Real Estate Investors Buying Formula
1.Determine the best use and highest market value of the
property in excellent condition. This research can be done by
your real estate agent (comparable Market Analysis) or by your
expert knowledge (experience) in the marketplace (you should
know your market inside-out and not by guessing)
2.Estimate cost of repairs use contractor estimates (you should
have a team of experienced contractors) that you can trust and
depend on. Your experience will help you quickly estimate ball
park numbers on most any project.
3.Calculate the carrying costs of the property. Purchase costs,
taxes, insurance, Title, attorney, appraisal, utilities,
financing (points, interest), selling costs (commissions),
advertising (for tenants or to sell), overhead expenses and may
be some miscellaneous costs not listed. On a quick paint and
replace carpet the work may take 2 weeks but you should plan on
2 to 3 months holding time. Larger projects may take a month or
two to complete you may want to consider 4 to 6 months carrying
costs.
4.What's your profit do you want to make 10% to 20% on the deal
not a bad profit but 10% on a $35,000 deal is only $3,500 for
two months work and headaches. You may want to consider paying
yourself a minimum $20,000 to $25,000 per deal this can
guarantee a good profit at the end of every transaction.
5.Offer price is the highest market value less repairs, carrying
costs and profit. This is the most you will pay for the property
you want to start somewhere lower, some where a lot lower, an
offer somewhere lower like your agent will be ashamed to present
your offer.
6.A new twist to the formula, there are a tremendous amount of
bank owned properties on the market today and there be more
tomorrow. When a bank takes over a property they list it for
sale with a real estate broker who prices it at the market value
it usually sells somewhat less than that. But what did the bank
actually pay for the property or what was the mortgage balance
when they took it over. Many times what the bank has in the
property is much less than the listed price.
Example 1: 123 Main St - highest market value $250,000, brokers
listing price $240,000, bank costs through foreclosure $165,000.
In this example the property needs only minor cosmetic work and
can be turned over quickly so you offer $210,000 and will make a
nice $25,000 profit. But what about the other $45,000?
Example 2: 729 New St - highest market value $195,000, brokers
listing price $190,000, bank costs through foreclosure $102,000.
This is another property with minor repairs; you offer $98,000
and close at $102,000 (depending on the marketplace you may
close a little higher). Using our normal formula we would have
offered $140,000 to close at $145,000 a difference in your
pocket of +$43,000.
To the bankers its' a numbers game they are building a backlog
of properties to move so you may have some good opportunities in
your area. Work with your real estate agent or title company do
a little more research into what all parties have in the
property and you may make some bonus money on top of your
planned profit.