Offer Formula

$75,000 ARV
65% of ARV = $48,750
Repairs/Costs/Assignment fee = $26,250
Offer $20,000
Counter offer of $25,000
Final Agreement $22,500.

Closing in mid January.

Thats how it works.

Keep it sim

"-" stands for subtract

Value of the Property
- Profit of at least 10%
- Fix up costs
- Holding costs (value of the property x 1.2% x number of months I will hold the property to sell or rent)
- Closing costs (3% of the value)
- Realtor Fee (6% of the value)
= the most I will offer on the house.

Holding costs: I use value times 1.2% because I have seen that this will cover my mortgage, taxes, insurances and utilities for one month. The amount that is calculated actually covers more than I need but I include it to take care of my what ifs.

I use this formula on properties I rent or flip because I want to build in profit regardless of whether or not I rent. In addition to the formula if the property is going to be rented it has to cash flow. If the property does not cash flow with my offer I go low enough the property will cash flow or at least cut even.

Should be at least 10% of FMV or $10,000, whichever is less (Your profit is the reason for doing the deal)

Subtract your costs of rehab
Subtract 3% of FMV for your acquisition and carrying costs, including:

Closing costs
Six months of property tax
Six months of property insurance
Six months of utilities

Subtract cost of money

We don't know how much we will be borrowing, so we have to guess. As a rule of thumb, you can take 80% of the future market value. Multiply this figure by 18% to come up with a one year interest amount, then divide by 12 for monthly interest. To know how many months you might need the money, look at the DOM (days on market) figure on the comparables and take an average. Next, convert the average number of days into a month figure (round upwards, i.e., 42 days = 2 months). Finally, add an additional month to the total. Multiply the number of months you need by the monthly interest figure, and you now have the total interest amount to subtract from your formula.

Here is a sample formula computation:

FMV $85,000
Profit ($8,500)
Rehab costs ($8,000)
Carrying costs ($2,550)
Interest amount ($6,120)
Offer $59,830

A short sale I worked on:

$115,000 - value of the property
- $17,000 - profit (I wanted a little more than 10% for my time)
- $28,000 - Fix up costs (this included lifting the corner of the foundation)
- $6,900 - Holding costs (115,000 x .012(1.2%) x 5 months - this included time to fix the property)
- $3,450 - Closing costs ($115,000 x .03(3%))
- $6,900 - Realtor fee ($115,000 x .06(6%))
---------------------------------------
= $52,750 - The most I would offer (actually, I offered about $50,000 because I wanted room to negotiate if I needed.)

The $2,000 fix up was a typo it is to be $28,000.

Here is how I come up with holding costs.

Take the value of the property.
Multiply this value by .012.
I use this for my monthly holding cost.

Once I know my monthly holding cost I multiply this by the number of months the property will be off the market.

I find the number of months off the market from comparables given by Realtors. These comparables will often show the DOM (days on market) for each property. Taking the average then throwing in my own experiences for the area I decide how long I will hold the property.

I understand that my formula is high. Some may questions my numbers; that is fine. I put the numbers the way I do so that I can cover "what if?" Often I may get more expensive mortgages, or run into more costs or whatever and I want to cover myself.

When I am getting conventional financing I will contact a closing agent / title company and ask them a general cost. Many people will guess 3% of the FMV but I find I get better numbers when I ask. I have seen closing costs go from 3% to 4% of the FMV. I do not want to lose 1% profit because I did not ask.

When I work with hard money lenders / Private Financing or other similar financing I generally estimate $1,500. Most closing in my area with private type financing will close near this amount. I can add points charged from hard money lenders to this if I need but that would be up to me.

This contract will work great for assignments of contract if your buyer is following something similar.

You will find that buyers have their own way to determine their offer price. This formula is common enough that a portion of your buyers will use something similar to this or even this same formula.

The offer may not need to be used however because if you have a buyer that says "Hey I want properties 25% below market" you really don't have to do a lot to figure out what you are going to give.

Either way I suggest working with what your buyers want.

There are also programs in the market that you can use as well. There is a program that is available call "National Construction Estimator". This will allow you to itemize your expenses even down to the nail so that you can create a very accurate estimate that you can use on your properties.

I would suggest, though, that you get a contractor that will give you free bids. This way you do not give yourself more work to do and build report with someone that you can use later on.

Essentially , it comes down to the 65 % rule . The formula is on biggerpockets.com and was mentioned on this site by others .

Thanks Michael for the clarification .

Randy S.

Here are the difficulties that may come from using a blanket 65%:
- Your repairs may be far higher than you expected and it can bite you in the *whatever*.
- Your market may not handle a 65% offer very well. Each market deals differently to offers. A good measure to how your market handles offers is what do your buyers want? Your buyers will often give you percentages that they are currently getting in your market. For example: I have buyers in Utah that want 20-25% below market with an occasional 30%. This means in certain areas of the Utah the market I should expect to need to offer higher than the 65% range.
- Your market may handle lower offers. There are markets such as areas in Mississippi that can handle 50-60% below market offers. This means that if a 65% rule is used you would offer way too much.

$75,000 ARV
65% of ARV = $48,750
Repairs/Costs/Assignment fee = $26,250
Offer $20,000
Counter offer of $25,000
Final Agreement $22,500.

Closing in mid January.

Thats how it works.

Keep it sim