Knowing how to do the numbers

[Toris Diggs]

I've studied several real estate courses went out with contractors and everything to learn how to figure out the numbers to know if its really a deal or not. I'm a numbers person. To me everything is just an equation. There's a formula for everything. Now I've been talking to other investors to work together try to get some joint venture deals together and one thing that I've noticed is that ALOT of these investors or supposed to be investors they either not really taking this business seriously and not doing their homework or they think that other buyers are stupid and just trying to get over. They either don't know how to do the numbers, the MAO, how to estimate repairs, or they not using the right comps. Because what I'm seeing is investors getting a property under contract for $50K, the AVR is $110K, and most of their repair estimates are way too low, and their trying to wholesale the property for $90K ???? And then they'll say oh its worth $150K and I'm like oh NO it's not? Where did you get these comps from because I'm familiar with that area and the houses in that area brand new only sell for about $110K-$120K at the most.

Comps = (H1 + H2 + H3) = Total /# of Houses

There not even using the basic formula for offers.  (ARV x .65) - Repairs = MAO 

Repair cost = (# of sqft  * Price per sqft)   Ex:  (House 2000 sqft * $15 per sqft) = $30,000 in repairs add another $3,000 for miscellaneous.  The cost of your repairs is determined by your area and area the house is in.  So if you talk to the contractors in that area you can pretty much get an idea of how much it will cost per sqft .   

minor repairs = $3 - $7 per sqft.     moderate repairs = $15- $20 per sqft     and major repairs = $30-$35 per sqft. 

[Thomas Franklin]

Toris Diggs Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.

I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.

ARV - Desired Profit - Closing Costs to Buy - Repairs - 10% of Repairs - Holdings Costs - Concessions - Realtor Fees - Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).

ARV: After repaired value or what you think it will sell for once repaired.

Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable.

Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.

Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.

Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, property insurance premiums, property taxes, loan payments, HOA Fees, etc.).

Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.

Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.

Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.

This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.

If you want to determine a property's ARV yourself, try the following method. You can use Zillow.com. In the search bar, type in the Property's Address. Scroll down to "Comparable Homes" and click on "Recently Sold." Find Recent Sales that are somewhat similar, to the Subject Property. For each of these, divide the Sales Price by the Square Footage, of Living Space. This will give you a price per square foot. Let's say you have done this, for three properties. Add the three price per square foot and divide, by three. This will yield an average price per square foot. Take the average price per square foot and multiply it, by the square footage of the Subject Property. This will give you a reasonable guesstimate of the Subject Property's ARV.