How to come up with your Offer Price on a Real Estate Deal: Do’s and Don’ts

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How do you come up with your offer price?  Do you offer 10% less than the offer price?  Do you get into a bidding war, pay full asking price, wing it or do you have a strategy to come up with your offer price?  I am amazed at the responses to these questions and would love to hear your strategy to come up with your offer price.  Here are some tips.

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Don’ts

  1. Asking price means nothing.
  2. Never pay over what your criteria deems it is worth to you
  3. Do not get overpay due to competition or a bidding war
  4. No emotions, it is about the numbers.  The property either meets your criteria or it does not

Do’s

  1. Define your exit strategies – You should have multiple exit strategies such as flip for retail, flip to an investor, rent and hold, lease option, offer seller financing then sell the note, sell the entity holding title, etc.
  2. Define your criteria – LTV and Cash Flow criteria.  70% LTV max and the deal must cash flow.  I take 70% of rent and subtract PITI.  70% is because I take off 10% each for property management, vacancy and maintenance.
  3. Find current and After repair value – Do a CMA (Comparative Market Analysis), appraisal and/or BPO (Broker Price Opinion), on the property for current value and ARV.
  4. Conservative repair estimate – Most deals need some repairs and savvy investors can add tremendous value with these repairs.  Be conservative in your estimates though, as there are almost always surprises when doing rehab.
  5. Soft costs – Holding cost, inspections, tax, insurance, utilities, agents commissions, etc.  If it is a hold then figure in property management, vacancy and maintenance
  6. Create a formula – Create a formula to calculate an offer range based on LTV and cash flow.

Example Formulas

LTV formula:

     

Take ARV X 50% – rehab and ARV X 70% – rehab

100K ARV X 50% – 20K rehab = 30K

100K ARV X 70% – 20K rehab = 50K

Offer range is 30-50K

 

Cash Flow formula:

            For the cash flow formula, I deduct 30% of the rent or 10% for each of the following:  Property Management, Vacancy, Maintenance.

             Rents X 70% – PITI for low LTV amount in of 50K

Rents X 70% – PITI for high LTV amount in of 70K

1000 Rents X 70% – 450 PITI = $250

1000 Rents X 70% – 600 PITI = $100

 

Do you calculate offer price on cash on cash return?  LTV?  Cap Rate?  Other?  Please share your formula.

About Author

Ryan is the founder of Real Return Real Estate™ , a company focused on buying property at extreme discounts, selling and renting with cash flow.

4 Comments

  1. Thanks Liz. I agree, this is business and only about the numbers. To many decisions are emotional and not good informed business decisions.

    I found software very helpful. Eventually I evaluated so many deals that I customized my own excel spreadsheets that have all kinds of crazy calculations for LTV, cash flow, Cap Rate, cash on cash return, ROI, etc. Now I am to the point where I can run the numbers in my head and spit out an offer range. During due diligence I really disect the numbers.

  2. For me it dependes on the situation. If I’m buying to flip then I go through a pretty complicated series of deductions off the anticipated after repair value. If I’m buying to hold then I usually start my search looking for properties that have around a 10% Cap rate.

    You are very right… Never… NEVER fall in love with a property. There is always another deal to be had.

  3. Can anyone help me with the excel formula for calculating the offer price when I specify the Cash on Cash return that is required? Basic inputs would be interest rate, down payment %, vacancy %, rental income, operating expenses and of course term of the loan. I have made a spreadsheet but there is some error and the price usually come about 5% too high. And while any online tool is ok, I would like to understand the exact math behind it. Appreciate any help. Thanks

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