Real Estate News & Commentary

Determining Maximum Purchase Price (MPP)

Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Flipping Houses, Mortgages & Creative Financing
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Maximum Purchase Price Real Estate Analysis

The question I get most often from new investors looking to break into flipping or wholesaling is, "How do I determine the maximum purchase price I should pay when trying to buy a property I plan to rehab or wholesale?"

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Most investors have some quantitative analysis technique they use for determining their maximum purchase price (MPP). Some use analysis techniques that require spreadsheets and/or complex formulas; other don’t use any formulas, but just go off a gut feeling they may have for the property or the location.

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While I’m certainly not a fan of the “gut feeling” method, I’m also not a huge fan of the complex analysis method either. While this may surprise some people (especially those that know my tendency to sit in front of large spreadsheets for hours on end), one of the main goals of my financial analysis is to be able to do it in my head in less than 10 seconds while standing in the property I’m considering. Certainly the whole analysis can’t be done in 10 seconds, but most of it can be.

And no, this isn't a post about the "70% Rule." For those not familiar with it, the 70% Rule basically states that MPP should be 70% of what you can resell the property for (the ARV) minus any necessary repair costs; it's probably the most common rule used by novice investors (and many experienced investors) to determine MPP. While the 70% Rule — and many other common rules for determining MPP — are certainly worth knowing and understanding, in my opinion they lack the accuracy (and often the precision) necessary to ensure you're really getting a good deal.

The formula I use and that I discuss below is tremendously simple and straightforward; in fact, many of you will keep reading and think to yourself, "This is obvious!" And while it *is* obvious to anyone who has done even a few deals, for new investors it can often provide an "a-ha" moment that really clarifies what it means to analyze a real estate deal.

So, without any further ado, here’s my formula for detemining the maximum price I will pay for a property I plan to flip…if you’re a rehabber, pay attention, and if you’re a wholesaler, keep in mind that this is a formula your buyers may very well be using themselves:

MPP = Sales Price – Fixed Costs – Desired Profit – Rehab Costs, where

Sales Price equals the conservative estimate of what I can sell the property for (not necessarily the price I’ll list it for!).

Fixed Costs equal all the costs, fees, and commissions that I can expect to pay during the project.

Desired Profit is the minimum amount of money I want to make off the project when it’s complete.

Rehab Costs are the material and labor costs required to rehab the property into resale condition.

As an example, let’s say that I have a property I’m considering purchasing. I believe I can easily resell it in rehabbed condition for $100,000. Additionally, I know my fixed costs to be about $17,000, my desired minimum profit is $15,000, and I’ve estimated the rehab costs to be about $18,000.

In this case, my maximum purchase price is:

MPP = $100,000 – $17,000 – $15,000 – $18,000

MPP = $50,000

So, if I can purchase this property for $50K or less, I’ll jump on the deal.

Now that I’ve provided this formula and the basis for it, the follow-up questions I generally get from most new investors is, “So, how do I determine the Sales Price, the Fixed Costs, and the Rehab Costs?”

All three numbers are tremendously important to the application of this formula, so I will discuss how to accurately determine those other numbers in my future blog posts…

Photo: Horia Varlan

By J Scott
J Scott runs a real estate company that invests in several parts of the country and that specializes in new construction, as well as purchasing, rehabbing and reselling distressed properties. J is ...
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    Justin Schnettler
    Replied over 10 years ago
    J- Do you have a correlation between MPP and Profits that you go by?
    Will Barnard
    Replied over 9 years ago
    This is a great tool for others. I would follow up with the similar question as Justin made: How do you come up with your profit amount, is it based on a specific cash on cash return, based on a % of something or what?
    J Scott
    Replied over 9 years ago
    I tend to focus in the lower price point properties — generally $90-140K resale — so my profit targets may be different than others (and definitely different than Will’s and other CA investors)… But, I shoot for a very, very conservative minimum of $15K on each property if the sales price is up to $120K. When I say “very conservative,” I mean that in the past two dozen properties I’ve done, I’ve only not hit that target once. Additionally, I like to see that $20K is a pretty reasonable target if I stay on budget and estimate my ARV correctly. In actuality, we average about $25K per flip, so being conservative is serving us well, though it probably means we’re missing out on some deals that would otherwise be pretty good. For higher end properties (anything over $150K), I like to see that a reasonable profit target is 15% of the resale price, with 10% of the resale price being my very conservative estimate (so again, very minimum of $15K on a $150K resale).
    Richard Dale-Mesaros
    Replied over 9 years ago
    One cost we seem to see popping up recently is the “buyer or lender request”, or in other words, stuff that arises from the buyer or their LENDER’S inspection. On one house recently, when we finally made it to the THIRD list of items, the one which really annoyed me was the lender’s request that we painted the garden shed!!!!! Good grief. Duly painted. Duly closed… Assume a number of around $1500 for these types of additional rehab costs. Now go find a deal! 🙂
    Mason Crane
    Replied over 7 years ago
    I am currently apprenticing with two local real estate investors, and while I just started I am learning quite a bit. I like the simplicity of this post, as it gets me to the point quickly! Thank you for the breakdown of the MPP, as that is something I’m struggling with. I’m hoping to find some more info regarding estimating the cost of repairs, closing costs etc. I’m brand spanking new, and I want to jump in with both feet! I look forward to reading more posts!
    J Scott
    Replied over 7 years ago
    Hey Mason, I’m actually getting ready to publish a book on estimating rehab costs in the next week or two…stick around BP and you’ll get more info!
    Mason Crane
    Replied over 7 years ago
    J, I’ve just opened a new tab with your site in it, so I’ll give it a look shortly. Please do update me on the status, as that will help tremendously in boosting my confidence to begin flipping! Best regards, Mason
    Kerry Smith
    Replied over 6 years ago
    Great formula! I will definitely apply it towards my first flip. Thank you for sharing it!
    Replied over 6 years ago
    Based on your example, it really doesn’t turn our much more profit than the 70% rule. Based on 70% – cost of repair = 53k. Your offer was 50k. Realistically, sounds like adding the commission, PML 2 points 10%//yr and I add that to my “cost” then actually using the 70% rule might be more effective and give me a more realistic number when I negotiate. I have not done ONE deal, just learning here… all points of views well taken
    J Scott
    Replied over 6 years ago
    As you indicated, we’re already starting at $3K apart (you’re going to make $3K in less profit than you would want if you use the 70% rule). Now, my analysis indicates that I don’t have any loan costs — what if you are using hard money at 15% and 5 points? You’ll likely spend another $6000 over the life of the project on loan costs. So, now you’re making $9K less than your desired profit? What if you live in state that has high closing costs or transfer taxes? That can easily eat another couple thousand dollars. So, while this example (my actual fixed costs) makes the analysis pretty close to the 70% Rule, if a few parameters were different, you could easily be getting yourself into a very thin deal using the 70%. Once you’ve run the numbers on as many deals as I have, you’ll understand what I’m saying…
    Replied over 6 years ago
    Ok, so I think Im really missing something. Im desperately searching for my first home to flip, I just saw a house listed for $140,000 that looks to have some potential. It needs a good deal of work so Im figuring $25k in rehab. ARV would suggest $140,000 x.70-$25000 = $73,000 A few area comps ( which I would need research further) are $180,000 This method would suggest; $180,000-$20k fixed costs- $25000 rehab – $25000 desired profit ( although anything asides from losing money is my goal ) = $110,000 Could this mean , buying from anywhere between $110k and $73k could be a profitable deal? Or am I not understanding this process?
    J Scott
    Replied over 6 years ago
    The ARV is $180K according to you and your comps. Using the formula in the article, your MPP in this situation is the $110K number. If you wanted to use the 70% Rule instead, it would be $180K * .7 – $25K = $101K. I would go with $110K, as I prefer that formula over the 70% rule.
    James (Michael) Ezzell from Hampton, Virginia
    Replied almost 6 years ago
    This is a great post. It seems to make things easier to understand for some reason. I am new at this learning as much as I can. sense I found this site I’m at the computer every night and most of the week-end lol. cant wait to make my first deal.
    Derek Kerley Investor from Jupiter, Florida
    Replied almost 6 years ago
    What about taxes? Seems like you would be breaking even when you have to pay short term tax on your gross profit?
    J Scott Developer from Sarasota, FL
    Replied almost 6 years ago
    You’re only taxed on your profit, so your profits will be reduced by the taxes, but it’s not possible that you’d go from profitable to even just because of taxes (unless for some reason you were paying 100% tax on your profits).
    Joaquin Reyes from Chicago, Illinois
    Replied over 5 years ago
    Like most of your blog posts, this one was extremely simple and helpful. Keep them coming. Enjoy the input you give all the people needing help, it really clarifies even further the simple lessons you are teaching.
    Dindar Nasim from Tacoma, Washington
    Replied over 5 years ago
    Thank you so much J Scott for the post. That aha moment is very true. I have never bough a property to flip before and this method is very encouraging because it is simple and makes sense for some one new like myself.
    rj kern
    Replied over 5 years ago
    Man am I glad I found this site because I was getting ready to sign up for a program, after reading a couple articles I feel like I can learn what I need. I should take the money I saved and buy all a box of candy or what ever. I also are just starting out in investing and will be looking for a mentor. THANKS
    rj kern
    Replied over 5 years ago
    Man am I glad I found this site because I was getting ready to sign up for a program, after reading a couple articles I feel like I can learn what I need. I should take the money I saved and buy all a box of candy or what ever. I also are just starting out in investing and will be looking for a mentor. THANKS Reply Report comment
    Charlene Garrison Investor from Detroit, MI
    Replied over 4 years ago
    You articulated that so well. I compare this to others I have read to get an understanding, you have succeeded in explaining what the MPP is. Thanks again.
    Dale Kuhn from Norwich, Connecticut
    Replied over 2 years ago
    Excellent, really expands upon the vague 70% rule, without over complicating things. Thanks J!
    Dustan Balkcom from Racine, Wisconsin
    Replied over 2 years ago
    This is a really helpful post! Thank you!
    Joseph Broaden from Bloomfield, Connecticut
    Replied over 2 years ago
    Great post, just what I needed today!!!
    Rashawn Collins from Las Vegas
    Replied about 2 years ago
    If you were it to wholesale to a buyer would you leave out the rehab cost as they would figure out that cost? Thus leaving you with the remaining profit?
    Tim Lin
    Replied over 1 year ago
    Thanks for posting this J Scott, could you point us to the blog where you calculate the Sales Price, the Fixed Costs, and the Rehab Costs?
    Jimmy Mozingo
    Replied 5 months ago
    J Scott, I'm a very brand new investor. I enjoyed your post very much. I also noticed that there hasn't been a response recently especially to Tim Lin's response asking for links to sales price, fixed cost and rehab costs. Can you help?
    Matthew Jepson New to Real Estate from Rhode Island
    Replied 2 months ago
    Very helpful post.