Which way to determine purchase price

Question

when you guys determine arv 
you multiply the expected sales price by.7
Then subtract repair costs.
But, do you also subtract all the quiet costs?

I am looking at a house that's ARV is 225k needs about 20k, asking price is 139k. So judging by that my max purchase price would be 137k. Is that correct?

I used to use http://www.homefixers.com/calculator.php
However, my max purchase price they usually give me is higher than what I am getting using above.

help?

Terry Royce · Answer

Thanks Lou. 
So I should be subtracting realtor fees too....

The current deal I am looking at and considering making an offer looks like this:

Foreclosure
Arv: 225-230k
Asking: 140k. (was listed Apr 19 @ 190k, they have been slowly dropping it)

Arv: 225 x .7 = 158k

158k
-25/30k repairs
-5,700 carrying costs (6mo. carry)
-300 utilities
-1500 taxes
-1500 ins.
-13,000 realtor selling fees
-5,000 purchase closing costs (estimate)

This gives a max purchase price 105k???
This seems ridiculously low.

I was planning on putting an offer in at 120k.... I am just trying to get financing lined up currently.

Lou Castillo · Answer

You took the ARV * 70% there was no reason to do that. Your ARV should be the price that will be marketale when you are ready to sell the house. For instance, if the market right is that houses are seling for $225,000 and the prices are dropping at 7% per year, but you'll have the house on the market in 3 months, then you'll want to subtract only about 2-3% from the value -so your ARV would be $184,000 from which you'll subtract expenses.

ARV               $218k
Rehab            $  30k
BSH               $   27k    (15% of ARV)
Profit             $  30k

Max Offer       $131k

Your $120k offer would be a good price for the house - I might even start neg. lower.

Be sure that the ARV of $225k is the current market price that will sell!

Lou

Lou Castillo · Answer

Sorry about the $184k ARV. I was originally working off the $190k price you had quoted, but then I realized that was the list price of the subject house. I went back and changed my figures but missed the $184K. It should have read $218k.

To answer your question of where you went wrong: the formula you were using was supposed to be:

Max Offer = (ARV * 70%) - Rehab
The 30% discount off of the ARV was to cover BSH costs and your profit. I just prefer to know where all of my numbers are coming from.

Good luck

Terry Royce · Answer

Where did you get the 184k from? I guess this is where I am confused... I thought max purchase prices was ARV x .7 and then subtract expenses??? where did I go wrong here?

Im very sure of the ARV the house next door sold in 5 days with no central air. The guy who bought it was talking to me this past weekend when I was peeking in the windows. His house was listed at 229 sold for 225. Several others have sold for that price also.

Sounds good. I was trying to get financing from a small local bank, but they want 25% down. I think I may just go the HML route again.

Lou... thanks for the responses. I appreciate your help.

Lou Castillo · Answer

Here's the formula that I have used for years and that I teach to all of my students:

ARV - Rehab - Buy/Sell/Hold Costs - Profit = Maximum Profitable Offer

The MPO is the deal breaker price. Never exceed the MPO. Start your negotiating well below that number and set a goal not to reach it.

You should list out all of your BSH costs and get a true number, but when you're at a property that can be cumbersome. That number generally ranges from 12-20% of the ARV. Based on how you typically finance properties, whether you use an agent or not, if it is typical to pay closing costs for your buyer, you can determine your average BSH and use that % in your formula.

Terry Royce · Answer

So you also factor in your realtor costs etc?

For a 100k house, that needs 10k of work. What would your highest and best offer be?

Jason Hanson · Answer

I factor in everything....you should start out by knowing what profit you want, or the least amount you are willing to settle for (10,000, 30,000).

Then factor in the hard money loan costs, carrying costs, closing costs.......in addition to the 70 percent rule minus repairs.

This business is about taking CALCULATED risks, so we want to make sure we cover it all.