What Should I Pay for That Crappy House?
You wanna buy a house, and you want to make a profit. But how do you know what price is right? Ask Bob Barker? C’mon, I love Bob but he’s ancient! You’ve got to have a winning investment formula. For you veterans, this info is older than your Grandma’s pound cake recipe. Newbies…. check it out – I’m about to drop some mad rocket science on you:
MAO = ARV – Rehab – B/S/H – Investor Profit – Assignment Fee
· MPO (Maximum Allowable Offer) is calculated by determining what the house will be worth after renovation
· ARV (After Repaired Value) less the rehab dollars required, less the Buy/Sell/Hold (B/S/H) costs, less profit for the rehabber less the Assignment Fee (your profit as a wholesaler)
· If you plan to rehab the house yourself, just delete the Assignment Fee from the formula
DOWN & DIRTY FORMULA
Another More “Down and Dirty” Rehab Formula:
MAO = (ARV * .70) – Repairs – Assignment Fee
Now look, in this market – I play super safe when I can. I’ve been using a multiplier of .60-.65. What’s that mean Mr. Einstein? Well it means that I’m starting at 60-65% of the After Repair Value (ARV) then subtracting my repairs. This gives me a cushion bigger than J-Lo’s ass, and it accounts for all my holding costs, closing costs, and realtors fees. Problem is, in crazy market where investors are paying way too much for deals, you’re gonna get knocked out of the game on every deal if you use a 60-65% multiplier. Your offers will be too low. So go in at 70% for now. Be very sure about your ARV. Check out comparable sales data.
TIP: Be sure to also look at houses under CONTRACT or PENDING. Call the listing agent for those properties and simply ask, “I’m looking at buying a house around the corner. We’ll rehab it to a beautiful state. Can you tell me, did you get close to your list price for your house?
COMPS are KING
Are comparable sales recent (60-90 days) and close to the house your considering (.5 -1 mile away)? Are the home amenities, features, renovations, and square footage similar? If the house you’re considering is in a Desperate Housewives-type neighborhood, and you’re looking at homes in a Compton-“Bring your own gun” type neighborhood, you best be researching the definition of “comparable” – after you strap on your bullet proof vest and put on your best badass, don’t “f” wit’ me I’m a gangsta face.
Look at the home through the eyes of the future homeowner, and remember that renovation costs differ from house to house. It’s the scope of work that counts and what’s required to make the investment look like comparable houses? Confused yet? Stay at it. If I can do it, so can you! I’ll be talking a lot more about this topic so stay tuned.
Just follow the formula to make offers, and apply an $8,000 – $10,000 assignment fee to make the deal worth your while if you plan to wholesale. Finally, don’t forget about those two little words – investor profit, which is the amount left for the investor to make the deal sexy. Stick with the current market trend (for investor profit) and start with $25,000 – $30K for an average price house.