How to figure Percentages and Cents on the Dollar

[Jim Watkins]

This may seem elementary to a lot here but I continue to see my students writing frantically to get it down so, I thought I'd post it.

[size=18][/size]When you first look at a potential deal, how do you determine the equity percentage and/or figure out how many cents on the dollar it will cost?

[size=12][/size]This is a very simple thing to do and knowing it will greatly assist in walking away from a potentially bad deal.

Example:

A house will cost you $65,000 to buy and has an After Repair Value (ARV) of $100,000 (The ARV is what the SOLD comps in the area say your house "should" sell for).

Drop the zero's or the last three numbers (000) off and take YOUR purchase price and DIVIDE it by the ARV/Retail price. This is the breakdown:
[b]65 DIVIDED by
100 =
.65 (cents on the dollar)[/b]
So you now know it is 65 cents on the dollar but what is the percentage of equity?
Take the maximum amount of equity you can have, which is 100% and minus the cents on the dollar figure you just got.
[b]100 percent equity MINUS
65 = 35% equity.[/b]

The number I have to be at or below for me to consider a deal (unless there are other factors brought to my attention) is .70 cents on the dollar or LESS. OR in percentages, 30% equity.

One final note:
DO NOT FALL IN LOVE WITH PEOPLE SELLING "GREAT DEALS" that have (example) $45,000 in equity! Do the math:

Cost: $130,000
ARV: $175,000
$45,000 profit.... right? WRONG!

130 Divided by
175 =
.74 cents on the dollar OR 26% equity. I pass!

Hope this little formula helps save some from a bad deal disguised with big numbers.

-Jim Watkins

[Ryan Webber]

When you actually factor ALL of your closing costs for buying and selling, initial financing costs, your holding costs for fix up time and sell time, realtor/advertizing fees, and unexpected repair costs, you will be sitting somewhere between 12-18% of ARV on expenses. If you only have 20% factored below ARV not including anticipated repairs then you will put yourself in a very tight position.

The number one mistake a new investor makes is buying a property for too much. Experienced investors preach the 70% equity formula because it will make you money on a property versus losing money. I have personally learned this formula the hard way.

I would highly recommend that any new investor follow this formula. It has been proven to protect you and ensure that you actually make an adequate profit for your risk. 70% of ARV minus repairs for purchase price will give you roughly 12-18% profit on a rehab deal. This amount of profit margin will make you a respectable profit if everything goes well and will still protect you if everything goes wrong. Things go wrong, and if you do enough deals you will find out that the only way to adequately protect yourself from unexpected issues is to buffer your investment with enough profit margin.

Going with 80% of ARV minus repairs may work if everything goes perfect. If it only takes you two weeks to fix up the property, and there aren't any unexpected repairs, and you stay in budget on your rehab, and it only takes 2 months to sell and close it For Sale By Owner. The problem is that most newbies factor their rehab on these pretenses and then get the shock of a lifetime when it doesn't work out that way. Being realistic and actually conservative is the best method when factoring a rehab or any investment.

Atleast 70% equity (equity does not include repairs as Jim pointed out) is the wisest financial decision you can make on buying a rehab. When you push those numbers, you are putting yourself into a financially risky position. Unless you have a low equity exit strategy (lease optioning, carrying the note, or long term rental) or you are in a HIGHLY appreciating market, I would follow the pros advice on this one.