"reverse" analysis to find an offer price

5 Replies

I know I've seen it done with the calculators, but I want to do it by hand. I have all the equations for the standard metrics, but my math isn't strong enough to twist them backwards to calculate a maximum offer based on the desired metric. Any help, please?

@Robert Lorenz If it's a buy and hold you just need to come up with a reasonable/fair/desired cap-rate. Put in that variable and your purchase price becomes the "x" that you're calculating. Alternatively, you can just find one of the spreadsheets and just start plugging in different offer prices until you are close enough to your desired cap-rate.

@John Leavelle I'm thinking in terms of algebraic relationships for all the common metrics, so the specific strategy shouldn't be a factor. Each strategy may demand the use of a few different metrics (cashflow, cash on cash, cap), but generally speaking there's a pretty short list of metrics that are used to perform a basic analysis of most residential properties, whether it's a SFR or a 250 unit apartment community. I'm not looking to go into deep analysis, just "back of the napkin" stuff.

@Andrew Johnson I'm actually demonstrating some of these basics to a group, and need to do it on a whiteboard. I can perform the math "forward", just haven't had a lot of pracrice doing it "backwards".

If any of the math people out there see this, could you maybe create a cheat sheet full of these equations as they appear in the metric and then twisted back to allow for easy calculating of an offer price based on the desired result and upload it to the shared files for everyone?

By "twisting it backwards" I mean like:

if A^2 + B^2 = C^2 then

C^2 - A^2 = B^2 


if E = mc^2 then

E/c^2 = m


Most metrics are based on NOI, so start with NOI. I am assuming that you can do the addition and subtraction to get to NOI.

CAP Rate = NOI/Current market value

So by algebraically rearranging the formula:

current market value = NOI/CAP

If you deduct debt service from NOI then divide by your required rate of return then you get your value.

e.g Your Value = (NOI-Debt Service)/Required rate of Return

An example:

Lets say:

Asking Price: 100,000

NOI = 10,000

Debt Service = 5,000

Required Rate of Return 5%

Now calculate:

CAP rate = 10,000/100,000 = 10%

Current Market Value: 10,000/10% = 100,000

Max Value = (10,000-5,000)/0.05 = 100,000

Now, I get you want to do this by hand... however, getting debt service by hand is a bit of a pain using tables. A better way to do this is with an Excel Sheet using Goal Seek like this one:

Goal Seek for Max Value

Good Luck!