How to do this $8M Deal?
I came across a property for sale that the owner is taking offers.
The house is on the $8M price range.
To give an Investor a 20% ROI, the offer should be $6.5M. My fee would be 3%.
What do you guys think about these numbers?
Is 20% too much of a return with these kind of numbers?
Is 3% Ok?
Sorry, guys! Big numbers here...
Regards,
Most Popular Reply
There's nothing wrong with an investor earning 20%, and there's nothing wrong with you earning 3% if you can get it. The rest of the math, however, is fuzzy to me.
First, how are you calculating the 20% ROI? If I buy at $6.5 cash!me pay you 3%, and put no money into the property and sell for $8 million in one year, I would earn $1.5 million profit which is is a 19.5% return (an impossible hypothetical example).
On the other hand, if I buy at $6.5, put in $500K in fix-up, have a 7% cost of exit, and pay you 3% of the purchase price, my $8 million sale results in a profit of less than $245,000 (because holding costs have to be subtracted from that). Let's call it $220,000, which is way too skinny of a deal for an $8 million property. $200K can vaporize quickly in a deal like this, resulting in a loser.
A better calculation is to take the ARV, subtract 20%, then subtract the cost of rehab plus a contingency, and the total purchase price paid by the investor, including your fee, shouldn't exceed that amount if they are to expect a successful outcome.