I have been following an offer formula most of my investing career. Some have asked me what the formula is. I have listed my formula below. There may be some that use a different formula or disagree with me but it works for me. Enjoy:
"-" stands for subtract
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.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125
There are information around this site that can be useful.
Here is a link that should help you:
http://www.deangraziosi.com/articles/real-estate-investing-tips/capitali...
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125
This is a great idea. Why not ask who the investors use as contracts.
There is a thought that I have though: what if you have different investors who all use different contractors - what do you do? Would you use every buyers contractors?
It seems that you could find a great contractor buy asking the investors who they use but then I would only use the best most favorable contractor each time I needed to.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125
Ok, this is a great formula. Is this used for REO's and rentals? I didn't see where the 70% ARV was applied. I've spent way too much time trying out multiple deal analyzer spreadsheets and who knows what, to evaluate a wholesale deal the right way, to present it to a buyer correctly. Using Larry Goins free analyzer, for a house with $80k value, 70% arv at $56k, and with all the deductions including my profit, it came out to an offer of $38,450. Does this sound about right? Thanks, guys.
You have to add in the 70% discount for your end buyer if you're going to assign it.
good stuff
"dump the clutch and nail the throttle"
"Just do it, Get it Done!"
--Matt Larson
Matt gets his REA to send him 100 listings of his model (preference on properties)...then he chooses 25-30 out of the 100 and makes [low] offers on those (25-30)...The 25:1 ratio = at least ONE Accepted offer! He says it works EVERY time!
PS. THANKS so much, Nstreet, for your formula!!! You're the best!
Happy Prospering! ~Kat, Liberty Residential Investment Acquisitions
• "To every thing there is a season, & a time to every purpose..." ~Ecclesiastes 3:1-8
• "Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy!" ~Dale Carnegie
• "Begin, be bold, and venture to be wise." ~Horace
• "Never, never, never give up." ~Winston Churchill
• "Whatever you do, or dream you can, begin it. Boldness has genius and power and magic in it." ~Johann Wolfgang von Goethe
I have my first flipper and I'm wondering if there is a standard "formula" everyone is using to achieve Cost of Repairs? Where do you get the numbers? Are you walking the properties with your contractor in tow? Do you get estimates ahead of time, before making your offers? Or is it a guesstimate? And, do you buy materials yourself, have crew do the work; or do you have the contractor do all of the work including material purchases? Hmmm? Just curious. Walking through 2 more FSBO's tomorrow...Thanks!
Happy Prospering! ~Kat, Liberty Residential Investment Acquisitions
• "To every thing there is a season, & a time to every purpose..." ~Ecclesiastes 3:1-8
• "Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy!" ~Dale Carnegie
• "Begin, be bold, and venture to be wise." ~Horace
• "Never, never, never give up." ~Winston Churchill
• "Whatever you do, or dream you can, begin it. Boldness has genius and power and magic in it." ~Johann Wolfgang von Goethe
good Info, I have my ears wide open good Info thankyou D.G Fams!
Here is a deal I just did.
$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
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~Matt Larson~
Lane, explain why the assignment fee is subtracted in your formula.
Has to be able to make the fee fack when they sell or refinance. My fee is an expense to the buyer.
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"In order for me to think outside the box, that would require me to acknowledge that the box actually exists. In my world, there is no box."
~Matt Larson~
What were the repairs and costs, and how 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
Thank you so much for this. You guys are awesome. I am a newbie and have not even received my books I ordered yet but am trying to learn all I can while I am waiting. Again thank you and Happy New Year.
excelent
"dump the clutch and nail the throttle"
"Just do it, Get it Done!"
--Matt Larson
very very intrestin ideas, thanks so much for sharing them. karla
http://nationsloan.com/cheap-loans/
thanks everyone on this post,I'm getting ready to do my first rehab and wanted
to see what the best way to go about it.Now I,,,,,from.....formulas to agents.
Thanks again for all of you giving comments on this subject.....I don't have worry those pitfalls anymore...... :0)
"-" 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.
Subtract profit amount
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
Jbird61
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.
I've been racking my brain on how people come up with the closing and holding cost for Offers.
Thanks for giving real examples with real numbers. I appreciate it.
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.
it's 25:1 game!!! keep play cards out and will win 1 out 25.
Be happy and go healthy ^_^
Ling and/or Dustin
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.
Anyway in 2011, my buyers that purchase wholesale deals from me want to see at least 15% net profit. PLUS I must then subtract my profit also.
When you do the work or hold on to the property yourself you can offer more, but when assigning, double close etc you need to offer less!
What works for us here in Denver in 2011 is (when we wholesale) we buy at 65% of a true quick sell ARV minus repairs then wholesale it to one of our buyers for 70% of ARV minus repairs.
Remember, NO formula is set in stone. If you have to pay a little more, but have a buyer that is willing to make a little less on a deal that of course adjust your offer!
Michael Mangham
MD Home Acquisitions LLC
Micheal would have it correct. You would not necessarily use the formula if you do not need to. You will find that your buyers will often define how you make offers and if you would use a formula. As I buy properties the more information I get the more I am willing to purchase a property so having a formula that spells out the offer you made will help me feel comfortable with the offer. I have buyers that as long as they have a percentage they are fine. Use what works best for you.
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
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.
Be aware: Such idea can also get you into troubles. What happens when your repairs are much higher that was assumed? What if you could have given a better offer and actually gotten an offer accepted?
Many times investors shoot for the easiest but this may loose deals and cost money when people are often purchasing.
Truly, it is best for new investors to walk many, many properties and work the numbers to get a good base of how their market and numbers will work.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125