addressed or factored before making an offer.
Don't take this the wrong way because I know you are new and you just asked the questions so that's good.

1- Closing costs are probably not included unless the seller has agreed to
pay all costs.
2- Other factors to me would be what the property's function will be.
Rental unit? Rehab & sell? Wholesale it?
3- The amount of repairs would depend on the actual repairs needed.
What I said in my post was that a property needs to have a minimum
of 30% equity for me to consider it further.
4- With the offer you are wanting to make, how have you estimated
how profitable it might be?
5- How are you thinking of buying it? A conventional mortgage? Hard
Money? Cash? Subject to? I ask these because your holding costs will
vary depending on which you choose.

A final note that even some seasoned investors overlook:
You need to budget for holding costs TWICE! When you buy it, you will pay closing costs and when you sell the house, you are likely going to pay closing costs again but, the costs will be factored from the sales price, not what you paid for it.

Look to see if there are any local clubs, etc. that can give you personal help as you go.

Good luck

N/A N/A · Answer

thanks for the formula.. but i have some questions.

what would be other factors?

dose this cost to buy include closing cost?

how much $$ would b allowed for repairs?

i have a few more but just can't get them out right now, i'm curious b/c i'm preparing to make an offer on a property here.

thanks travis

How to figure Percentages and Cents on the Dollar

How to figure Percentages and Cents on the Dollar

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