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
Close Date: 7/27/09
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