How to Determine Your Buy Price

[Ethan Brown]

Hello everyone! I have a few questions regarding how you determine your "Buy Price." (I'm looking for long term rentals right now). I'm assuming you all use comps to determine this, but do you use components such as average price per square foot? If so, what have you found works best to find components such as the sqft price that gives you the true market value on a home? When you find this, how much lower of a sqft price do you try to achieve (how much equity)? Do you look to decrease the sqft price/properties price by an even greater amount than usual when in a high market like this one in order to achieve more equity? Lastly, are most of your deals just found or gotten after putting in offers at this price you determined was your "Buy Price"? All responses are greatly appreciated!

Thank You,

Ethan Brown

[Joe Villeneuve]

A couple of rules:

1 - Don't set your "Buy Price" based on what it will take to get the property.  You don't want the property, you want the "Deal".  They are not the same thing.  Sometimes the best "deals" you make are the properties your don't get.

2 - When establishing your Buy Price (offer), the first number you put into the equation (yes, math sets it...and nothing else) is your desired profit or cash flow.  Always pay yourself first.  Equity isn't paying yourself, although it is important, it isn't paying yourself...it's paying the property.

3 - Don't use "avg cost/sf" to establish anything unless all the properties you are using to calculate this are within 1 mile of the property in question, and they are the same size, as in the sq ft of ALL of the properties you are using as comps are within 10% of the property in question....and sold within the last 6 months.  This includes rental comps too.

4 - Reverse Engineer the maximum offer price from the Sold Comps followed by the profit/cash flow back to the offer price.  The formula is slightly different based on the Exit Strategy"

     a - Flipping:  Sold Comps - Desired Profit - Projected Rehab - Misc Fees (closing costs, etc...) = MAX. Offer Price.
     b - Holding:  Rental Comps - all monthly expenses (insurance, taxes, etc...) = Maximum Mortgage Payment; 
                        Maximum Offer is generated from what the Maximum Mortgage Payment will buy based on Int. rate,
                        term and 20% (or less) Down Payment

5 - Never Offer more than the Maximum Offer Price. See #1 above. There's a reason why it's called the "Maximum Offer Price". 

6 - Never, EVER, do these calculations in your head.  They MUST be done in writing, or preferably in Excel.  When you do them in your head you will rationalize the input to match a desired output that will NOT be real.  In other words, you will chase the Property and not the Deal.  See # 1 above.

7 - ALL offers must be made in writing.  NEVER make ANY verbal offers.  Verbal offers are "suggestions", and will generate worse counteroffers.  Written Offers are formal Offers, and will usually always generate counteroffers closer to your offer.